Microsoft Back in Lawsuit Hot Seat as Talks Collapse

The U.S. Justice Department and at least 20 states are poised to file broad new antitrust suits Monday against Microsoft Corp. after eleventh-hour talks between the software giant and government officials collapsed Saturday.

A Justice Department official said negotiations ended “without resolution [and] . . . were not expected to resume.”

The department and the states were expected to proceed with separate but similar antitrust lawsuits against Microsoft in U.S. District Court in Washington. Neither lawsuit is expected to block the release of Microsoft’s computer operating system software update, Windows 98, which Microsoft said it will release to computer makers on Monday and offer to consumers June 25.

Microsoft, whose family of Windows software runs more than 90% of the world’s personal computers, apparently reached an impasse with negotiators after government officials would not yield on a demand that the software giant offer a version of its Windows 98 that includes the Internet browser of archrival Netscape Corp.

Microsoft also apparently refused to allow computer manufacturers to control the appearance of the screen display users see when they turn on their computer. The start-up screen for Windows contains a brightly colored Microsoft logo, and PC makers had hoped to reclaim that real estate for themselves.

The company began bargaining with government officials Thursday after they threatened to file antitrust lawsuits in federal court.

Microsoft, which tried to drum up support for its position with a public rally Saturday in New York, expressed regret over the breakup of negotiations.

“We’ve worked hard to make these discussions a success because we think a lawsuit will be bad for consumers, taxpayers and the entire industry,” said Microsoft spokesman Tom Pilla. “We have made a number of significant offers to address the government’s concerns, but the government is still making a number of unreasonable demands.”

Microsoft Chairman Bill Gates said in a videotape distributed by Microsoft that “the government made some nonnegotiable demands that were very surprising to us.” He said the demands “were not in the best interests of customers.”

After the talks broke down Saturday afternoon, New York Atty. Gen. Dennis C. Vacco held a conference call with representatives of attorneys general’s offices in Connecticut, Illinois, Iowa and Wisconsin to discuss the states’ strategy. Another conference call to update the rest of the states, including California, involved in the case will be held today, said Marc Wurzel, a spokesman for Vacco.

Vacco is expected to be in Washington on Monday with the documents the states had planned to submit Thursday, before Microsoft’s offer to come to the bargaining table. But the states are still coordinating with federal officials and have not yet decided whether to file a separate case of their own, Wurzel said.

“From what we can tell, it looks like they have thrown down the gauntlet,” said Mike Pettit, executive director of Procomp, a coalition of companies, including Netscape and Sun Microsystems Inc., that have lobbied the states and the Justice Department to pursue an antitrust case against Microsoft.

The collapse of the talks set the stage for what is expected to be the most widely watched and consequential antitrust action since the massive federal antitrust case that led to the breakup of the Bell Telephone monopoly in 1984.

The case pits one of the nation’s most aggressive and innovative software companies against a suddenly reinvigorated Justice Department, which in recent months has squared off against companies in the entertainment, aerospace and telephone industries out of concern that their big deals are anti-competitive, will boost prices and hurt the economy.

The concerns about Microsoft center on the inclusion of its Internet Explorer Web browser in Windows 98.

But the government has also raised concerns about exclusive licensing agreements Microsoft has made with some Internet content and service providers to market Microsoft’s Web browser as well as agreements that bar computer makers from changing the look and functionality of Microsoft software before they sell it to their customers.

The Justice Department and state authorities contend that Microsoft uses its domination of personal computer operating software to force PC makers and consumers to use its other products, such as its Web browser, which has been offered free to consumers for more than a year to gain market share against rival Netscape.

Sources said government negotiators were initially heartened last week when Microsoft signaled a willingness to negotiate a settlement to charges it illegally stifles competition in the software industry.

Some negotiators said they now feel Microsoft’s offer to bargain with state and federal regulators was insincere from the start. One source close to the talks claimed that Microsoft officials showed up late for negotiations Saturday. Another source close to the talks said that, in retrospect, he believes the software behemoth’s conciliatory moves on Thursday were designed solely to generate publicity and whip up interest in Windows 98.

A Microsoft spokesman denied those claims and said the company “negotiated in good faith.”

Ernest Gellhorn, an antitrust law professor at George Mason University Law School, who has followed the Microsoft case, said the breakup of the talks could amount to a negotiating ploy by both parties. “They may want to see who will blink first,” Gellhorn said, noting that the case could still be settled without going to trial.

Any antitrust case, however, would pose challenges for both sides.

Microsoft risks ensnarling its fast-paced software development business in the slow-moving wheels of jurisprudence. Depending on the kind of antitrust case brought against Microsoft, the company could be forced to significantly alter its business contracts and software licensing agreements as well as the features of the software it sells.

But many antitrust experts, including some who support bringing a case against Microsoft, say the Justice Department faces an uphill battle to persuade a court to require Microsoft to allow PC makers more flexibility in configuring its flagship operating system.

“The department must prove not only that Microsoft has monopoly power but also that Microsoft has acquired or maintained that power through “exclusionary” or “predatory” acts, Charles F. Rule, a former chief of the Justice Department’s antitrust division who is advising Microsoft, wrote in a memorandum he recently prepared outlining his view of the case.

Times staff writer Karen Kaplan contributed to this story.