Microsoft, DOJ filing settlement changes

Sources familiar with the filings said they don't expect the changes--made in response to public comments about whether the deal would be in the public interest--to be "dramatic." Still, any modification would represent a turnabout in positioning as the two sides struggle against a tide of comments opposing the proposed deal. The period of public comment closed one month ago, with the Justice Department saying that comments opposing the deal outnumbered those in favor by a 2-to-1 margin.

"Remember, Microsoft's public posture is that they've already agreed to a far-reaching settlement," said Rich Gray, a Silicon Valley-based attorney closely following the antitrust trial. "Microsoft's approach to this all along has been to stake out a position and then be unyielding." Therefore any concession is significant, Gray said, because it signals a change in strategy.

The Justice Department, nine of 18 states and Microsoft settled the case in early November. Nine other states and the District of Columbia rejected the deal, choosing to continue with litigation. For now, the case is moving forward on two separate tracks: on the one hand, the approval process for the settlement according to the Tunney Act, on the other, proceedings to determine a remedy in ongoing litigation.

Andy Gavil, an antitrust professor with the Howard University School of Law, said the Justice Department and Microsoft have little choice but to change the settlement following a query made by U.S. District Judge Colleen Kollar-Kotelly in a Jan. 31 court order and comments made during a Feb. 8 status hearing.

"The two of them risk opening a major credibility gap with the judge if they come back with a review of thousands of comments and say there isn't one substantive change they think needs to be made," Gavil said.

But Gray said the settlement changes could lead to a slippery slope. "Once they start making changes, they...run the risk of opening a floodgate," he said.

Kollar-Kotelly has scheduled a March 6 hearing to discuss the proposed deal, and a number of Microsoft competitors and settlement opponents have asked to make presentations. So far, the judge has denied many of the requests, but there's still the potential for the hearing to turn into a forum for demanding more changes to the settlement.

But Microsoft appeared ready to avoid a flood of changes sought by the litigating states. Earlier Wednesday, ahead of filing its public-comment brief, the software giant asked Kollar-Kotelly to dismiss the litigating states' claims. The dismissal request in conjunction with changes to the settlement could end the nearly four-year-old antitrust case if the judge accepts Microsoft's reasoning.

The software giant argued that the litigating states' attempt to secure stiffer sanctions against Microsoft would "displace" the Justice Department's authority in the matter and would constitute a blatant attempt to "seek to establish (state trustbusters) as national antitrust policymakers."

The Justice Department, "joined by a bipartisan group of nine states, reached a settlement agreement with Microsoft that the DOJ determined to be in the national interest," said Microsoft spokesman Jim Desler. "Today's motion points out that a few states should not be able to override this determination by seeking different remedies," he said.

The litigating states said Microsoft's request had no legal merit.

"Microsoft's attempt to dismiss the case was expected, and late, and we will resist it strongly," said Iowa Attorney General Tom Miller, one of the states' leaders. "The Microsoft position would undermine lawful, proper and practical enforcement of our country's antitrust laws by the states and perhaps by private parties," Miller said. He said the litigating states would file a response soon and would ask the judge to deny Microsoft's motion.

Opening Windows
The stakes are high because of how much more the states are looking for in a court-imposed remedy vs. the settlement.

The settlement largely would place restrictions on Microsoft's business practices, while the litigating states are seeking changes to how Microsoft develops and deploys software. In a December remedy proposal, the litigating states said Microsoft should give away the source code for Internet Explorer, license through auction Office for use on competing operating systems and carry Sun Microsystems' Java in Windows for 10 years.

The litigating states also are targeting Microsoft's crown jewel, Windows XP. They want Microsoft to sell a stripped-down version of Windows without the so-called middleware, such as Web browsing, instant messaging and media-playback technologies. Kollar-Kotelly agreed to their request early this month for access to the Windows XP Home, Professional and Embedded source code, which is being reviewed by University of Utah Professor Lee Hollaar.

"You can bet Microsoft would like nothing more than to make the states' case go away," Gray said. "But Microsoft's argument just doesn't fly because the Justice Department wasn't the only plaintiff."

Gavil agreed that getting the states' claims dismissed would be tough for Microsoft.

"If you look at the language of the statute, Microsoft has made a facially plausible argument, but it's not a very sensible one," Gavil said. This is just an obvious bar to the states' lawsuit; why wasn't it raised earlier--as in May 1998, as soon as the lawsuit was filed? There's an issue of whether it's been waved and an issue of how sensible a reading of the statute it is."

Unless Kollar-Kotelly dismisses the litigating states' claims, that portion of the case returns to trial March 11 to determine a remedy. The litigating states initially assembled a "Who's Who" list of Microsoft competitors to testify, including executives from AOL Time Warner, Novell, Palm, RealNetworks, Red Hat and Sun. A Gateway executive also will testify on behalf of the states.

Microsoft Chairman Bill Gates and CEO Steve Ballmer are tentatively scheduled to testify during the proceeding.