Suspicious States Won’t Let Microsoft Off Easy

When the Justice Department filed its antitrust case against Microsoft Corp. two years ago, many thought the federal government would have a tough time keeping its partners in line--the 19 state attorneys general whose egos and party differences threatened to ensnarl the government’s landmark antitrust case.

Instead, the attorneys general are a thorn in the side of Microsoft and its chairman, Bill Gates, who suddenly finds himself facing high-stakes negotiations in which his billions in corporate profit and ubiquitous Windows software offer him no advantage.

On Tuesday, presiding U.S. District Judge Thomas Penfield Jackson granted Microsoft’s request for more time to seek an out-of-court settlement in the government’s suit against the company. Jackson reportedly may wait as long as 10 days before issuing his ruling to allow the parties to hash out a deal.

But many state attorneys general in the case are suspicious of Microsoft’s record. They believe Microsoft breached a 1995 consent decree that restricted the way Microsoft could sell Windows.

Instead, they contend, Microsoft used a loophole to package its Web browser to its Windows program in order to quickly stake out a place on the Internet. And the states are almost paranoid about signing another accord that might offer the software giant fresh loopholes.

“Microsoft has demonstrated that they can’t be trusted,” said Jamie Love, director of the Consumer Project on Technology, a watchdog group affiliated with Ralph Nader that was among the first to urge the Justice Department to file a case against Microsoft. “This is an aggressive company that will exploit any loophole for competitive advantage.”

This puts Gates in a rare weakened negotiating position. For a quarter of a century, Gates has run Microsoft, whose Windows operating system is used on 90% of the world’s personal computers, as his own kingdom and is used to negotiating from a position of power.

Now Gates has a weaker hand because he must convince the Justice Department and 19 states, plus the District of Columbia, that Microsoft’s recent settlement offer will lead to major changes in how it conducts business and that it will keep its word.

Instead, many of the state attorneys general want to wait for Judge Jackson to issue a ruling and officially declare that Microsoft broke antitrust law. Only then are they willing to agree to a compromise deal that would let Microsoft escape with anything short of the company’s breakup.

Although Microsoft’s settlement offer contains significant concessions--including agreeing to remove its Internet Explorer Web browser from some current and future versions of Windows and to offer uniform pricing of its flagship software product--experts say the company will have to scramble to reach a deal within 10 days.

That’s because any agreement must be vetted not only by the Justice Department’s antitrust division chief, Joel Klein, but also by state officials from New York to California.

Most of the 19 state officials are seen as hard-liners. Connecticut Atty. Gen. Richard Blumenthal, New York Atty. Gen. Eliot Spitzer and Iowa Atty. Gen. Tom Miller are said to favor a breakup of Microsoft. The hard-liners are believed to have urged Klein to view Microsoft’s latest offer with great skepticism, going back again and again to Microsoft for assurances about consumer protection and market access for rival companies.

Sources close to the talks said the parties have not made much progress since Microsoft’s offer last week, despite fervent efforts by Richard Posner, a federal judge in Chicago who has been mediating settlement talks by fax, e-mail and telephone.

The Justice Department and other moderates, such as Ohio Atty. Gen. Betty Montgomery, reportedly would be willing to settle the case for something less than a breakup of the company. But Microsoft would have little incentive to reach a settlement with only some states because it would leave the company open to antitrust civil suits in the remaining states.

One source familiar with Microsoft’s thinking said the company is trying to seek assurances from Jackson that, if the company settles, he will vacate any adverse rulings in an expected avalanche of civil suits.

But the hard-liners among the states in the Microsoft case are emboldened by Jackson’s scathing 207-page findings of facts, issued in November, that largely sided with the government and concluded that Microsoft has used its software dominance to crush rivals and extend its power into emerging technology markets for Internet software.

“I think this is an instance where the two sides need a lot of help from [federal negotiator] Richard Posner,” said antitrust expert William E. Kovacic, a law professor at George Washington University. Moderate forces, he said, “need Richard Posner to deliver the following message to the hawks: Think about the likely result of litigating this case to a conclusion.”

If Microsoft appeals, he said, how decisive would their victory be?

Complicating matters for Microsoft is the fact that the states have shown their independence on several occasions.

During the first days of the trial, New York Assistant Atty. Gen. Stephen D. Houck unsuccessfully sought to conduct his own questioning of trial witnesses, separate from the federal government. Later, the state of South Carolina withdrew from the landmark antitrust case altogether.

But some legal experts believe antitrust chief Klein retains sufficient control to get the states to go along with any deal the Justice Department finds satisfactory.

“In this situation, Joel Klein is the 800-ton gorilla,” said Daniel M. Wall, a former Justice Department lawyer who founded Antitrust magazine. “Microsoft should act like Klein’s calling the shots. I think if push comes to shove, the states are going to listen to Joel Klein.”