Appeals Court Reverses Microsoft Breakup Ruling

In a major victory for Microsoft, the federal appeals court Thursday unanimously reversed the breakup of the software giant, ruling that the company violated antitrust laws but that the trial judge engaged in "serious judicial misconduct."

Click here to read the ruling.

The U.S. Circuit Court of Appeals for the District of Columbia ordered that a new judge decide what penalty the company should face. It also struck down and altered some of the lower court's findings of antitrust violations by Microsoft.

Overall, 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."

Microsoft cheered the ruling. "I'm incredibly optimistic about the future," said Microsoft founder Bill Gates. The decision "removes the breakup cloud from the company" and "significantly narrows this case," said Microsoft spokesman Jim Cullinan.

Jackson Slammed

But the judges also concluded U.S. District Judge Thomas Penfield Jackson improperly conducted himself in the case, leaving himself open to the appearance he was biased against Microsoft.

In a rare rebuke of a colleague, the judges ruled Jackson made inappropriate comments to the news media and outside courtroom that gave the appearance he was biased against Microsoft. Among his comments, Jackson compared Microsoft founder Bill Gates to Napoleon.

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.

After the news broke, Microsoft shares that had been down 89 cents to $70.25 suddenly 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. They now face several options, including considering settlement talks, appealing to the Supreme Court or seeking penalties against Microsoft from the new judge.

"This is a significant victory," said Attorney General John Ashcroft, who said he would be open to settlement talks with Microsoft. Assistant Attorney General Charles James said the ruling's key finding was that Microsoft engaged in anticompetitive conduct to preserve its monopoly. James is in charge of the Justice Department's antitrust division.

Connecticut Attorney General Richard Blumenthal, one of the leaders of the states' antitrust effort, said "this result ... is a very powerfully positive outcome because it sustains our core claim that Microsoft has acted illegally by maintaining its stranglehold on the market."

President Bush was informed of the ruling, but White House spokesman Ari Fleischer said he was withholding comment so the Justice Department could review a very complicated legal decision.

Decision Faces High Court Challenge

The appeals court made several changes in Jackson's three primary conclusions about which company 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.

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 denigrating Gates and comparing 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.

-- Reuters and the Associated Press contributed to this report.