State loses Microsoft ruling

In a stinging defeat for Massachusetts Attorney General Thomas F. Reilly, a federal Appeals Court yesterday upheld the antitrust settlement between Microsoft Corp. and the US Justice Department. The six-judge panel unanimously rejected an effort by Massachusetts to impose tougher sanctions on the world's largest software company.

"The district court . . . went to the heart of the problem Microsoft had created, and it did so without intruding itself into the design and engineering of the Windows operating system," the Appeals Court declared. "We say, 'Well done!' "

Reilly said the ruling was "terrible news for consumers and competition, and ultimately this is bad news for our economy." But Microsoft's general counsel, Brad Smith, hailed the decision, saying it would benefit the entire industry. The decision came one day after Microsoft agreed to pay as much as $34 million to settle a consumer class-action lawsuit in Massachusetts. Smith said that resolution of the Massachusetts cases and other legal disputes has eliminated the uncertainty that has hindered Microsoft's decisions about how to spend its $50 billion cash reserve.

The current case began in 1997, when the Clinton administration's Justice Department filed a complaint that Microsoft had violated a consent decree it had signed in 1995, to settle an earlier antitrust complaint. That conflict escalated into one of the biggest antitrust trials in American history, as Microsoft was charged with using its dominant power in desktop operating system software to penalize numerous rivals, in-cluding IBM Corp., Sun Microsystems Inc. and Intel Corp. The Justice Department was joined in the case by attorneys general from 19 states, including Massachusetts.

In 2000, US District Judge Thomas Penfield Jackson found Microsoft in violation of federal antitrust law and ordered the company to be broken into two parts. But Jackson's order was tossed out on appeal in 2001, partly because of Jackson's indiscreet comments to a journalist during the trial. By then, the Bush administration had come to Washington, and a new Justice Department team was willing to settle the case. The result was a consent decree that put limits on many Microsoft business practices, but which was considered toothless by many Microsoft critics, and by the Massachusetts attorney general.

Reilly opposed the settlement, along with representatives of two major computer industry trade associations.

Ken Wasch, president of the Software and Information Industry Association, one of the groups that supported the appeal, was disappointed by the outcome. But Wasch was full of praise for Reilly. "Your attorney general is a true hero to the software industry," Wasch said. "When the other states gave up the fight two years ago, Tom Reilly stood on principle. . . . He fought courageously, and he fought alone."

Microsoft's Smith seemed eager to mend fences with Reilly. "Throughout this process we've appreciated the high level of professionalism of the attorney general's office," he said. "I hope we'll have the opportunity for an ongoing dialogue and an improving relationship with Attorney General Reilly and his staff."

But Reilly made no effort to conceal his bitter disappointment. "Today's opinion has demonstrated that our antitrust laws are no longer effective in protecting consumers," he said. "The so-called remedy that the district court came up with is meaningless."

Reilly said yesterday he and his staff will study the ruling before deciding whether to attempt an appeal to the US Supreme Court. But Smith seemed confident that such an appeal would be futile.

Microsoft's chief financial officer John Connors has told Wall Street leaders the company will unveil plans for its cash reserve before an analysts meeting in late July. Smith said yesterday the most likely moves involve increasing stock dividends and a major buyback of shares.

But Microsoft still faces uncertainty overseas. The European Union fined the company $613 million in March for antitrust violations, and is moving to force Microsoft to strip its Media Player software from its Windows operating system. Microsoft is appealing the ruling.

Hiawatha Bray can be reached at bray@globe.com.