Big Error Found in Microsoft Hearing

A federal judge expressed reservations Tuesday about a controversial $1-billion Microsoft Corp. proposal to settle scores of customer class-action lawsuits, especially after an economist supporting the plan admitted making a major mathematical error.

The economist said he had underestimated the potential damages facing Microsoft by as much as $8 billion. But class-action lawyers who negotiated the deal with Microsoft convinced the judge that they wouldn’t have demanded more from the company if they had been using the higher figure.

U.S. District Judge J. Frederick Motz said he will issue a preliminary ruling in mid-December on the plan to resolve the suits, which accuse Microsoft of antitrust violations that allowed it to overcharge for Windows and other software.

Last week, the leading plaintiffs’ lawyers in the suits consolidated in Motz’s federal court here said they would drop their cases if Microsoft donates $1 billion in software, hardware and training to 16,000 public schools nationwide.

At the first day of hearings on that plan Tuesday, Microsoft and the class-action lawyers said it was a fair settlement because Motz had thrown out or substantially weakened many of the suits filed on behalf of 150 million Americans.

But the deal was attacked by California class-action lawyers, by some state attorneys general who have their own case against the software giant, and by Microsoft competitors including Apple Computer Inc., which said it was worried about losing more ground in the education market.

Microsoft and the national class-action lawyers almost killed the chances of their own proposal when a University of Washington economics professor retracted an estimate he had given hours earlier of the potential damages at stake.

In his initial presentation, Keith Leffler--who had been hired by the national class-action attorneys--said Microsoft customers might be entitled to recoup between $2 billion and $5 billion, far less than the as-much-as $46 billion claimed by lead California class-action lawyer Eugene Crew.

After rechecking his figures during lunch, Leffler returned to the court and announced he had made a mistake, and that the potential damages were more than twice that, or $5 billion to $13 billion.

Judge Motz said the mistake raised questions about the integrity of the settlement. The national class-action lawyers, lead by Michael Hausfeld and Stanley Chesley, would be paid fees by Microsoft if Motz approves the deal.

The gap between $2 billion and $13 billion “is a huge difference,” the judge said. If the settlement talks had been based on such an underestimate, Motz said he was inclined to send both sides “back to square one.”

But Microsoft and the national lawyers convinced the judge that that step was unnecessary. They said the economist’s numbers had only been drawn up in the past week to defend the plan and hadn’t been used as a basis for the talks. Going into the discussions, the plaintiffs’ lawyers said, they had used the broad range of between $1 billon and $20 billion.

Motz had other concerns about the plan, such as whether he should mandate a national settlement when consumers in some states, including California, are protected by laws that might enable them to collect more. Crew and some other class-action lawyers want the settlement rejected or at least their cases exempted from it.

Also weighing in against the proposed settlement were the attorneys general of California and Minnesota, two of the nine states that are continuing the public antitrust case. The hearing will resume Dec. 10.