New York Times

October 27, 1998

At Trial, Microsoft Says Key Meeting Was a 'Setup'

WASHINGTON -- Opening a new line of defense in its antitrust trial, the Microsoft Corporation on Monday portrayed a meeting that is a focal point in the Government's case as a "setup" orchestrated by its Internet software rival, the Netscape Communications Corporation.

Microsoft based that claim on the fact that the Justice Department issued a civil subpoena to Netscape the day after the meeting, on June 21, 1995, and that two days later Government lawyers received a reply from a Netscape lawyer.

Microsoft obtained the previously undisclosed letter from the Netscape lawyer to the Justice Department only two days ago -- an omission that Microsoft called a "flagrant" breach by the Government of the rules of pretrial document discovery.

The Justice Department and 20 states that are suing Microsoft have alleged that at the June 21, 1995, meeting Microsoft made an illegal offer to Netscape to divide the market for the browser software used to navigate the Internet's World Wide Web.

And the next day, in an e-mail message to William H. Gates, Microsoft's chairman, Dan Rosen, a Microsoft executive who had attended the meeting, reported that much of the discussion between Microsoft and Netscape had "centered on how the lines would be drawn between" what Microsoft and Netscape would market.

In his fourth day cross-examining James L. Barksdale, the president and chief executive of Netscape, John Warden, Microsoft's lead lawyer, asked the question that framed what he called the "setup" defense.

"Isn't it a fact," Warden declared, "that the June 21, 1995, meeting was held for the purpose of creating something that could be described as a record to be given to the Justice Department to spur them on to take action against Microsoft?"

Barksdale replied, "That's absurd."

David Boies, the Justice Department's trial counsel, said the subpoena for information was issued to Netscape in connection with another inquiry into Microsoft that the Government was already conducting at the time.

Boies said that Microsoft's effort to portray the June 1995 meeting as a Netscape conspiracy suggested that Microsoft's lawyers were straining to try to discredit a powerful allegation in the Government's case. "Any time a defendant says, 'We were set up,' I think that tells you how a trial is going," Boies said.

The subpoena issued by the Justice Department the day after the Netscape-Microsoft meeting did refer specifically to a separate matter that the Government was investigating at the time: Microsoft's plan to bundle its online service, Microsoft Network, or MSN, with its new operating system, Windows 95, which was shipped two months later, in August 1995.

That investigation had been undertaken after America Online complained that placing a direct link to MSN from the Windows 95 desktop was an unfair leveraging of Microsoft's monopoly in operating systems.

(That complaint was eventually settled when Microsoft agreed to place a link to America Online on the Windows desktop -- but only after the online service had agreed to distribute Microsoft's browser to each of its millions of members. David M. Colburn, a senior vice president of America Online, is expected to testify about that arrangement later this week.)

A Government lawyer says the company is straining to defend itself.

In the end, the Justice Department took no action to prevent Windows 95 from being shipped with a link to Microsoft Network.

Nonetheless, the June 23, 1995, response by Gary L. Reback, then a Netscape lawyer, to the Justice Department's subpoena for information in the MSN investigation focused mainly on the meeting two days earlier.

Reback's four-page letter states that at the meeting, Microsoft said it would not provide Netscape with necessary technical information unless "Microsoft gets an equity interest in Netscape, a seat on Netscape's board of directors, and otherwise controls Netscape's ability to compete against Microsoft."

Later, Reback, a partner at Wilson Sonsini Goodrich & Rosati, wrote that Microsoft had made it clear that if Netscape was going to compete with Microsoft "in any way," then Microsoft "will competitively harm Netscape."

Attached to Reback's letter was a copy of the notes taken at the June 1995 meeting by Marc Andreessen, a co-founder of Netscape, in which he described the "threat" by Microsoft that it planned to "own" the market for browsers that run on Windows 95 and that "Netscape should stay away."

In its motion seeking sanctions against the Justice Department today, Microsoft said, "The recently produced documents demonstrate quite clearly that the June 21, 1995, meeting was a 'set up' orchestrated by Netscape's counsel."

Later today, Microsoft introduced documents and memos from Netscape's files suggesting that the company had lost an important corporate customer to Microsoft largely because of Netscape's own failings, not because of predatory behavior by Microsoft.

In 1996, Intuit Inc. maker of Quicken, the popular personal-finance software, asked Netscape to provide a customized version of Netscape for use with Quicken. The Netscape documents suggest that the company could not provide the new software for many months.

One slide from an internal Netscape presentation shown in court today included the heading "We offered, but did not deliver" the five custom modifications to the program that Quicken had wanted.

"While you were trying to figure things out," Warden said, "Microsoft had already offered" a customized version of its browser.

Barksdale acknowledged that Netscape had made errors, but added, "I don't think that was the primary reason we did not get the business." Microsoft offered Intuit special inducements that Netscape could not match, he said, including free software and special coding in Windows that made Quicken easier to run.

After four full days of cross-examination, Warden closed the questioning of Barksdale this evening by entering into evidence a note that had been written in jest by several employees for display on Netscape's internal computer network.

"Next Monday Netscape will release two or three more bug-ridden beta versions" of Netscape Navigator, the note began, adding that the program "is faster than a dog with no legs, if the dog's up to his waist in treacle. And dead."

Barksdale explained: "We allow our employees to let off steam this way. Mostly they complain about the food in the cafeteria."