Friday September 7, 2001

WASHINGTON - Reversing a Clinton-era legal strategy, the Bush administration announced yesterday it will no longer seek the breakup of Microsoft and wants to end the historic antitrust case against the software maker as quickly as possible. The Justice Department, however, indicated it will seek penalties first suggested by a judge earlier in the case that could affect or delay the company's soon-to-be-released Windows XP operating system. That news sent Microsoft's stock dropping on Wall Street, where investors have been eagerly awaiting the release of the company's new operating system in hopes it would reinvigorate the stagnant technology sector. By early afternoon, Microsoft stock was down 66 cents to $57.08 a share on the Nasdaq Stock Market.

"The department is seeking to streamline the case with the goal of securing an effective remedy as quickly as possible," the Justice Department said.

Microsoft, which has long resisted a breakup, reacted cautiously to the announcement. "We remain committed to resolving the remaining issues in the case," spokesman Vivek Varma said. The Bush Justice Department said it was dropping two key elements of the Clinton-era case against Microsoft for fear they would lengthen court proceedings and hurt consumers. The department said it "is taking these steps in an effort to obtain prompt, effective and certain relief for consumers." Justice said it would no longer seek to break Microsoft into two companies - one for its Windows operating system and the other for its other business and home software - as U.S. District Court Judge Thomas Penfield Jackson once ordered in the case. That order was eventually reversed by an appeals court, and a new judge was appointed to consider a new penalty.

The department also said it would not pursue allegations the company had illegally combined a previously separate product - a strategy known as tying or bundling - in an effort to hurt competitors.

Both decisions were victories for Microsoft, which has waged a costly four-year battle to dispute those allegations and has continued to build more features into its products. But the Justice Department said it would seek to stop Microsoft from making certain exclusive deals with partners, forcing computer manufacturers to keep specific icons and programs on the Windows desktop, and other requirements. Those restrictions were also imposed by Jackson, but immediately rescinded when Microsoft appealed the case. Jackson's penalties also included a prohibition on tying, which would presumably not be included in the new penalties sought by the government. Howard University law professor Andy Gavil said the restrictions could have a large impact on Windows XP, which has been completed by programmers but won't reach stores until October. Microsoft has given computer manufacturers more latitude in icon placement than in previous versions of Windows, but Microsoft still requires that certain Microsoft icons appear on users' screens.

"It's hard to square the interim remedy with Windows XP," Gavil said. "All of these little things really have to do with how XP is being prepared and marketed." Gavil said the Justice Department's action means the case could move more quickly and is more palatable to Bush appointees.

"Rather than fight the battle over breakup, get down to the brass tacks over how we can change their conduct now in a way that will preserve some competition in the marketplace," he said. "It is probably more philosophically agreeable to the administration."

During a ceremony on the White House lawn, President Bush declined to comment directly on the case but told reporters: "During the course of the campaign and throughout my administration I have made it abundantly clear that on issues relating to lawsuits - to ongoing lawsuits - that I expect the Justice Department to handle that in a way that brings honor and thought to the process.

"I respect and hold our attorney general in high esteem and I honor the work that he's done and I'm going to leave it at that," Bush said.

Iowa Attorney General Tom Miller, who has been one of the leaders in 19 states' suit against Microsoft, said in a statement that he agrees with the current strategy.

"Since the Court of Appeals decision, the states and DOJ have directed their efforts to one objective - the quickest and most effective remedy possible," Miller said. "This decision is consistent with that objective."