Justice Dept. Drops Microsoft Breakup Request

Marking a dramatic change of strategy in its long-standing antitrust case against Microsoft, the Justice Department announced today it will no longer seek a breakup of the world's largest software company.

Rather than break up the company into separate operating systems and applications businesses, the Justice Department said the government will pursue restrictions on Microsoft's business practices to "obtain prompt, effective and certain relief" for consumers.

The decision eradicates any possibility that the software giant could be chopped in half. That was the penalty assessed the company in a dramatic ruling in June 2000 by District Court Judge Thomas Penfield Jackson.

In June of this year, an appeals court overturned Jackson's breakup order and removed him from the case, ordering a different judge to assess a penalty to the company. But the court upheld Jackson's initial ruling, in 1999, that Microsoft had illegally taken advantage of its monopoly in the software market.

The DOJ memo says that because the appeals court upheld Jackson's ruling on the abuse of the software monopoly, the department "believes it has established a basis for relief that would end Microsoft's unlawful conduct."

District Court Judge Colleen Kollar-Kotelly has since been assigned to the four-year-old case. The initial lawsuit against was Microsoft was filed in October 1997.

‘Bundling’ Also Out the Window

Additionally, the DOJ has announced that it will no longer seek to prove that Microsoft had illegally "bundled" its Internet Explorer browser with its Windows 95 operating system — a key part of the original case.

"Pursuing a liability determination on the tying claim would only prolong proceedings and delay the imposition of relief that would benefit consumers," the Justice Department explained in its announcement.

That means Microsoft's new Windows XP operating system, which integrates a variety of new offerings, will not be subject to legal scrutiny on the "bundling" issue.

But Windows XP — due to be released on Oct. 25 — may not be free of legal entanglements. The Justice Department has indicated it will seek some of the remedies laid down by Jackson, including a prohibition on deals in which Microsoft could, among other things, force computer manufacturers to put particular icons or programs on computer desktops. That would have an impact on the new operating system.

Still, the decision constitutes a change of strategy by the government. Under the Clinton administration, the DOJ vigorously pursued a breakup of the Redmond, Wash.-based company. The Bush administration, however, has been less assertive in trying to split the company in two.

Although seemingly good news for the company, investors were still determining the implications of the announcement. In late-afternoon trading, Microsoft's stock was down $1.43 cents to 56.31.

What Comes Next?

The next step in the case is for the two sides to produce a joint status report on the case, which Kollar-Kotelly has ordered them to do by Sept. 14. Kollar-Kotelly will then begin the process, including court hearings, of deciding on a penalty.

Although the DOJ has now pulled back on the breakup issue, it is not the only party seeking a penalty against Microsoft. Seventeen attorney general offices are also involved in the case, and the hard-line stance of a few of them is thought to have been a reason why settlement talks between Microsoft and the government fell through last year.

"The state attorney generals are thought to be more aggressive than the Justice Department on some of these issues," says James Love, director of the Consumer Project on Technology, a Washington-based think-tank.

Nicholas Economides, a professor of business at New York University who has studied antitrust cases extensively, says the fact that Justice Department officials made their decision public is significant in itself.

"They are trying to get the [state] attorney generals behind them in not pursuing the breakup," he says.

Economides also thinks a likely verdict will be strict limits on Microsoft's dealings with the computer manufacturers and other companies dependent on its products.

"The ultimate remedy must be restrictions on the contracts that Microsoft can write," says Economides.

ABCNEWS.com's Peter Dizikes and ABCNEWS Radio contributed to this report.