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For Microsoft, Harsh Ruling Foretells a Punishing Penalty Phase

The judge's tougher-than-expected ruling opens the door to countless civil actions.

So you thought maybe

Microsoft

(MSFT) - Get Microsoft Corporation Report

was going to get off easy?

With Monday afternoon's

release of U.S. District Judge

Thomas Penfield Jackson's

conclusions of law in the

Justice Department

-led antitrust action against Microsoft, the final -- and ugliest -- phase of this three-part pig roast begins.

Part One ended in November, with Jackson's

release of his findings of fact -- what Microsoft did. Part Two ended Monday afternoon with the

release of his brutal findings of law -- just how Microsoft's actions violated antitrust laws. Now we begin the penalty phase, in which the DOJ and its state-attorneys-general partners will use the judge's findings as carving knives on the Microsoft carcass.

Jackson gave 'em plenty to work with. On point after point in his decision, he set up the potential for what could be crippling "remedies" assessed against Microsoft.

On first reading of his findings, I'm struck that they are generally more harsh than most observers -- excepting perhaps

Sun Microsystems

TheStreet Recommends

(SUNW) - Get Sunworks, Inc. Report

CEO Scott McNealy -- had expected. The killer points, with some excerpts from Jackson's findings Monday:

  • Jackson's repeated findings of "predatory" action by Microsoft, through its monopoly, will strengthen considerably the hand of the DOJ in seeking severe penalties.
  • Jackson's findings of a long-term pattern of abuse of that monopoly argue for a positive response by him to DOJ's inevitable requests for tough penalties: "Over the past several years, Microsoft has comported itself in a way that could only be consistent with rational behavior for a profit-maximizing firm if the firm knew that it possessed monopoly power, and if it was motivated by a desire to preserve the barrier to entry protecting that power."
  • The breadth of Jackson's findings argue for structural remedies ahead, not only limits on Microsoft's future business practices: "Only when the separate categories of conduct are viewed, as they should be, as a single, well-coordinated course of action does the full extent of the violence that Microsoft has done to the competitive process reveal itself."
  • Jackson's listing of several companies specifically harmed by Microsoft's actions -- " IBM (IBM) - Get International Business Machines Corporation Report, Hewlett-Packard (HWP) , Intel (INTC) - Get Intel Corporation Report, Netscape, Sun and many others" -- invites almost immediate litigation by them against Microsoft, using Monday's document as the basis of their claims.
  • Jackson sounds ready to give DOJ and the 19 state attorneys general joined in this action some interim injunctive relief, before the appeals process gets under way.

There are already more than 100 civil cases pending against Microsoft for monetary damages for the actions alleged in earlier findings. In addition, the states are entitled to civil as well as injunctive relief now that Jackson has turned in these tough findings of law.

We can expect to see an avalanche of additional civil damage claims filed against Microsoft by public and private entities, now substantially buttressed by Jackson's findings Monday. Microsoft will likely be in the courts for years, with huge legal bills and, very possibly, huge judgments ahead.

Jackson says he'll release shortly a schedule for the penalty phase of the trial. Look for an aggressive timetable. After a year and a half of trial, including four months of negotiations on a settlement, this case has already dragged on much longer than Jackson originally indicated he'd allow.

The 1990s were a cruel time for Microsoft, from the beginnings of the

Federal Trade Commission's

investigation into Microsoft's business practices in 1990, through Monday's findings. Monday's ruling from Jackson, and Microsoft's shave and haircut in the market, dropping $79 billion-plus, hardly bring that tough decade to a close. Too much pain remains to close the books yet -- and I fear we cannot say that the worst for Microsoft is now past.

Not a pretty day for Microsoft. Bill Gates and others at Microsoft Monday offered the predictable response: The key thing they were defending by not settling was all technology companies' right to innovate on their own terms.

Indeed. But bought, probably, at a very high price.

And as I said in a

column earlier Monday, not a propitious moment to jump into a new Microsoft position. Though if you can handle the dead-money issue here, this is probably a good time to hold on to existing positions.

See our index page for a full roundup of Microsoft antitrust coverage.

Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, neither Seymour nor Seymour Group held positions in any securities mentioned in this column, although holdings can change at any time. Seymour does not write about companies that are current or recent consulting clients of Seymour Group. While Seymour cannot provide investment advice or recommendations, he invites your feedback at

jseymour@thestreet.com.