States Splintered on Microsoft Settlement


The coalition of states suing Microsoft Corp. fractured Tuesday with half throwing their support behind a proposed settlement with the Justice Department and most of the rest--led by California--vowing to hold out for tougher terms.

The splintering of the 18 states involved in the case represents a victory for Microsoft, which has long sought to chip away at their united front.

But the split adds an unpredictable twist to the long-running case and will mean more courtroom battles and uncertainty for Microsoft, even though it settled last week with the Bush administration.


After a flurry of last-minute negotiations, nine states agreed Tuesday to sign a slightly revised 18-page consent decree with the Justice Department, which requires Microsoft to abide by a set of conduct restrictions designed to compensate for its past illegal behavior.

The states are Kentucky, Illinois, Louisiana, Maryland, Michigan, New York, North Carolina, Ohio and Wisconsin.

California led the other nine states and the District of Columbia, which refused to sign on Tuesday. They are Connecticut, Florida, Iowa, Kansas, Massachusetts, Minnesota, Utah and West Virginia.

However, some of those states, including Florida and Iowa, said they were still reviewing the terms of the settlement and might decide to sign it.

California Atty. Gen. Bill Lockyer rejected the proposed settlement, saying it doesn’t do enough for “victims of Microsoft’s illegal use of its monopoly power” over PC operating systems.

The decision to press ahead represents a political risk for Lockyer, who is becoming the target of criticism from Microsoft and its allies, who are calling the case a waste of taxpayer money.


On the other hand, the Democratic attorney general has the strong support of many Silicon Valley companies, including Sun Microsystems Inc. and Oracle Corp., that staunchly oppose the proposed settlement.

As the largest of the states still pressing the Microsoft case, California probably will bear much of the expense and burden. The state already has hired well-known trial attorney Brendan Sullivan to represent it, and last year the state Legislature approved an additional $3.7 million for high-tech antitrust enforcement, providing a war chest for the battle.

Lockyer would not say how much it will cost to press the Microsoft lawsuit. Other states involved in the suit will share in the expenses.

U.S. District Judge Colleen Kollar-Kotelly said Tuesday that the Microsoft case will move forward on two tracks: one to approve the proposed settlement and another to proceed to trial for those states that do not settle.

The unprecedented move sets up the possibility of two separate, and perhaps conflicting, resolutions in the landmark case.

“This is really uncharted water,” said Iowa Atty. Gen. Tom Miller, who had been serving as the spokesman for the state coalition.

Kollar-Kotelly also terminated an order that all parties must participate in mediation talks.

The judge rejected Microsoft’s request Tuesday that the states’ lawsuit be delayed for several months while the proposed settlement is subjected to a congressionally mandated court review. Under the 1974 Tunney Act, a judge must decide whether the consent decree is in the public interest. That process--which will include a 60-day period for public comment--is expected to be completed by February.

Kollar-Kotelly said she would move forward with the states’ lawsuit at the same time. A trial is set for March.

Microsoft officials said Tuesday they were pleased that half of the states had decided to drop the suit. The company said it hoped other states would join in the settlement.

“We made every effort to reach a compromise to address the states’ concerns and allow everyone to move forward,” Microsoft Chairman Bill Gates said in a statement. “Yesterday, at the request of the states, we made some additional revisions to clarify the proposed decree and better capture the intent of the parties.”

But most attorneys characterized the changes as minor clarifications and revisions.

“They don’t change the substance of the agreement,” said Philip Beck, attorney for the Justice Department.

One change requires Microsoft to more fully disclose the computer interfaces for its Windows server products, enabling rivals to make their products compatible with the Windows operating system.

Another modification seeks to make it more difficult for Microsoft to refuse to disclose certain technological data to rivals by arguing that it would compromise security. The states also won the right to enforce the agreement if they believe Microsoft has violated the terms.

“No settlement is perfect,” said New York Atty. Gen. Eliot Spitzer, who was once considered a hard-line Microsoft foe but surprised many of his colleagues by attempting to cut his own settlement deal with Microsoft. “But the public’s interest in this case will be vindicated.”

One of California’s problems with the settlement is the requirement that computer makers license their innovations back to Microsoft, which then would be free to develop competing products.

Another is Microsoft’s current freedom to use its clout in subtle ways.

As an example, Lockyer said Microsoft is giving cash bonuses to computer companies that sell Windows XP machines if the start-up process for consumers takes only 30 seconds.

The real purpose, he said, is to make it too expensive for companies to preload their machines with rival software, which slows down the boot-up process.

“We certainly give them credit for having a lot of clever people,” he said.

Microsoft declined to comment on Lockyer’s charge.

Assistant U.S. Atty. Gen. Charles James denied reports Tuesday that he personally pushed through a settlement with Microsoft, without consulting the department’s staff attorneys. “Stories that this was hammered out in some backroom deal between myself and Microsoft are totally false,” James said.