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Suit expected as DOJ talks end

Eleventh-hour negotiations between Microsoft and antitrust regulators collapse, clearing the way for possible legal action next week.

Eleventh-hour negotiations between Microsoft and antitrust regulators collapsed today, clearing the way for legal action as early as Monday.

In a harshly worded statement, Microsoft said the talks fell apart because of unreasonable demands by the government. According to the software giant, regulators wanted the company to give up its right to display the Windows user interface when consumers turn on a new PC for the first time.

The regulators asked Microsoft to relinquish its right to display the Web-browsing functionality that it says is a key part of the Windows operating systems. They also wanted the software giant to include Netscape Communications' browser in "every copy" of Windows, the company said.

"We worked hard to try to resolve this, but the government demands went too far with no basis in law and, most important, were not in the best interest of consumers," Microsoft chief executive Bill Gates said in a statement. "We unfortunately had no other choice but to resolve this matter in court."

Microsoft said a lawsuit planned by federal and state prosecuters before the talks began is "without merit and would hurt consumers and the American software industry."

In its own statement, the Justice Department said that "at this point [negotiations] are not expected to resume." It did not elaborate on why the talks broke down.

A spokeswoman for the New York state attorney general's office said lawyers were stationed in Washington prepared to file a lawsuit Monday.

Ken Wasch, president of the Software Publishers Association, said it was not surprising that the talks broke down. "In order to head off the antitrust action, Microsoft would have had to travel a great distance in a very short period of time," he said.

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 computer makers--loomed.

An announcement on state and federal antitrust action against Microsoft had been scheduled for Thursday but was canceled after the parties agreed to hold the 11th-hour talks. Attorneys for the software giant flew in to Washington late this week for the negotiations, which began in earnest yesterday morning.

Microsoft was originally scheduled to ship Windows 98 to computer makers yesterday but delayed that release until Monday while the discussions continued. The company said today that it is not planning any further delays.

The lawsuit that state attorneys general had been planning to file contains 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.

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.

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 plaintiff.

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.