States Reject Settlement of Microsoft Antitrust Suit
Eighteen states that joined the Justice Department’s historic antitrust lawsuit against Microsoft Corp. are refusing to endorse the government’s proposed settlement, raising doubts about the deal even before its unveiling today.
The surprise agreement reached late Wednesday will be filed in federal court in Washington this morning, but the states will ask for more time to study it, concerned it doesn’t fairly punish the software giant, sources said Thursday.
If approved by U.S. District Judge Colleen Kollar-Kotelly, the pact would barely budge Microsoft’s position as the world’s most powerful technology company.
Microsoft competitors and several states in the 3-year-old suit say it would allow the company, which has been found to have violated federal antitrust laws, to continue using Windows as a base to attack new markets such as instant messaging, digital photography and on-screen video players.
Investors in the Redmond, Wash.-based software giant evidently agreed with that assessment, bidding up the company’s shares by more than 6%.
“There’s no question that the champagne should be flowing very freely in Redmond,” said Robert Lande, an antitrust expert at the University of Baltimore. The settlement “ensures Microsoft’s continued dominance.”
By unanimously refusing to sign the agreement, the states are leaving it to the judge to decide whether they can have more time to review the pact or whether the case should proceed directly to a required hearing on its fairness. Earlier, Kollar-Kotelly said she would not consider an extension to today’s settlement deadline.
If a fairness hearing is held without the states’ agreeing to a settlement, the states probably will split further, with some bowing out of the fight. Others, including California and perhaps New York, probably will argue against the deal and could seek a full trial on how Microsoft should be punished.
“I’m going to continue to urge the states to take the review time we need to fully understand every word and every implication in the proposal before we decide whether to settle,” California Atty. Gen. Bill Lockyer said. “Doing anything less would be irresponsible, and I’m confident the court will agree.”
The Justice Department and other states declined to comment.
The harder-line states also hope public scrutiny of the settlement might cause the Justice Department to reconsider. Even some of Microsoft’s rivals, including Oracle Corp., Sun Microsystems Inc. and AOL Time Warner Inc., consider that a longshot.
The government “will take a little heat for a couple of days. But then it will be back to business as usual for Microsoft,” Lande said.
In Washington, White House spokesman Ari Fleischer brushed aside questions at a briefing about whether President Bush had signed off on the proposed settlement.
Under the terms of the settlement, Microsoft would be barred from prohibiting computer manufacturers from adding non-Microsoft features to their machines, and PC makers could remove features that come with Microsoft’s pervasive Windows operating system.
That gives more power to computer makers, which earlier faced crippling retaliation from Microsoft if they installed Netscape browsers instead of Microsoft browsers. The settlement bars such discrimination and forces Microsoft to disclose more about how Windows works with other software, so competitors can design programs that work as well as Microsoft’s do on Windows.
The major U.S. computer manufacturers--Dell Computer Co., Compaq Corp., Hewlett-Packard Co. and Gateway Inc.--declined to comment.
The agreement would be in place for at least five years and could be renewed for two more years. A three-member panel of experts would decide whether Microsoft is opening up enough of its interfaces to allow competition on Windows features made by other companies.
The measures are well short of settlement offers rejected by the government last year as too weak. Microsoft would not have to ship a version of Windows without add-ons, and it could intermingle the code of such features as the Internet Explorer Web browser with that of Windows.
The states frequently have taken a harder line in the case than the Justice Department, reluctant to follow the federal government’s lead in dropping unresolved parts of the case. The states also want changes in the new Windows XP system. Last month, California hired one of the nation’s top trial lawyers, Brendan Sullivan, to represent the states.
But it is very rare for such a joint prosecution to split entirely.
“There have been cases in which the two parties have hit different ending points,” said Kevin Neely, spokesman for Oregon’s attorney general. In 1997, for example, the Federal Trade Commission accepted new rules on Toys R Us practices that had restricted competition, while the states pressed on and won monetary damages.
“We are unaware of any cases which are similar to the Microsoft case, where there has been a direct split,” said Neely, whose boss heads the antitrust committee of the National Assn. of Attorneys General.
Microsoft’s five-year deal with the Justice Department would be binding even if the states won’t participate, people familiar with the agreement said.
If the states fight on in court, “they do have the ability to make Microsoft’s life miserable,” said Rob Enderle, a Giga Information Group analyst. He said the settlement seemed soft on the company, given an appeals court’s findings of wrongdoing in June.
Microsoft is betting that it can outlast a few states in court, and some state officials are concerned about the expense of such a battle.
“State budgets are more sensitive to the economic cycle than the federal budget. I expect some of the states to give it up,” said Bill Whyman, a vice president at Precursor Group, a Washington-based investment research firm.
The Justice Department told Congress in 1999 that it had spent $9.4 million since 1994 investigating and prosecuting Microsoft for antitrust violations. And in papers filed in U.S. District Court in August 2000, the Illinois attorney general’s office listed more than $1 million in costs incurred in pursuing Microsoft since 1997.
News of a tentative settlement came as a shock to those following the case, even though Kollar-Kotelly had urged an agreement and appointed a mediator.
“The government appears to be ignoring the core aspects of the Court of Appeals ruling,” said Kenneth Starr, the former judge and Whitewater prosecutor who represents some of Microsoft’s opponents. “It’s not surprising that the states are reluctant to give away their overwhelming victory.”
States have been wary of how the Bush administration might approach the Microsoft case, fearful that a Republican-run Justice Department would not pursue tough punishment.
And few held out much hope that the parties would come together. Microsoft and government attorneys recently bickered over such details as how many witnesses should be called during the next phase of the trial, and how many days would be needed for discovery. They were even further apart on ways to punish Microsoft.
One of the few things the company and the government did agree on was that mediation would be fruitless. “The parties believe that further alternative dispute resolution procedures would be unproductive at this time,” Microsoft and the Justice Department said in a joint status report in August. But Kollar-Kotelly ordered the parties to negotiate around the clock anyway.
Microsoft was pushing Thursday to wrap up a settlement including all parties before today’s hearing. “We really do desire a settlement,” Microsoft spokesman Jim Desler said. “‘We’re focusing on what we need to do for tomorrow’s hearing.”
Mike Pettit of ProComp, an alliance of Microsoft competitors, called the proposed settlement “a slimmed-down deal. There’s a little on [computer firm] flexibility and a little disclosure, but I can’t find anything that sounds to me like it would be very effective.”
Pettit and others said Microsoft competitors will oppose the settlement in so-called Tunney Act hearings today on its fairness to the public, and that they may file antitrust suits seeking triple damages.
Lawrence Lessig, a Stanford Law School professor and technology expert, said any new freedoms given to PC makers could lead to significant product innovation in the industry. But he cautioned that Microsoft has often proved unwilling to abide by promises to change its business conduct.
“I’ve always thought that one of the greatest checks on Microsoft’s behavior would be the freedom to bundle other devices into their products,” Lessig said. “If they were free to be innovative, that would be a good thing. But all of this seems to depend on the good graces of Microsoft, and that is the thing we have to be most skeptical about.”
