Microsoft in victory over government

THE US government suffered a major legal defeat in its campaign against Microsoft yesterday.

An appeal court ruled that Microsoft was quite within its rights to combine its Internet browser with its operating system, the key issue in the government's competition case against Bill Gates' software giant.

Microsoft's enemies argue that it is using its dominance of the market for operating systems - the basic software that makes the hardware in computers work together - to build a dominant position in Internet software. Browsers are the basic software that allows computer users to use the Internet, and Microsoft has slowly edged its rivals, like Netscape, out of the market.

A lower court had granted an injunction against Microsoft on the grounds that it had tied its Web browser to Windows 95, breaking a 1995 agreement, and fined the company $1m (pounds 628,000) a day. Microsoft had argued that the two were legitimately linked, but the court disagreed.

Yesterday's ruling said that the court had been wrong in the procedures that it had used, and in its argument about the browser.

"We find that the District Court erred procedurally in entering a preliminary injunction without notice to Microsoft and substantively in its implicit construction of the consent decree on which the preliminary injunction rested," the court said.

It ruled that an "integrated product" was one which combined separate functions in a way that was useful for consumers - something which Microsoft has always argued was the case for the Internet browser.

The US Justice Department has brought a broader competition case against Microsoft, which is due to be heard in September.

The Appeals Court ruling cuts away the ground from under the government. It comes at a propitious time for Microsoft, which this week will release Windows 98, its latest operating system. The main selling point of the new product is that it integrates the computer with the Internet even more tightly.

Though the latest judgement overturns the injunction, it does not prevent the Justice Department from proceeding with its effort to dislodge Microsoft from its position of dominance. Effectively, it throws the case back to the judge who will hear the larger case.

But by undermining the key argument, it will make the government's task even harder, and will increase criticism from business that the Justice Department has overreached itself.

The court said that the second, larger case might supercede the narrower issue upon which it had been asked to rule.

It said that the Justice Department "may well regard further pursuit of this case as unpromising, especially given the alternative avenues developing in its recently launched separate attacks on Microsoft's practices."

Whatever the legal niceties, Wall Street clearly though the judgement was good news for Bill Gates. Microsoft's stock price, which has suffered as the government has assembled its case against the company, leapt by more than three points.