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Microsoft, DOJ in last-minute talks

Microsoft is in last-minute negotiations with the DOJ and state attorneys general in an attempt to settle a pending antitrust suit.

Last-minute negotiations between Microsoft and the Justice Department and state attorneys general will begin in earnest tomorrow in an attempt to settle a pending antitrust suit.

An announcement on the state and federal litigation had been scheduled for 9 a.m. PT today but was canceled after the parties agreed to hold the 11th-hour talks. Microsoft was originally scheduled to ship Windows 98 to computer makers tomorrow but has delayed that release until Monday while the discussions continue.

"The Justice Department, a coalition of state attorneys general and Microsoft are engaged in discussions," the department said in a statement. "They have reached an agreement under which, while the discussions continue over the next several days, Microsoft will not ship Windows 98, and the Justice Department and the states will not file lawsuits."

The state attorneys general and Microsoft issued similar statements. Representatives from the Redmond, Washington-based company, three state attorneys general from Connecticut, Iowa, and New York, and U.S. Assistant Attorney General Joel Klein are participating in negotiations, according to a source.

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"Microsoft made an 11th-hour offer to resolve this matter without litigating," a source close to the case said. No details on the talks were available, but the source said an overture made by Microsoft "is intriguing. Everything is in limbo right now."

As reported yesterday, Microsoft had said it was continuing discussions with regulatory officials to address any antitrust concerns, as the finishing touches were being put on lawsuits against the software giant. These conversations come in the wake of a face-to-face meeting between Microsoft chief executive Bill Gates and Klein last week.

Microsoft spokesman Tom Pilla reiterated that the company is "continuing" ongoing discussions with Justice Department officials but declined to elaborate. He added that Microsoft will postpone shipping Windows 98 to computer makers until Monday, instead of shipping tomorrow as originally planned. The product is still slated to hit retail shelves on June 25.

In a statement, Microsoft confirmed that it has "completed all work to develop Windows 98 but has agreed with the DOJ and state attorneys general not to release the product to computer manufacturers until Monday."

Microsoft said it "has taken this step so that discussions with the government, which have been proceeding for over a week, can continue." The company "continues with plans for the commercial launch of Windows 98 to consumers on June 25."

A Justice Department official confirmed that Microsoft and regulators have been in discussions "over the last several days" but said the talks "did not take on the flavor of negotiations until the last day or two."

The lawsuit that state attorneys general had been planning to file as early as today contained allegations that Microsoft is using anticompetitive practices to maintain its monopolies in operating systems and office-related applications and to establish a new monopoly in Internet software.

Regulators had lawyers stationed at the U.S. District Court in Washington ready to file the antitrust lawsuit as the appointed hour approached. Instead, the parties involved handed out statements indicating the status of the negotiations.

The antitrust allegations, broader than many legal experts had expected, include a pricing scheme that "wrongfully hampers competition" among office productivity software by making it "economically impractical" for computer makers to offer rival programs. The suit also alleges that Microsoft still uses contractual requirements that prevent online service providers--including America Online--from promoting rival browsers, such as Netscape Communications' Navigator.

Microsoft denied the allegations. "We think a lawsuit would be bad for consumers and bad for the future of the software industry, and we don't believe there's any legal basis for a lawsuit," spokesman Mark Murray said.

The states' lawsuit would seek a preliminary injunction allowing computer makers that license Windows 98 to substitute other browsers besides Internet Explorer. The suit also requests that Microsoft preliminarily be blocked from entering into agreements with ISPs, content providers, and others that make their placement on the Windows 98 desktop contingent on the promotion or distribution of Internet Explorer.

The planned suit outlined by sources is subject to change but, for now, contains numerous allegations. Among them:

• Microsoft engages in a pricing scheme for Microsoft Office that makes it difficult for original equipment manufacturers to ship machines that carry office productivity programs made by rivals of the software giant. The scheme, which encourages OEMs to license Microsoft Office on a "per system" basis, inhibits competition among makers of such programs, which typically include word processor and spreadsheet software.

Microsoft, for its part, said it has never prevented a computer maker from loading or shipping a competitor's office productivity program. Murray pointed out that the current pricing scheme had been approved by the Justice Department.

• Microsoft continues to impose contractual requirements on some online service providers listed on an "Internet Connection Wizard" directory, which prevents the services from promoting Netscape's Navigator. Although Microsoft relaxed the restrictions for many of its partners, the prohibitions remain for America Online, AT&T WorldNet, and CompuServe. Microsoft said the agreements are "completely legal and pro-competitive."

• In mid-1995, Microsoft tried to persuade Netscape not to build browsers that would run on Microsoft's Windows platform. When Netscape refused, Microsoft engaged in "anticompetitive and exclusionary conduct" designed to lock out Netscape. Murray called the allegations "a complete fable."

The states that are expected to join in the filing include New York, California, Connecticut, Florida, Illinois, Iowa, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, New Mexico, North Carolina, Ohio, South Carolina, Utah, West Virginia, and Wisconsin, the sources said. The District of Columbia also plans to join as a defendant.

Indiana was expected to join the multistate effort, but it decided at the last minute to bow out. "We do not believe that the mere bundling by itself off [Microsoft's] Windows 98 and Internet Explorer software is necessarily anticompetitive," an attorney for the Indiana state attorney general said in a letter to head prosecutors in Iowa, New York, and Texas.

As reported, in a surprise announcement, Texas reconsidered its position to join the lawsuit amid a letter-writing campaign from Texas-based computer companies. Pro-Microsoft companies wrote similar letters to attorneys general in California and New York.

Today, Texas attorney general Dan Morales, in an effort to get in on the settlement action, said in a statement he intended to participate in the negotiations as well as continue his office's "investigation in a deliberate and prudent fashion." The statement offered no further details.

As first reported by CNET's NEWS.COM, antitrust prosecutors from some states met in February with Justice Department officials to discuss strategies for legal action against Microsoft. Since then, the talks have been on-again, off-again, as a self-imposed deadline of May 15--the shipping date of Windows 98 to OEMs--loomed.

Business editor Jeff Pelline contributed to this report.