Washington A federal appeals court unanimously reversed the breakup of Microsoft on Thursday, ruling that the software giant violated antitrust laws but the trial judge engaged in "serious judicial misconduct" by making derogatory comments about the company.
The U.S. Court of Appeals for the District of Columbia ordered that a new judge decide what penalty the company should face while also striking down and altering some of the findings of antitrust violations by Microsoft.
The appeals judges said they agreed "with the District Court that the company behaved anti-competitively ... and that these actions contributed to the maintenance of its monopoly power."
By a 7-0 vote, the appeals court concluded U.S. District Judge Thomas Penfield Jackson made inappropriate comments to the news media and outside court that gave the appearance he was biased against Microsoft.
The judge's actions "would give a reasonable, informed observer cause to question his impartiality in ordering the company split in two," the appeals court said.
"Although we find no evidence of actual bias, we hold that the actions of the trial judge seriously tainted the proceedings before the District Court and called into question the integrity of the judicial process," the court added.
Though winning a major victory, Microsoft officials in Redmond, Wash., were mum on the decision. Investors, however, reacted with glee.
Shares of Microsoft were down 89 cents to $70.25 before word of the ruling began leaking out. The shares surged $3.82 to $74.96 before they were halted in late morning trading on the Nasdaq.
The Justice Department and 19 states sued Microsoft, alleging it tried to thwart competitors illegally.
On Thursday, the Justice Department said: "We are pleased that the Court of Appeals found that Microsoft had engaged in illegal conduct to maintain its operating system monopoly. We are reviewing the court's opinion and considering our options."
The appeals court made several changes in Jackson's three primary conclusions about which of the company's actions violated law.
The judges reversed the finding that Microsoft's packaging of its Windows operating system with its Internet Explorer violated antitrust laws, saying the government, in the new phase of the case, would have to show that Microsoft "unreasonably restrained competition" with that action in order for it to seek a penalty. It upheld the finding that Microsoft improperly monopolized its share of the computer operating system market, and it altered the standard to be used in considering a third violation cited by the lower court.
"Of the three antitrust violations originally identified by the District Court, one is no longer viable: attempted monopolization of the browser market. ... One will be remanded for liability proceedings under a different legal standard: unlawful tying. ... Only liability for the monopoly-maintenance violation has been affirmed and even that we have revised," the judges said.
In a rare rebuke of a colleague, the appeals judges said Jackson "engaged in impermissible ex parte contacts by holding secret interviews with members of the media and made numerous offensive comments about Microsoft officials in public statements outside of the courtroom, giving rise to an appearance of partiality," the court said.
"The public cannot be expected to maintain confidence in the integrity and impartiality of the federal judiciary in the face of such conduct," the appeals court said.
The appellate decision that Microsoft may be able to package the products together was reached, the judges said, because they feared that such a prohibition on packaging software "may impede operating system innovation."
The U.S. Court of Appeals decision is the most significant antitrust ruling since the court-ordered breakup of the AT&T telephone monopoly almost two decades ago.
The decision, which faces a likely Supreme Court challenge, may embolden Microsoft in several new initiatives it has under way to merge its popular software products.
Microsoft had banked the company's future on a strategy of extending the dominance of its Windows operating system to the Internet with new software that integrates with the core operating system.
The breakup Jackson had ordered and the appeals court reversed has been recommended by the Justice Department and 17 of the 19 states that sued Microsoft under antitrust laws, accusing it of using anticompetitive practices to maintain a monopoly over its competitors in operating systems.
The government argued against Microsoft's bundling of its Internet Explorer browser with Windows, alleging it pushed Netscape's competing browser out of the marketplace. Also, the government said Microsoft bullied computer makers into ceding control of the computer's desktop.
Microsoft argued that consumers appreciate having the browser and operating system in one package, and simply acted in its own interests in a competitive market. They said recent innovations in personal computers are a testament to their practices.
Both Microsoft and government lawyers were grilled by appeals judges during the first day of the February appeals hearings, as the techno-savvy judges asked pointed questions about whether the software company used anticompetitive practices to quash the "nascent seedlings of competition."
But on the second and final day, the mood turned sharply in Microsoft's favor as the judges were outraged at Jackson's statements to reporters before and after his order.
In interviews with newspapers, magazines and book authors, Jackson was quoted as comparing Microsoft chairman Bill Gates to Napoleon and the company to a drug-dealing street gang, among other comments.
Jackson granted some of the interviews on an embargoed basis before the antitrust trial ended last year with the expectation they would be published afterward a fact singled out by some appeals judges.
The appeals court said it only reversed Jackson's penalty decision because, "The most serious judicial misconduct occurred near or during the remedial stage. It is therefore commensurate that our remedy focus on that stage of the case."