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State exits Microsoft suit
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December 7, 1998: 8:07 p.m. ET
S. Carolina attorney general says AOL-Netscape merger changed landscape
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NEW YORK (CNNfn) - South Carolina withdrew from the federal antitrust suit against Microsoft Corp. Monday, citing a strong competitive environment in the computer industry.
The Justice Department, however, said it plans to move forward with the case along with the remaining 19 states that jointly filed suit against the software giant.
State Attorney General Charlie Condon said the recent $4.2-billion merger proposal between America Online Inc. (AOL) and Netscape Communications Corp. (NSCP) offered evidence that competition is thriving in the computer industry, an argument previously made by Microsoft lawyers and officials.
"I can no longer justify our continued involvement or the expenditure of state resources on a trial that has been made moot by the actions of the competitive marketplace," Condon, a Republican, said in a statement. "The Internet economy is the place where the winners and the losers of this competition will rightfully be decided."
A Justice Department spokeswoman said South Carolina's withdrawal would have "zero impact on our case."
In May, the Justice Department and 20 states sued Microsoft for illegally maintaining a monopoly with its Windows operating system and working to extend that monopoly into Internet software.
Microsoft and other critics of the suit have maintained the government's purpose is to protect the interests of Microsoft's competitors, particularly Netscape. Condon echoed that sentiment in his statement while criticizing the way the Justice Department has handled the case.
"Over the last year, it has become clear that the government's case has been about Internet competitors, not about consumers," he said.
"The government's witnesses are either Microsoft's competitors or paid government experts. Consumers have not taken a leading role in this action. That's because there are no monopolies on the Internet. The consumers of South Carolina are benefiting from freedom and competition in the marketplace."
Condon added that innovation and competition should be left to the marketplace, "not to government bureaucrats or the courts."
At a Washington news conference, Microsoft General Counsel William Neukom said the company was pleased by South Carolina's decision and hoped other states would follow suit.
The news sent Microsoft (MSFT) shares up 6-3/16 to close at 133-9/16.
Gov't says case will be business as usual
Marc Wurzel, a spokesman with the New York attorney general's office, called Condon's decision a "non-event."
"With multistate litigation, states sign on and off with great regularity," he said.
Microsoft hopes South Carolina's withdrawal, and the reasons behind it, will urge other states to follow suit. Microsoft's legal team said they were involved in ongoing talks with other state attorneys general.
But Tom Miller and Richard Blumenthal, attorneys general from Iowa and Connecticut, respectively, doubted South Carolina's decision will prompt additional defections. Miller and Blumenthal have been two of the more active state participants in the suit.
"It doesn't change anything," Miller said. "If the case had been going badly, one of the states leaving might have posed some problems. But when a state leaves because of external events, it doesn't change the dynamics of the case."
Brian Goodstadt, an analyst at S&P Equity Group, said the most significant impact will likely rest in the public's perception of the case rather than in the courtroom.
"It may turn the PR wars around a bit," he said. "The government had been winning the PR wars by vilifying [Microsoft Chairman] Bill Gates. This could turn things a bit."
Wurzel pointed out that, unlike New York and Iowa, South Carolina was not one of the more active states involved in the Microsoft lawsuit.
"South Carolina wasn't contributing a lot of resources or manpower to this case," he said.
Along with South Carolina, the other states that joined the Justice Department in the antitrust suit were: California, Connecticut, Florida, Illinois, Iowa, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, New Mexico, New York, North Carolina, Ohio, Utah, West Virginia and Wisconsin.
Texas, which at one time lead the states' antitrust efforts against Microsoft, dropped out just days before the government filed the suit in May. At the time, Attorney General Dan Morales expressed concerns that the suit may have a negative effect on Texas' high-tech community, which includes Compaq Computer Corp. (CPQ) and Dell Computer Corp. (DELL), the world's top two computer makers.
Microsoft moves forward
Separately, Microsoft's legal team said it has filed a motion with the trial judge, Thomas Penfield Jackson, seeking permission to subpoena merger-related documents from AOL and Netscape, a deal that also involves Sun Microsystems Inc. (SUNW). Lawyers want access to the documents to demonstrate that a single company such as Microsoft cannot control access to the Internet, a claim central to the government's lawsuit.
"The parties to the transactions are all witnesses for the government in this case, and the fact that they are working cooperatively against Microsoft in the area of Web browsing software goes to the very heart of the government's claims," Microsoft said in the court filing.
Published reports have speculated that Gates, who is not on either sides' witness list, may take the stand before the trial is over. Both sides are allotted 12 witnesses, plus two rebuttal witnesses they can call after the original 12 testify.
The government declined to call Gates to the stand because it did not want to contend with a hostile witness, though it has released excerpts from his videotaped deposition throughout the trial.
Microsoft also declined to call Gates as one of its witnesses, contending that it tapped the people most familiar with the case.
The company could call Gates to the stand as one of its rebuttal witnesses, though Neukom told the Moneyline News Hour with Lou Dobbs it's too early to speculate whether that will happen. [167K WAV] or [167K AIFF]
Judge Jackson has rebuked Gates for a lack of candor in his deposition. Excerpts have shown Gates frequently quibbling with lead Justice Department attorney David Boies over such seemingly simple terms as "compete" and "non-Microsoft browsers."
At the news conference earlier Monday, Gates delivered a detailed response to the government's use of his deposition, saying Boies was "out to destroy Microsoft."
Neukom accused the government of making the trial a personal attack on Gates rather than focusing on the merits of the case.
"This case is not going anywhere for the government," Neukom said.
A Justice Department spokeswoman dismissed Gates' comments as a public-relations ploy to divert attention away from the issues of the trial.
Professor set to testify
The trial will begin its eighth week Tuesday, with David Farber, a professor of telecommunication systems at the University of Pennsylvania, taking the stand as the government's next witness.
In his written direct testimony, which the Justice Department released late Monday afternoon, Farber contends Windows and Internet Explorer are separate products.
That issue is integral to the government's case. The Justice Department has argued that by bundling the Web browser into the operating system, Microsoft illegally undercut Netscape's Navigator browser market share. Navigator had been the dominant Web browser until Microsoft included Internet Explorer for free within Windows.
In a highly technical testimony, Farber maintained "there are no technical barriers that prevent Microsoft from developing and selling its Windows operating system as a standalone product separate from its browser software."
Microsoft has long argued that the browser is a fundamental component of the operating system and cannot be removed without causing irreparable harm to Windows.
In June, a federal appeals court ruled that the Windows 95-Internet Explorer combination is an integrated product and stuck down a preliminary injunction prohibiting the company from offering it as a single product.
Because of a scheduling conflict, Farber will interrupt Sun Vice President James Gosling's testimony, who will take the stand for a third day of cross examination later this week. 
-- by staff writer John Frederick Moore
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