Updated from 2:42 p.m. EDT

In a setback for the

Justice Department

, the

U.S. Supreme Court

on Tuesday sent the antitrust case against

Microsoft

(MSFT) - Get Report

to a lower court, which quickly asked the parties to set a schedule for arguments.

To investors, the decision seemingly represented a battle won in a war that has gone poorly. After opening at $60.94, the software company's shares rose as high as $65.88 before closing up $1.44, or around 2.4%, at $62.69.

The appeal will now be heard by the

Court of Appeals for the District of Columbia Circuit

. A three-judge panel of the court of appeals, in a related case, issued an important ruling in Microsoft's favor two years ago. The Justice Department had invoked an obscure 1974 law known as the Expediting Act in an effort to send the company's appeal directly to the Supreme Court.

The Circuit Court of Appeals has made no secret of its eagerness to hear the case. After the Supreme Court passed on the matter Tuesday morning, fewer than six hours passed before the appeals court ordered each side to propose a briefing schedule. It set a deadline of Monday.

District judge Thomas Penfield Jackson ruled on

June 7, that the company illegally used its monopoly position to compete unfairly and ordered it split in two. Before Jackson began issuing a series of rulings against the company, its stock had traded for more than $100.

"In No. 00-139, the direct appeal is denied and the case is remanded to the United States Court of Appeals for the District of Columbia Circuit," the Supreme Court wrote Tuesday. "In No. 00-261, the petition for a

writ of certiorari

for judgment is denied."

The former is the case brought by the U.S. Department of Justice; the latter is a case brought by 17 state attorneys general, led by New York Attorney General Elliot Spitzer.

"We're disappointed that the Supreme Court declined to hear arguments in the Microsoft case at this time," said Tom Miller, attorney general of Iowa and a leader of the working group of states in the Microsoft case. "We continue to believe that prompt and final resolution of this case is in the public interest, and that the Supreme Court is the most appropriate forum for that resolution. Nevertheless, we look forward to presenting our case to the U.S. Court of Appeals for the D.C. Circuit."

Asked whether the software company considered the decision a victory, Jim Cullinan, a Microsoft spokesman, declined to comment.

The Redmond, Wash. company plans "on outlining a significant number of legal, factual and procedural errors," Cullinan said. "We're confident of our appeal."

Gina Talamona, a spokeswoman for the Department of Justice, said its attorneys "look forward to presenting our case to the court of appeals as expeditiously as possible." A spokesman for Spitzer had no immediate comment.

Justice Stephen Breyer dissented from the decision, writing that he recognizes the country's economic need for hasty legal certainty in the case but that "I believe this court can consider the issues fully now by taking additional briefs and by granting additional time for oral argument, if necessary."

Chief Justice William H. Rehnquist, whose son is a lawyer for

Goodwin Procter & Hoar

, a law firm retained by Microsoft, declined to recuse himself from the case. The firm's work is isolated to matters unrelated to the antitrust case, and the court's decision-making is hurt by a judge's recusal, he wrote.

The appeals court has said it will expeditiously hear the case as a full panel, rather than as a three-judge panel.

On Wall Street,

reaction to the news was jubilant.

TheStreet Recommends

"Short of the verdict being reversed, this is very good news for Microsoft," said William Epifanio, an analyst for

J.P. Morgan

. (The firm has not done recent underwriting for the company, and Epifanio rates Microsoft shares a buy.) Characterizing the opinion of his firm's legal analysts, Epifanio said Jackson had disregarded a portion of the appeals court's 1998 ruling that related to the way Microsoft tied its Web browser to its operating system. The appeals panel might now be eager to reverse Jackson again, he said.

Other analysts were more cautious.

"At this point, we think a split decision is likely, however, there is still a long way to go during the appeals process before a decision will be made," wrote Melissa Eisenstat, an analyst for

CIBC World Markets

. (She rates the shares buy and her firm has not done recent underwriting for Microsoft.)

Michael E. Stanek, analyst for

Lehman Brothers

, said the decision "lays the groundwork for a much more balanced view of this case."

Several analysts said the company's stock will likely continue to react to trial news, but, in Stanek's words, "Microsoft ultimately trades on its fundamentals."

"And let's face it," he said. "They're in a product transition with a double whammy of the PC market basically just tanking, especially recently."

Throughout the trial, investors have swung Microsoft's stock price wildly, reacting to bogus settlement rumors, legitimate trial news and then to estimations of the company's so-called fundamentals, the latter produced by analysts themselves. In

April, the stock plunged 5% after an influential

Goldman Sachs

analyst drew attention to revenue estimates just as a flurry of trial news was settling.

Timeline of Legal Battle

Though Microsoft declined to claim a victory, it has aggressively sought the lower court's review. In

April, before setting remedies in the case, Jackson agreed to support the DOJ's efforts to seek an expedited appeal. Microsoft made its opposition clear then.

After Jackson approved a motion to send the case to the Supreme Court, the parties spent the summer arguing over whether the case was so complex that it should first be heard by the lower court

On

Aug. 15, prosecutors assailed Microsoft's initial assertion that the case involves too many complex legal and factual issues to merit immediate Supreme Court review. Prosecutors sought to distill the details of the case into a few questions of whether Microsoft violated antitrust laws by illegally protecting its Windows monopoly.

Lawyers for the Justice Department said in a brief that Microsoft had exaggerated the complexity of the legal issues in a bid to stymie the government, and they suggested that the Supreme Court is every bit as capable as the court of appeals of hearing the Microsoft case.

In the first brief to the Supreme Court, filed

July 26, Microsoft argued that "full and fair consideration" of its appeal would pose an unwieldy burden on the Supreme Court and said that it hoped to winnow the number of violations included in the case in the lower court.

Calling federal prosecutors "afraid" of the standard judicial process, Microsoft on June 19, asked Jackson to deny a prosecution motion to send the company's appeal of his decision directly to the Supreme Court.

At the time, the company presented a three-fold argument: That the consolidated federal-state case did not meet the Expediting Act's narrowly defined statutory application; that the case's general importance was insufficient grounds to warrant use of the Expediting Act; and that using the act would actually slow the appeals process because the Supreme Court would eventually end its session, possibly sending appeals back down and further convoluting the whole matter.

Microsoft's effort was doomed, because Jackson had already clearly stated his intention to certify the appeal directly to the nation's highest court. But it set the stage for the company's later protestations, including its most forceful argument -- rephrased and repeated throughout the ensuing documents -- that the case is extraordinarily complicated.

On June 7, Jackson ordered that Microsoft be split in two and placed restrictions on its business practices to remedy antitrust violations. He subsequently stayed both remedies. The appeals court on June 13 volunteered to hear any appeal as a full panel, rather than as a three-judge panel, "in view of the exceptional importance" of the case.

The breakup ordered by Jackson would place the Windows operating system in one company and create a second business for everything else, including software applications, the Internet Explorer Web browser and the Microsoft Network Internet service provider and network of Web sites.

Last week, Assistant Attorney General Joel Klein, who led the DOJ's antitrust case, said that he would

leave the Department of Justice at the month's end.