US appeals court unanimously threw out a ruling splitting Microsoft Corp into two companies, while upholding a judge's finding that the largest software company illegally defended its Windows monopoly.
The judges ordered new hearings on a remedy to stop Microsoft, whose Windows operating system runs 95 percent of the world's personal computers, from abusing its dominance. The court disqualified US District Judge Thomas Penfield Jackson as a "publicity-seeking judge" who gave news interviews comparing Chairman Bill Gates and other company officials to drug dealers.
The 7 to 0 decision forces the Bush administration, which inherited a case filed when Bill Clinton was president, to decide whether to seek a settlement. The 19 state attorneys general in the case may pressure US Attorney General John Ashcroft to press ahead in court.
The ruling "truly is mixed," said William Baer, ex-head of the Federal Trade Commission's antitrust unit. "It vindicates the government's belief that Microsoft engaged in anticompetitive conduct. At the same time, it sustains Microsoft's view that whatever it did certainly didn't warrant a breakup."
Justice Department officials said they are reviewing their options. "Today's decision represents a very significant victory," Ashcroft said.
Gates signaled a settlement might be possible, saying the company will "work to resolve the remaining issues without the need for litigation."
Microsoft said in a statement the ruling "drastically narrows the case and removes the breakup cloud from the company."
Although the court declined to rule out the possibility that a breakup order might be reimposed, the judges said a court-ordered split is a rarely used tool that should be applied "only with great caution."
They also said they overturned Jackson's breakup order, which would have split Windows from the rest of the company, because it depended on a number of findings they reversed.
"The court is sending a strong signal that divestiture is not a reasonable remedy in this case," said Ernest Gellhorn, an antitrust professor at George Mason University.
Still, Iowa Attorney General Tom Miller said government lawyers "have a good argument for a very strong remedy, perhaps a breakup."
State attorneys general said they may demand changes in the new version of Windows, which bundles Internet telephone service, instant messaging and video conferencing. Critics have complained that Windows XP, due to be released Oct. 25, might let Microsoft gain control of the market for these Internet features.
The decision "will provide the basis for remedies that fundamentally change Microsoft's conduct in the marketplace so as to stop its misuse of monopoly power," said Connecticut Attorney General Richard Blumenthal.
The decision came from a federal appeals court that includes Douglas Ginsburg, an antitrust expert once nominated to the US Supreme Court, and Harry Edwards, who will be stepping down as the court's chief judge in July. All seven judges to consider the case joined the 125-page decision in full.
The unanimity of the ruling helps "makes this case bulletproof from Supreme Court review," Gellhorn said.
On the monopoly-maintenance question, the appeals court said Microsoft's contracts with Internet service providers, requiring them to feature the company's Internet Explorer browser, were designed to illegally protect the Windows monopoly.
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