January 22, 2002 4:20 PM PST
AOL's Netscape sues Microsoft
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WASHINGTON--Netscape Communications, a division of AOL Time Warner, filed suit against Microsoft on Tuesday, claiming that the software giant's business practices crushed the onetime upstart's Internet browser.
The lawsuit is based on previous court findings that Microsoft's business practices amid the infamous browser wars of the 1990s violated two sections of the 1890 Sherman Antitrust Act.
In April 2000 a federal judge ruled that Microsoft used anti-competitive means to thwart Netscape's browser, which once had a leading position in the market but now is a distant second to Microsoft's Explorer. In June 2001, a panel of seven appellate judges upheld eight separate antitrust counts against Microsoft.
Netscape, which was acquired by AOL in 1999, is seeking an injunction that could include forcing Microsoft to sell a stripped-down operating system that does not include a browser. In addition, AOL seeks monetary damages that could be tripled under federal law, although it did not specify an amount.
In some ways, the Netscape lawsuit is trying to achieve what the government failed to do so at trial, such as proving Microsoft tried to extend its Windows monopoly to the browser market.
"Netscape's lawsuit is a logical extension of the findings entered by the District Court and unanimously affirmed by the Court of Appeals that Microsoft thwarted competition, violated the antitrust laws, and illegally preserved its monopoly at Netscape's expense," Randall J. Boe, AOL's general counsel, said in a statement.
"There is no question that Microsoft's conduct violated the law and harmed competition and consumers," Boe continued. "Netscape's lawsuit seeks not only an award of damages, but for the court to provide injunctive relief that will help restore competition on the computer desktop."
Microsoft asserted that the lawsuit is more a competitive move by AOL Time Warner than a legitimate attempt to recover damages.
"AOL Time Warner has been using the political and legal system to compete against Microsoft for years," Microsoft spokesman Jim Desler said. "This is just the next tactic in their litigation plans. Microsoft is investing to build new products, while AOL invests in lawyers and lobbyists to put roadblocks in Microsoft's way."
Desler also accused AOL Time Warner of using the Netscape lawsuit to undermine the settlement that Microsoft reached in November with the Justice Department and nine states. That settlement is undergoing review pursuant to the Tunney Act. In December, nine other states that didn't join the settlement filed a remedy proposal asking that, among other items, Microsoft be compelled to give away the Internet Explorer source code to restore competition in the browser market.
AOL Time Warner is using the Netscape suit "as an attempt to undermine the settlement between Microsoft, the DOJ and the bi-partisan group of attorneys general," Desler said. "Today's filing is timed to interfere with the efforts to bring that case to a conclusion."
Jury trial sought
Netscape is asking for a jury trial and is seeking damages but did not specify an amount in the lawsuit, filed in U.S. District Court for the District of Columbia. However, the lawsuit does ask for triple damages based on the Clayton Act and the District of Columbia Code, as well as interest and attorneys fees.
Netscape also asked for an injunction against Microsoft's alleged antitrust violations, both current and future.
The judge in the case ultimately would decide the nature of the injunctive relief, which Netscape suggested could be derived from a remedy proposal filed last year by nine states and the District of Columbia. One option: forcing Microsoft to release a version of Windows without its own "middleware" products such as a Web browser, media player or instant messenger.
Bob Lande, a professor at the University of Baltimore Law School, sees the Netscape suit as unique in some ways.
"This is fundamentally different from the couple of hundred other private suits filed against Microsoft because it's not just arguing over money," Lande said. "Here they're asking for injunctive relief that could change the way the high-tech market looks and change the nature of competition in the market. There is really tremendous public interest in which way this thing comes out."
Rich Gray, a Silicon Valley lawyer closely watching the Microsoft antitrust trial, had a mixed response to the lawsuit.
"On the one hand, it's a dramatic development. But on the other, it's not a surprise," Gray said.
He noted that U.S. District Judge Thomas Penfield Jackson's "findings of fact" issued in November 1999 "provide a road map directly to this lawsuit." There are also competitive reasons for filing the lawsuit now.
AOL and Microsoft "are in a death struggle for ownership of the consumer in the digital world," Gray said.
Original case
The Justice Department and 20 states filed their antitrust lawsuit against Microsoft in May 1998, but only 19 states pursued the case. One more state dropped out last year.
The suit alleged that through a variety of business tactics--exclusive contracts and integration of the Internet Explorer browser with Windows 98, among others--Microsoft used its monopoly power to squash Netscape.
The government argued that Microsoft believed Netscape could develop into middleware that could eventually replace Windows. The government also asserted that Microsoft used anti-competitive means to preserve its monopoly. These arguments and evidence introduced by the government resounded with Jackson, who presided over the trial.
"Through its conduct toward Netscape, IBM, Compaq, Intel, and others, Microsoft has demonstrated that it will use its prodigious market power and immense profits to harm any firm that insists on pursuing initiatives that could intensify competition against one of Microsoft's core products," Jackson wrote in his findings of fact in November 1999.
Jackson concluded that Microsoft's actions prevented consumers from having more choices and innovations. "Many of the tactics Microsoft employed have also harmed consumers indirectly by unjustifiably distorting competition," he found.
Although lawyers have filed more than 100 private lawsuits on behalf of consumers, the government's case actually does a better job bolstering civil lawsuits brought by competitors.
Gray estimated damages could be anywhere "from the hundreds of millions to the billions of dollars."
In the quarter ended Dec. 31, Microsoft set aside $660 million to cover the potential cost of settling the class-action suits pending against the company. Still, Microsoft has nearly $40 billion in cash.
While the Netscape lawsuit "piggybacks on the findings of fact and conclusions of law the government spent years determining," the goal is much broader, Lande said. "In some ways, they want to retry the whole and get at the things the government left out.?
In the June 2001 appeals court decision, seven judges threw out Jackson's order that would have broken Microsoft in two. The court also sent back to retrial the allegation that Microsoft had illegally tied--or integrated--its Web browser with the operating system. The Justice Department decided not pursue either matter. The court also dismissed a claim Microsoft illegally tried to extend its monopoly to the browser market.
"It's an interesting strategic choice," Lande said. "They're trying to do what the government originally tried to do and couldn't."
