Breakup dissension not stopping Microsoft settlement talks

In fact, Microsoft has put enough "on the table" for negotiation that the parties could reach an agreement before final oral arguments begin on Feb. 22, sources said. The stumbling point is disagreement over a proposed breakup of the software maker, said sources close to the talks.

Behind the scenes, it is no longer certain the government camp--the Justice Department and 19 states--is unified on breaking up the Redmond, Wash.-based software maker, sources said.

Microsoft has rejected any talk of a breakup, but has indicated that it is open to negotiations over a possible settlement. In an email sent to congressional offices on Feb. 9, Microsoft executives argued that any breakup would be "extreme and unwarranted...a regulatory death sentence while the high-tech economy whizzes by on Internet time." The company said it would accept "common-sense" restrictions on its business conduct in order to settle the case, the email said.

"We send regular updates to (federal officials) on a number of issues, so this is not a unique situation where we are sending an e-mail to (Capitol) Hill members to discuss broad issues such as encryption or security," Microsoft spokesperson Jim Cullinan said. "We thought it was a good time to let the members of (Congress) know our position exactly...that we've always been interested in coming to a fair and reasonable settlement that addresses the government's concerns."

While many antitrust experts have given the settlement talks no better than a 50-50 chance of succeeding, that they've continued this long is an encouraging sign.

The secret settlement negotiations, which started on Nov. 30, have proceeded fairly quietly while other aspects of the trial moved forward.

The exception is a series of leaks last month that the government had proposed breaking up Microsoft. These irked Microsoft CEO Steve Ballmer, who lashed out at the government, calling the leaks "reckless and irresponsible."

The presiding trial judge, Thomas Penfield Jackson, pegged Judge Richard Posner, who heads the U.S. Court of Appeals for the 7th Circuit in Chicago, to broker settlement talks. Posner, a highly respected, conservative jurist, is one of the few antitrust mediators in the country capable of brokering a deal, said legal experts.

"No matter how either party feels about Posner, his position as a leading appeals court judge gives him a unique viewpoint valuable to both sides," said George Washington University Law School professor Bill Kovacic.

In the early stages of the talks, the government met weekly with Posner on Mondays and Microsoft on Tuesdays. But as negotiations intensified in recent weeks, the schedule became more fluid in another sign both sides were making progress, sources said.

Posner's levelheadedness and ability to work with a drastically different set of proposed settlements has helped keep the secret negotiations going, sources said. But Microsoft's determination to settle would apparently be another factor. The software maker has put "a lot on the table," said a source familiar with the negotiations, but has adamantly resisted any proposal for breakup.

The states have until now taken a harder line than the Justice Department, said legal experts.

"The states are much more true believers when it comes to the old-time religion of structural, hard-hitting antitrust," Kovacic said. "The Justice Department is more cautious."

"You can ask why the states are there in the first place," said University of Baltimore School of Law professor Bob Lande. "Isn't their very presence saying they don't quite trust the antitrust division?"

There are increasing signs that the states are fragmenting over breaking up Microsoft and it is the Justice Department now taking the harder line, said legal experts.

One problem may be the publicity surrounding the case, which makes winning paramount for the Justice Department, said legal experts.

Meanwhile, the Justice Department and Microsoft have been working to rally support, the government with Silicon Valley technology companies and Microsoft on Capitol Hill.

The email to lawmakers could be construed as a last-ditch effort by Microsoft to rally support and turn up pressure on the government to back off the breakup scenario.

"We continue to be concerned--even dismayed--that the Department of Justice, according to several press reports, is insisting on breaking up the company," the email said. "This solution would be a boon for our competitors, but would be harmful to consumers."

But Microsoft's lobbying effort may be too little too late, said legal experts.

"Microsoft isn't the first company to try and rally support on the Hill, and I can't even say their lobbying campaign is the most aggressive. I don't think that it is," Kovacic said.

Microsoft's best chance of resolving the case may now be at the negotiation table, where the pressure increases to put more on the table as the trial moves forward.

Should Jackson rule against Microsoft, as many legal experts predict, his devastating "findings of fact" could be used in class-action suits pending against the software maker.

"This is something Microsoft surely would want to prevent," Lande said.

Settlement talks could intensify later in the week and over the weekend as final oral arguments draw nearer, sources said.

The talks could also be pushed back.

"If there really is a delay due to the mediation by Judge Posner, it must mean that they are very close to a settlement," Lande said. "If they are just talking, putting forth the same old far-apart positions, they would just go ahead with the oral argument on the 22nd."

Following oral arguments, Jackson will draft his "conclusions of law," essentially his ruling, sealing Microsoft's fate. Remedy hearings would follow Jackson's ruling, expected as early as next month, with the government likely pressing hard for a breakup of Microsoft, Lande said.