WASHINGTONBill Gatess lawyers went to federal court last fall with a good hand. But it isnt the hand they played.
They could have conceded that Microsoft Corp. is a tough competitor, but more forcefully argued that consumers are helped, not harmed, by its hardball tactics. They could have acknowledged Microsofts monopoly-like dominance in personal-computer operating systems, but argued that restrictions enforced by government bureaucrats would do more harm than good in such a fast-moving industry.
Instead, Microsoft refused to give an inch. Rather than emphasizing the strongest elements of its case, the companys lawyers have become mired in defense of the weakest parts. They have argued fervently that the company doesnt have a monopoly, despite Windows 90% share of the market in PC operating systems. They have maintained that the company doesnt bully its competitors, despite internal electronic mail and documents suggesting otherwise.
Judge Has Questions
The result: Although a decision by Judge Thomas Penfield Jackson is still at least three months away, Microsofts defense is in disarray and its executives and economist have been battered so badly on the witness stand that the judge has questioned key elements of the Redmond, Wash., software giants case. Microsofts supportersand, privately, even some members of its defense teamharbor doubts about its course.
Theyre letting the government define the case, instead of going with their strongest cards, says Thomas Hazlett, a visiting scholar at the American Enterprise Institute, a conservative Washington think tank, who has been a vocal opponent of the antitrust case brought by the Justice Department and 19 states. Microsoft should stand up and say, Yes, we tried to eliminate our competitors. Instead, they argue over threats, e-mails and exclusive contracts that are common in any industryplaying right into the governments hands.
Others who have strongly opposed the governments case express frustration with Microsofts defense. Theyre bungling it, says Stephen Margolis, a North Carolina State University economist who, like others quoted in this article, was on a list of pro-Microsoft economists that the company recently distributed to reporters.
Mr. Margolis notes that Microsofts lawyers failed to pursue the strong arguments they could have made on the lack of consumer harm and the idea that competitors arent foreclosed from the market. Instead, they are defending themselves by saying they are not a monopoly. If people find that unreasonableand many people probably doit undermines everything else they say.
Microsofts lawyers also refused to accept that this case is as much a public-relations battle as a legal one. And on the publicity front, as even they now concede, they have been clobbered. The governments lead trial counsel, David Boies, has proved to be a master showman, serving up juicy documents and courtroom pyrotechnics that play well in the press. The Microsoft lawyers, with their dry and legalistic arguments, frequently wind up sounding defensive. Given the high stakes in this case for Microsofts reputation, the public-relations fight may prove almost as important as the legal arguments.
Microsofts field general is William Neukom, the companys courtly, silver-haired general counsel, who takes copious notes during the trial and passes scribbled instructions to his team of lawyers from New Yorks Sullivan & Cromwell seated around the defense table. As his clients troubles have worsened, he has been stepping more often before the news cameras outside the courthouse to remind the media that courtroom theatrics arent going to prevail in this case; rather, Mr. Neukom says, the facts and the law are. going to win it, and they are on our side.
Mr. Neukom says there has been no second-guessing on the defense team, not a minutes worth. The core of the governments case is fatally flawed, he says, and its evidence of illegal conduct is weak. As for engaging each and every one of the governments specific charges, he says, Microsoft had no choice. You have to meet those allegations with the facts, he says. We feel very good about where this case stands right now.
Its unclear what role Mr. Gates, Microsofts chairman, has played in shaping the legal strategy, but it certainly mirrors his combative style. Mr. Gates was personally involved in the companys response last year to the Justice Departments charge that Microsoft wasnt living up to terms of a 1995 consent decree, which settled an earlier antitrust case. It isnt known whether he has continued the hands-on involvement; a company spokesman wouldnt say.
While there is no sign that Mr. Gates has lost faith in his legal team, Ted Nielsen, a young executive who has the chairmans ear, was sent to attend the trial. Mr. Nielsen sits in the front row each day, like a third-base coach, focused intently on every play. You can tell how he thinks witnesses are doing by watching himgrimacing, grinning, shaking his head. During breaks, he reports to Redmond from the corridor, chattering into a cellular phone; Mr. Nielsen says he simply is providing technology advice to the legal team.
Much of the defense rests on the claim that Microsoft isnt a monopoly. But some involved in the companys defense now are asking why they are trying to defend turf that cant be held, thus losing credibility with the public and the judge? Retreat to the high ground, these insiders argue, by shifting emphasis. Defend Microsofts right to innovate. Show that consumers havent been hurt. And play the trump card: If there is a problem, can government lawyers and economists really be trusted to fix it?
Fear of Collateral Damage
These insiders say the defense has been hemmed in by the hard line taken by Mr. Gates, and by fear of what one of them called collateral damage from private lawsuits. If Microsoft is declared a monopoly by the courteven if no other limits are placed on the companyits ability to acquire companies and make other deals could be reined in, while the number of private antitrust suits against the company would be likely to grow.
It is legal for a company to have a monopoly if it has been fairly won. But it is a violation of the antitrust laws to try to use that monopoly to keep out rivals or hurt competitors in other markets. Microsoft hasnt been accused of gaining a monopoly illegally, but rather of trying to use its monopoly in PC operating systems to thwart challengers and win dominance of other markets, such as that for Internet browsers.
If Judge Jackson formally tags Microsoft as a monopoly, every private antitrust suit against it would start at the 50-yard line. Plaintiffs no longer would bear the burden of proving that Microsoft has a monopoly. Thats likely to set off a race to the courthouse by lawyers itching to file class-action suits against the company. And Microsoft could face even more serious legal threats from Netscape Communications Corp., which is being acquired by America Online inc., and others that have been targeted by Microsofts business tactics, legal experts say. Already, cases fi1ed by Caldera Inc. and Bristol Technologies Inc. are headed for trial, and another, by Blue Mountain Arts, is pending.
