Round one US, next stop Europe?

What promises to be the largest antitrust case of the century has, according to experts, already generated £62.5m in legal fees, and now the EC is launching its own inquiries into computer software giant Microsoft. Anne Mizzi reports.

European lawyers are bracing themselves for a mass of competition work generated by the European Commission's investigation into software giant Microsoft.

The US Justice department has won the first round in its battle to end Microsoft's monopoly of the global computer industry.

But the damning finding of fact made public by federal court judge Thomas Penfield Jackson last week is only the beginning.

Although individual countries have agreed not to take any action until the US inquiry into the monopoly is completed, the European Commission is launching its own inquiries into possible anti-competitive behaviour by Microsoft.

So far Jackson has found that Microsoft “enjoys monopoly power”, while its actions “have inflicted collateral harm on customers”.

Jackson must now decide what action to take to split up the monopoly while Microsoft is already planning its appeal.

Meanwhile, European lawyers eagerly await the next move in the antitrust action, in anticipation of a share of the legal fees, which one source estimates to have already topped $100m (£62.5m) in the US.

And the developments in the US will determine the future landscape of Microsoft's global business.

Asked what impact the US judgment will have on Europe, John Frank, Microsoft's head of legal for Europe, the Middle East and Africa, says that any remedy that comes out of the case would be implemented on a global basis.

The 40-strong in-house department is spread across eight locations in Europe, with five UK-based lawyers in Reading.

Frank believes the legal function is at the heart of Microsoft's operations.

He says: “As a company what we sell is technology which has to be protected by intellectual property law and so as a company the legal function – that includes our copyrights and intellectual property rights – is fundamental to what we sell.”

Frank says: “We just have the finding of fact and so are still waiting for a final ruling. At that point we anticipate an appeal. We remain confident about the outcome in the end.”

US sources agree that Microsoft's chances have been substantially reduced by the finding of fact, and that the part of the ruling dealing with the incorporation of Microsoft's internet explorer into basic software will be vulnerable on appeal.

That issue is likely to be focused on by Microsoft's key litigator John Warden, who, according to one leading rival, has a track record for maximum advantage in the appellate process.

Warden, a partner at leading Wall Street firm Sullivan & Cromwell, is described by one New York source as a “formidable opponent”. The source says: “He is very thorough and has a strong presence in the court room and a commanding speaking voice.”

But the US Justice Department's findings indicate that Microsoft may be found liable for abusing its market dominance to the detriment of competitors and consumers.

Frank says: “As a very successful company we have been subjected to a great deal of scrutiny in the normal business regulatory issues and concerns.

“We do our best to maintain constructive relationships with the regulatory authorities and answer any concerns promptly.”

Howard Cartlidge, head of competition at Olswang, which advises Microsoft on e-commerce issues, says the EU will be reluctant to duplicate the US investigations, but that there may well be a case against Microsoft under EU law. He admits the way the US case is going will be a blow to the giant.

Cartlidge says the interesting area for competition lawyers is whether the hi- tech market will be treated as a deviation from the norm.

“Microsoft is arguing it should be approached in a different way because these markets are changing so rapidly.”

Italian firm Studio Legale Sutti is currently pursuing a complaint in Italy against Microsoft on behalf of a non-profit association for computer users, the International Alliance for Compatible Technologies.

Livia Oglio, head of competition and the head of Suttis' London office, is leading a team on the action which includes senior associate Charles Casassa.

Casassa says the Italian regulator is waiting for the outcome of the US suit before making its decision.

He says: “The fact finding has produced results that we find very optimistic. We are in complete concurrence with Judge Jackson.

“There are very close analogies with our case.”

If the court finds against Microsoft in its final decision, one possible remedy would be to follow the US court's decision in the 1980s to break up telecoms giant AT&T into “Baby Bells”.

But in this case they would be called “Baby Bills” after Microsoft chairman and chief executive Bill Gates.

Although he is working on a case against Microsoft, Casassa insists: “We would never espouse the squashing of Microsoft.”

And Oglio makes the point: “In Italy that kind of break-up couldn't happen. They could just declare a certain activity illegal and fine the company every time they did it.”

