Judge Orders Prosecutors to Revise Microsoft Breakup Plan

In the courtroom, the judge discussed the possibility of a three-way Microsoft breakup.
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Updated from 12:23 p.m. EDT

The federal judge overseeing the antitrust case against Microsoft

(MSFT) - Get Report

brushed aside the company's motion to dismiss a government breakup proposal, then ordered prosecutors to revise their plan to split the company in two.

Judge Thomas Penfield Jackson also said he foresees ``no further process'' in the trial after Wednesday's hearing on possible remedies, potentially indicating an early decision. The company had request for several months to prepare to argue against a breakup.

After hearing a little more than four hours of arguments in his courtroom in Washington, Jackson told federal antitrust prosecutors lawyers to update their two-way breakup proposal by Friday. In the courtroom, he had discussed the possibility of a three-way breakup.

Microsoft's shares rose 2 13/16, or 4.5%, to close at 66 in Wednesday regular trading. The stock is well off its 52-week high of 119 15/16, reached before settlement negotiations in the antitrust trial dissolved.

"Judge Jackson has had two years to think about his decision," said James Lucier, a software industry analyst for

Prudential Securities

. "It's pretty clear or seems likely he's going to order a breakup, and frankly the sooner we do it the better."

"Investors just want this stage to be over with," Lucier said, noting that an extremely adverse judgment from Jackson already seems to be priced into the company's stock. "They want to move on to the appeal process."

The court proceedings appeared to begin on a sour note for the Redmond, Wash.-based software company, which unexpectedly filed additional written documents on

Monday seeking to dismiss the breakup proposal. Judge Jackson, who did not request the extra documents, opened the hearing by declining to discuss the company's motion to dismiss.

"I intend to proceed to the merits of the remedy," Jackson said, according to the

Reuters

news service. Kevin O'Connor, an assistant attorney general from Washington, then began the government's case for a breakup.

But Jackson criticized the government proposal, saying it would create two monopolies where now there is one. ``A bisection will in effect create two separate monopolies,'' Jackson said.

Instead, he praised a friend-of-the-court filing calling for Internet Explorer, Microsoft's Web browser, to be split away into yet a third company. ''Rather than reorganizing Microsoft into only a Windows company and a single applications company, the court should supplement plaintiffs' proposed final judgement by separating the Internet Explorer product and personnel into a third, independent company,'' the brief said.

Jackson ruled on April 3 that the company used illegal methods to expand its monopoly on the Windows operating system to other businesses.

The

Justice Department

and 17 attorneys general proposed last month to split the company into two parts. One company would own the operating system business while the other would own the remainder of Microsoft's assets, including the Office software package, Web browser and the

MSN

network of Web sites.

Microsoft's remedies proposal, which it was required to file May 10, asked for a dismissal of the Justice Department's proposal. The additional documents filed Monday sought to bolster the dismissal motion, using arguments the government itself made in its prior case against Microsoft.

Forced to propose remedies for a ruling it plans to appeal on behavior it still maintains was legal, Microsoft asked for behavioral regulations, including restrictions governing the company's license agreements with computer makers. The government proposal also offers conduct remedies, including some that appear in the company's proposal. Two states abstained from the government proposal because they oppose the breakup.

When the time came for Microsoft's lawyer, John Warden, to defend the company's conduct remedies proposals, he took a pass: ``I'm not going to discuss it, it's addressed in the brief.''

Instead, Warden spent his time in court Wednesday arguing against the breakup proposal and explaining why his company needed months of preparation if the judge is considering a breakup.

As the court proceedings proceeded on the East Coast, William H. Gates, Microsoft's chairman, made a presentation to business leaders on the West Coast at the company's fourth annual CEO Summit. According to a prepared statement from the company, Gates "shared his belief that the successful companies in this next generation of the Internet will be those that renew their customer commitment, strengthen ties with partners and use the power of leading-edge Internet services."

The company is poised to release Next Generation Windows Services, the first incarnation of the company's envisioned platform of software applications floating on the Internet.