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Microsoft deal ends contempt charges

In a deal that clears contempt-of-court charges, the company will distribute updated versions of Windows 95 without the Internet Explorer browser.

WASHINGTON--The Justice Department and Microsoft today announced a settlement on a major issue stalling their high-profile antitrust dispute, clearing the software giant of contempt-of-court charges that could have resulted in an unprecedented fine of $1 million a day.

According to both sides, Microsoft has agreed to FAQ immediately provide computer vendors with the most up-to-date version of Windows 95 without the desktop icon for its Internet Explorer browser.

The settlement resolves the hotly contested dispute over whether Microsoft complied with a federal judge's December 11 order to separate its Internet browser from Windows operating system products, but it leaves unchanged the Justice Department's underlying contention that the software giant's current marketing practices violate a 1995 consent decree.

The agreement clears the way for computer vendors--also known as original equipment manufacturers, or OEMs--to offer a version of Windows 95 that does not have Microsoft's Web browser preinstalled, both sides said.

Though neither side would say who had initiated the settlement, Joel Klein, See special coverage: Beyond contempt assistant attorney general on antitrust issues, called the decision a victory for the government.

"Competitors and innovators should know that their products can compete on their own merits," Klein said in a statement. "It should not be snuffed out by Microsoft's use of monopoly power."

"The underlying injunction remains in place," he added, noting that the government is still investigating whether the order will affect Windows 98.

Microsoft, meanwhile, stressed that the settlement--which adds two new licensing options to OEMs--allows it to comply with the order while at the same time preserving full Internet capabilities in Windows 95.

"These options are essentially a hiding rather than a removing approach," said Microsoft attorney William Neukom, Microsoft's senior vice president for law and corporate affairs, adding that in agreeing to the settlement, the "government changed its position to what it earlier said was an unsatisfactory position."

In mid-December, Jackson appointed a computer and Internet law specialist to study the matter and propose a legal finding by May 31. In the meantime, the judge ordered Microsoft to offer Windows without browser software.

Microsoft responded by offering OEMs three options: the most recent version of Windows 95 with IE; a two-year-old version of Windows 95 that predated IE; or a current version with all IE files removed that Microsoft admitted would not operate.

Shortly afterwards, the government was back in court, alleging that Microsoft's plan to sever IE from versions of Windows that were commercially useless or inoperable violated Jackson's preliminary injunction. It asked Jackson to fine Microsoft $1 million for every day it remained in contempt of court.

The motion was contentiously argued in a two-day hearing last week and in numerous court briefs. A closing hearing previously scheduled to take place today was canceled after the settlement was reached.

Under the settlement, Microsoft is agreeing to offer OEMs two new choices. One essentially allows Microsoft to offer Windows 95 after an "Add/Remove" utility built into the operating system has removed the IE icon and a number of other files relating to the browser. Microsoft said that choosing the option will disable some but not all Internet functions.

The other option calls for only the icon to be removed. "Under this option, it's important to recognize that every single file of Internet Explorer code remains on that personal computer," Neukom said.

The agreement will allow both sides to get on with the core issue in the case, which is the interpretation of the 1995 consent decree and whether it prevents Microsoft from including Internet Explorer with its operating systems.

"The significance for us is we put this narrow issue behind us and we really move on now to our appeal" of Jackson's preliminary injunction, said Microsoft spokesman Greg Shaw. He emphasized that Microsoft has agreed merely to hide parts of the Internet Explorer code residing in Windows rather than to remove it altogether.

In reaching a deal, which both sides hailed as a victory, each side appeared to retreat for positions they had taken earlier in the case.

In its original petition filed in October, the government requested that Microsoft be required to remove from Windows all files that are shipped with the retail version of IE, as well as inform end users how to remove IE from the operating system. Even a month later, the Justice Department suggested that simply deleting the icon would not be enough because OEMs and personal computer users should "have the ability to freely choose among browser products in all respects."

Similarly, Microsoft was adamantly opposed to removing the icon, writing in one court brief that the proposed remedy was "wrongheaded" and accusing the government's of waffling in the case. Analysts, meanwhile, observed that Microsoft's objections were much ado about nothing, given OEMs' clear preference to carry the Windows version with IE fully loaded.

But Doug Melamed, the No. 2 attorney at the Justice Department's antitrust division, reiterated that the agreement was a victory for consumers. He also took issue with Microsoft claims that the DOJ's position has changed, saying that the agreement announced today is consistent with what the government has sought all along, which is for consumers to have the option of buying a PC that does not have IE preinstalled.

"We have maintained since our opening papers that one way they could comply was to add this add/delete option to OEMs, and that's what they agreed to," Melamed added.