But a legal source says: “The Department of Justice wants to go for splitting up Microsoft.”

A three-way split of the company would result in Microsoft retaining the operating systems with the internet service providers and integrated systems splitting into separate companies.

Splitting the internet business from the operating systems is described as “the most extreme form of relief”, by a US source, who adds: “It could be coupled with some mandatory licensing orders.”

This would force Microsoft to give licenses to its smaller competitors. US lawyers say alternatives would include ordering Microsoft to make changes to the boot-up sequence.

But Darrel Prescott, a partner at Coudert Brothers in New York, says: “The ultimate split remedy would not be of great impact on the stockholders.

“I would think that Microsoft would be most concerned with the mandatory IP licensing.”

EU competition specialist Peter Alexiadis, based in the Brussels office of US firm Squire Sanders & Dempsey says that there is a fundamental difference between Baby Bills and Baby Bells. He says it was possible to split AT&T along geographic lines.

But with Microsoft, the court is more likely to split the firm according to its services. He warns that this will not guarantee success for new market entrants.

He says: “If everyone has invested so much in Microsoft systems there would have to be a very strong case to make them switch. Any potential competitors would have to have very deep pockets.”

Casassa says the US court will have to achieve a balance between maintaining a competitive market while allowing Microsoft to continue to provide a significant contribution to the development of software in a level playing field.

Alexiadis echoes Casassa, adding: “One thing the regulators must not do is give the message that there is a danger in innovation.”

He says he anticipates change. “There will be a shift in the balance of power if the judgment goes against Microsoft,” he says.

“I'm not suggesting this is a storm in a tea cup but there will be a lot of incentive to really go for Microsoft.

“There will be a hell of a lot of licensing activity and monitoring by antitrust authorities.”

But he says it is no free-for-all for start-up companies. “Small companies trying to take on Microsoft would be in for a bloody nose,” Alexiadis predicts.

If Microsoft fights on as anticipated, the match will be well worth watching with lawyers on both sides hoping to land the telling punches.

However, as Bill Allan, the Linklaters competition partner who leads the firm's Microsoft team, puts it: “We will have to wait and see. At the moment all we have got is findings of fact.

“The legal process has got quite a long way to go.”

The Microsoft setup

Bill Gates is Microsoft's chairman and chief executive officer.

Bill Neukom (see other box).

John Frank is Microsoft's director of law and corporate affairs in Europe, the Middle East and Africa.

Outside US law firms

Main corporate and commercial firms: Sullivan & Cromwell and Washington-based Covington & Burling. Other firms used in the US include: California firm Wilson Sonsini Goodrich & Rosati, New York firm Clark & Weinstock, Schwegman Lundberg Woessner & Kluth and Barbour Griffith and Rogers. For the lawsuit, Microsoft has picked John Warden of Sullivan & Cromwell. He is leading a team of 10 including partners Richard Urowsky, Steven Holley, Theodore Edelman, Michael Lacovara and Richard Pepperman. Back up is provided by consultant firms Preston Gates & Ellis and Covington & Buling. Partner Rick Rules is the main player at Covington.

In the UK

Bill Allan and Anna Carboni at Linklaters & Alliance. Richard Kingham and Allan Moore at Covington & Burling in London. Richard Kemp at Kemp & Co. Simon Olswang at Olswang.

The leading legal players

Thomas Penfield Jackson, a federal court veteran, is the presiding judge.

For the US government

Joel Klein, head of the antitrust division in the Department of Justice.

David Boies, partner at niche New York firm Armonk, acting for the Justice Department.

Tom Miller, Iowa's attorney-general, is lead attorney for the 19 US states which are bringing the action with the Justice Department.

For Microsoft

William 'Bill' Neukom is senior vice president of law and corporate affairs at Microsoft. He is responsible for the direction and management of legal work and government, industry and community affairs. Reports to Microsoft president Steve Ballmer. Neukom practiced at Gate's father's law firm, which is now called Preston Gates & Ellis.

John Warden of Sullivan & Cromwell is the senior outside litigator for Microsoft.