Microsoft Settlement Offer Is Inadequate, Sources Say

Microsoft Corp.’s eleventh-hour bid to settle its antitrust case appeared to have fallen short Saturday, leaving the outcome of the biggest antitrust case since the breakup of Standard Oil in the hands of a federal judge.

Sources close to the government said a detailed settlement proposal that Microsoft sent Friday to the Justice Department, 19 states and the District of Columbia, was inadequate because the company failed to acknowledge any antitrust wrongdoings or agree to significant restrictions in the way it develops and markets Windows, which runs more than 90% of the world’s personal computers.

Microsoft spokesman Jim Cullinan declined to comment.

Justice Department officials spent the weekend polling lawyers for the 19 states and the District of Columbia about Microsoft’s settlement offer, and whether to ask presiding U.S. District Judge Thomas Penfield Jackson for more time to negotiate.

But government officials indicated that as early as Monday they may declare the settlement negotiations at an impasse.

“The government wants an agreement that restores competition in the [software] industry,” said a source close to the government. “And this [Microsoft] offer is not there.”

As of late Saturday, antitrust officials had no talks scheduled with the federal mediator in the case, U.S. Circuit Judge Richard A. Posner in Chicago.

Technical experts called in by the government continue to study the minute details of Microsoft’s proposed settlement.

The development appeared ominous for Microsoft, whose outspoken chairman, Bill Gates, declared in a book he wrote last year that, “I have a natural instinct for hunting down grim news.”

Jackson told Microsoft and government negotiators that if they don’t make progress in settling their antitrust dispute out of court, he plans to issue a verdict Tuesday about whether Microsoft violated federal antitrust laws.

In November, Jackson issued 207 pages of scathing findings of facts that sided with most of the government’s allegations and concluded that Microsoft has used its software dominance to crush rivals and extend its power into emerging technology markets for Internet software.

Jackson’s findings were so damning that most observers expect the jurist to find Microsoft in violation of some portions of the Sherman Antitrust Act. Such a verdict would lead to a remedies proceeding this spring, after which Jackson could impose severe sanctions on Microsoft, including a breakup of the company before the start of summer.

“The government tried conduct remedies once before and Microsoft still managed to do a lot of bad things. This time the judge could be persuaded that something structural is needed to address” the problem, said Robert H. Lande, a professor of law at the University of Baltimore who has closely followed the Microsoft antitrust case.

He was referring to a 1994 antitrust agreement Microsoft reached with the Justice Department that restricted the way Microsoft could license Windows. But the two sides ended up in a court dispute over whether that agreement restricted Microsoft from packaging its Web browsers into Windows, which is one of government’s current antitrust allegations.

That dispute also made several states mistrust the last-minute settlement offer by the software giant, considering the loopholes in the 1994 consent decree, said a government advisor involved in the settlement talks.

The state attorneys generals “are asking, ‘Why should we believe them now?’ ” the source said.

At least some states are not in a hurry to reach a settlement, the source said. Some states are leaning toward allowing Jackson to issue his final ruling, presuming that it will be favorable to their antitrust case, and after that to resume settlement talks with Microsoft. “It doesn’t mean you don’t talk. Let’s see what the law is [first],” the source added.

There were conflicting reports about exactly what Microsoft’s settlement proposal contains. It has been widely described as “technically complicated.”

Industry observers noted that settlement negotiations often go down to the wire and that Microsoft and the government still have time to salvage a deal.

“It is quite typical for settlement negotiations to go down to the last minute,” said Herbert Hovenkamp, a University of Iowa law professor who served as a consultant to the states early on in the Microsoft trial. “The two sides can wait to settle it if they choose, up to the minute Judge Jackson opens up his courtroom doors to deliver his ruling.”

A source close to the negotiations told The Times on Friday that Microsoft has offered to untie its Internet Explorer Web browser from at least some versions of Windows. The company also reiterated its previous offer to modify its software licensing agreements, to share more technical information and to give PC makers more freedom to customize Windows.

But the same source said Microsoft did not propose to break up the company or agree to release the underlying Windows software code, which would allow other software makers to market competing versions of Microsoft’s flagship product.

ABC News, also citing an anonymous source, said Microsoft offered to allow government oversight over some of its business practices. However, ABC said Microsoft would not accept limits on what features or functions it could add to its Windows software.