One of Microsofts arguments has been that it doesnt dominate the PC operating-system market because of competitive threats from Silicon Valley start-up Be Inc. and tiny Red Hat Software Inc., in Research Triangle Park, NC. But it isnt too convincing. Once you get to the point where people are laughing, you have to do something, says Stanley Liebowitz, a University of Texas economist who has been a strong Microsoft supporter. But the companys defense team, he says, doesnt seem to have any fallback position.
Waning courtroom credibility has been another problem for the company, and it can be traced directly to Mr. Gates. Even before the trial began last year, the Microsoft chairmans unyielding approach set a confrontational tone with Judge Jackson that persists today. Mr. Gates insisted that Microsoft couldnt unbundle its internet software from Windows, despite the judges order to do so.
Mr. Gates also appeared defiant and uncooperative in his videotaped deposition, so that any executive testifying later who wanted to be more candid risked countering his bosss testimony. In the Gates videotape, which continues to haunt Microsofts defense, the famously hands-on chairman appeared forgetful and repeatedly insisted he wasnt involved in key decisions and company strategy.
That deposition gave Mr. Boies, the governments lead trial counsel, an opening to attack Microsofts credibility, an approach he has pressed with each witness since. If Judge Jackson finds that Microsofts witnesses arent credible, the rest of the companys defense is threatened as well. And such a finding would make the judges ruling harder to overturn by the appeals panel that almost certainly will review the case.
Microsofts lawyers have complained bitterly that Mr. Boies is waging little more than a public-relations campaign that has scant bearing on the substance of the case. The press has fallen under Mr. Boiess spell, they say, reporting only the trials drama and ignoring more pertinent facts. One Microsoft lawyer says, We have not done as good a job as we should have to explain our message and the law, which he says strongly favors Microsoft. Mr. Boies, he says, has been focusing on largely peripheral and tangential issues, doing a good job turning to his advantage the theater of the courtroom.
Case in point: On his first full day cross-examining Microsofts lead-off witness, economist Richard Schmalensee, Mr. Boies barely touched on the witnesss 328-page statement. He hammered away at other points, such as whether Dr. Schmalensees testimony squared with his past writingsit didntand avoided the line-by-line dissection of witness statements that Microsofts lawyers had conducted earlier in the trial.
A Survey, a Memo
At the end of the day, just as reporters and television crews were deciding what report about the trial that day, Mr. Boies produced a memo written by Mr. Gates year that asked his staff to survey software developers that would support Microsofts Windows strategy. Then Mr. Boies produced another memo showing that the surveywhich had been cited by Mr. Schmalenseewas rigged in Microsofts favor. A third memo, displayed on oversize video screens, noted that most of the companies polled thought Microsoft should be sueda finding the company hadnt made public.
Gotcha. On the courthouse steps, Mr. Neukom denounced the ambush as a cheap stunt, irrelevant to the substance of the trial. But it got prominent play on television news programs and in major newspapers.
Then came the famous videotape fiasco. When Microsoft senior vice president James Alichin took the stand, Mr. Boles gleefully dismantled a video demonstration Mr. Alichin had brought. The tape was supposed to show that Windows doesnt work well when its Internet software is removed, countering a key government argument. But Mr. Boiess dissection of the video prompted the judge to say that the tape was so deeply flawed that it casts doubt on the entire reliability of that evidence.
Mr. Allchin was given a chance to redo the tape, and after a grueling all-night effort, he played it the next day with fewer problems. The affair was later dismissed by Mr. Neukom as a sideshow and a melodrama about four minutes of tape that will have little bearing on the facts of the trial.
Scoring on Other Points
But Mr. Boles also has scored substantive points that strike at the core of Microsofts case. When he rattled Dr. Schmalensee with questions on the survey, it was after the economics professor had been forced to concede a more important point: that there was no viable alternative to Windows for most PC makers today.
Similarly, the most damaging day for Mr. Alichin wasnt the day that landed him software to Windows could be achieved using the products separately as well. That undercut one of the companys, key arguments: that Microsoft bundled the two products to benefit consumers, not to crush rival Netscape, as the government alleges.
Some of Microsofts supporters wonder why the companys lawyers bothered arguing the unbundling point. In a separate but related case, a federal appeals court ruling last year gave Microsoft wide latitude to add new features to Windows, even if it targeted a product already being sold by another company. (After that ruling, exultant Microsoft lawyers said the decision would let the company add a ham sandwich to Windows if it chose to.)
Some members of the Microsoft team are preparing for an appeal, as if this part of the case already is lost. And as Microsofts fortunes flag in court, the prospect of court-imposed restrictions on its business practices becomes increasingly likely. Justice Department officials insist that, since it is impossible to know whether or how broadly the judge will rule against Microsoft, such talk is premature. They also say that none of the possible remedies under discussion in recent monthsranging from a breakup of the company to forced licensing of Windows or a more narrowly tailored set of conduct restrictionshas been decided on.
Judge Jackson clearly would like to wrap things up. Before Tuesdays afternoon session, he offered an allegory that he insisted was irrelevant to the Microsoft case, hut is relevant to our work as lawyers.
When you discover you are riding a dead horse, the best strategy is to dismount, he said. But lawyers have other strategies, including buying a stronger whip, changing riders ... declaring that the horse is better, faster and cheaper dead, and, finally, harnessing several dead horses together for increased speed.
That said, he concluded, turning to Mr. Boies, the witness is yours.