Sun Files Suit Saying Microsoft Juked Java

Updated from 2:28 p.m. EST

Sun Microsystems(SUNW - Cramer's Take - Stockpickr) took a larger potshot in its longstanding feud with Microsoft(MSFT - Cramer's Take - Stockpickr) Friday, filing a lawsuit against the software maker that alleges Microsoft's anticompetitive behavior damaged the Java platform.

Sun's suit builds upon the June 2001 U.S. Court of Appeals ruling that Microsoft abused its monopoly power, and it specifies a perceived thwarting of the Java platform. Sun General Counsel Mike Morris stressed that the federal appellate ruling specifically ties Microsoft to anticompetitive behavior regarding the Java platform and the Netscape browser. The action follows a similar lawsuit filed by AOL Time Warner(AOL - Cramer's Take - Stockpickr) in January, seeking unspecified damages and a similar injunction on behalf of its Netscape segment.

"This is about determining the extent of damages, figuring out how to fix it, and how to prevent it from occurring again," Morris said.

Sun is seeking damages, changes in existing Microsoft software and an injunction to force Microsoft to unbundle Internet Explorer, server products and the .Net service. Sun also wants Microsoft to license its proprietary interfaces to Sun and other companies, and it wants immediate relief in the form of incorporation of the Java Virtual Machine into the Windows XP operating system. Morris didn't give a specific estimate of damages, saying only that it would be more than $1 billion.

Microsoft spokesman Jim Desler called the lawsuit a "predictable tactic by Sun." "We believe there is no legal or factual basis for this lawsuit," Desler said. "It's time to move past these lawsuits, many of which are related to a lawsuit the parties settled last year."

Timing is Everything

Legal experts disagree over whether the Sun lawsuit is more about winning monetary damages or changes in Microsoft behavior.

"I do not think this lawsuit is a big deal. It's rehashing old issues. It says Microsoft is a monopolist," said James Lucier, Prudential Securities' senior Washington research analyst. "The principal importance of this lawsuit is not as a lawsuit in its own right, but rather as an attempt to influence the anti-trust case occurring in Washington."

The suit's timing is no coincidence, Lucier suggested. It came just one day before a federal judge originally was scheduled to begin hearings to determine tougher sanctions against Microsoft in a case brought by nine states. (The judge postponed those hearings Friday by one week, to March 18.) These dissenting states refused to approve the software maker's anti-trust settlement with the Department of Justice. Lucier said he believes Sun is asking for a laundry list of injunctions in an attempt to influence the federal judge to accept more stringent actions in the dissenting states' anti-trust case. He believes Sun's chances of winning substantial sums through the suit are slim because private anti-trust cases tend not to result in large cash damages.

But Ernest Gellhorn, a law professor at George Mason University in Arlington, Va., said he believes the Sun suit is primarily about getting money out of Microsoft, though he says it's too early to guess at an amount.

Gellhorn said proving liability will be the easy part for Sun's case since it can rely on the appeals court ruling, but calculating how much the company has lost in damages will be far more difficult. In addition, Gellhorn said the dissenting states' sanctions hearing in Washington will make it difficult for Sun to win any preliminary injunctions. "I think they'd have difficulty showing they are being hurt right now in a distinctive way that will not be covered by the other proceedings" in Washington, he said.

On the Books

In its June 2001 opinion, the U.S. Court of Appeals in the District of Columbia ruled that Microsoft violated the Sherman Act by forcing its hardware partners to use its version of Java and by its attempt to "deceive developers" into using Microsoft's version of Java and by strong-arming Intel to stop cooperating with Sun on Java.

Sun alleges that Microsoft cost is sales from licensing fees, software and hardware sales. It also claims that Microsoft's tactics hurt its reputation and reduced the value of Java trademarks.

The company hopes that the U.S. Court of Appeals opinion will help expedite its case by establishing certain complaints as already proven. Morris says the lawsuit could be heard in less than a year. He added, however, that Sun also contends that Microsoft has extended its anti-competitive practice beyond the products included in the Department of Justice's case, including newer lines such as workgroup server software and the .NET initiative. There would most likely be some time spent in the case proving grievances in those areas. "Their ultimate goal is to establish Microsoft-controlled choke points to Internet access," Morris complained. "That would be a profound tragedy for the industry as a whole and consumers."

This isn't the first time Sun has lashed back at Microsoft over the beloved Java environment. Sun filed a breach of contract lawsuit against the software maker in 1997, alleging that Microsoft was working to fragment the Java effort, obtaining a Java license but attempting to extend it in a separate direction. The suit was settled in January 2001 when Microsoft offered to pay Sun $20 million and remove "Java compatible" trademarks from its products. Sun also terminated Microsoft's Java licensing agreement. After that settlement, Microsoft retaliated by removing Java from its 2001 flagship rollout of Windows XP. Sun seeks an injunction to get Java incorporated in Windows XP.

Sun introduced the Java software platform in the late 1990s to provide a more open development environment than Microsoft's Windows operating system, with the motto that programmers could write a program once and run it on any Java device.

Sun shares were up as much as 14% in Friday trading because of a mid-quarter update it delivered Thursday. The server maker reaffirmed its plan to grow revenue slightly from the second quarter's $3.1 billion levels, and to improve gross margins from the December quarter's 36.6%. Sun added the cautionary note that it was not seeing the level of linearity it saw in a by-the-book second quarter. Typically Sun garners 50% of its business in the last month of the quarter, but on Thursday the company said it had more ground than usual to make up going into March. Nonetheless, CFO Mike Lehman expressed confidence that Sun would make its quarterly numbers and return to profitability in the June quarter as planned.

Sun shares had fallen 32% year to date ahead of the report as investors increasingly feared a warning from the company.

Staff Writer Ronna Abramson contributed to this report