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Horns locked over Microsoft-school deal

A federal judge hears arguments over a controversial civil-case settlement proposal while criticism mounts from sources including Apple Computer.

Lawyers representing more than 100 civil cases pending against Microsoft defended the legitimacy of a controversial settlement in federal court Tuesday.

The federal judge presiding over the hearing late Tuesday rescheduled the remainder of the settlement hearing until Dec. 10, when Microsoft will make its presentation. The hearing had been scheduled to end at 2 p.m. PT but extended until well after 5 p.m., with plaintiffs' lawyers divided over the settlement and Apple Computer making presentations before the court.

Microsoft and plaintiff attorneys cut the deal last week, agreeing to set up a private foundation to aid needy schools and donate an estimated $1 billion in cash, software, services and training over five years. Microsoft also would provide Windows licenses for refurbished computers donated to the schools.

Most of the cases, which allege Microsoft overcharged consumers for Windows, were brought last year after a federal judge ruled Microsoft violated the 1890 Sherman Antitrust Act. In June, a panel of seven appeals judges largely upheld the antitrust ruling against Microsoft.

Lawyers representing the Redmond, Wash.-based company and the consolidated cases met Tuesday before U.S. District Judge J. Frederick Motz at the U.S. District Court for the District of Maryland in Baltimore. Motz was not expected to reach a decision on the settlement proposal Tuesday, as the hearing stretched into the evening.

Michael Hausfeld, a partner with Cohen Milstein Hausfeld and Toll in Washington, D.C., and his associates presented most of the evidence and witnesses supporting the settlement. Witnesses included Nobel Laureate and economist Joseph Stiglitz and Keith Leffler, an economics professor with the University of Washington.

Lawyers associated with Eugene Crew, a partner with Townsend, Townsend & Crew in San Francisco, peppered Hausfeld's team and witnesses with questions. Crew heads a California coalition that opposes the settlement presented witnesses later in the proceeding.

"The issue in a class-action settlement is whether the class has been adequately represented," said Andy Gavil, an antitrust professor with Howard University School of Law. "It's a very involved inquiry and also looks at the merits of the case and what they were likely to recover--and in an odd way forces the lawyers to reveal what were the weaknesses of their case."

Good for schools?
The afternoon session of the all-day hearing largely focused on the proposal's benefit to education, including a panel presentation.

The settlement's impact on education has set the stage for the proposed settlement hearing, with numerous arguments pro and con. On Monday, Apple Computer filed a 30-page brief opposing the proposed agreement, and trade groups the Computer & Communications Industry Association (CCIA) and the American Antitrust Institute (AAI) sent separate letters to Motz asking him to reject the deal.

"Around half of the computers in education today are Apple computers, and we're the second largest supplier overall and the largest supplier of portable computers to education," Apple CEO Steve Jobs said in a statement. "Given this, we're baffled that a settlement imposed against Microsoft for breaking the law should allow, even encourage, them to unfairly make inroads into education--one of the few markets left where they don't have monopoly power."

But in court Tuesday, Hausfeld's team made its case for how the deal would benefit schools, particularly those that don't have the money to regularly buy new computers or software. The donations would go to public elementary and secondary schools at which 70 percent of students are eligible for federal meal assistance, or approximately 14 percent of the nation's schools, according to plaintiff attorneys.

But critics charge the settlement is anticompetitive and is the wrong way to address problems with the nation's public schools.

"An order for Microsoft to place low-cost computers and free Microsoft software into the public schools, where future Microsoft customers can be trained, is the type of punishment that Brer Rabbit sought in the briar patch," wrote AAI President Albert Foer in the group's letter to Motz.

"To the extent that this influx of Microsoft products undermines Apple, one of Microsoft's few remaining competitors, whose base of strength happens to be in the public schools, the proposed settlement of these antitrust suits may actually be anticompetitive," Foer continued.

Jobs agreed. "Today our schools have a choice, and to date they have chosen Apple around half of the time," he said. "We think our schools deserve to keep their power of choice, and our kids deserve better than having to learn on old, refurbished Wintel computers."

During Tuesday's marathon court session, George Reilly, with San Francisco-based O'Melveny & Myers, made about a 10-minute presentation opposing the proposed settlement on the behalf Apple.

Microsoft defended the proposal as a good deal all around.

"Today the court saw presentations from a variety of experts in the field," said Microsoft spokesman Jim Desler. "This is an appropriate settlement that offers tremendous benefit to help empower disadvantaged communities and youth."

Feuding lawyers
The hearing pitted two powerful law firms against each other. Crew's team represents the group opposing the deal. Hausfeld is the mastermind behind the school giveaway concept.

"The tension here is obviously (that) the lawyers in the Baltimore case are ready to walk away, and the lawyers in California are not," Gavil said.

In many ways, the court hearing entrenched plaintiff lawyers in a struggle over jurisdiction of the cases. The federal cases were consolidated under Motz last year, but California's Superior Court in San Francisco has jurisdiction over the cases there that were never moved to federal court. Crew is lead attorney on this latter group.

But overlap between the cases opened the possibility for the federal deal to include the state-level cases in California. "This is one of those difficult gray areas in the law," Gavil said.

Because of the way the "classes for the cases were defined in federal court, for all intents and purposes the members of the classes in California are subsumed within the classes as defined in the federal action," he said.

Should Motz adjudicate the case "as settled, and if it is approved, the members of all these cases would be precluded," Gavil continued. "Microsoft could go to the California judge and say, 'We already settled these cases in Baltimore, so these cases should now be dismissed.'"

California scheming
Legal experts say lawyers in California have good reason for opposing the settlement. The cases there are the farthest along and potentially the most damaging to Microsoft, because laws there work differently than in most other states.

Lawyers started filing civil cases against Microsoft in February 1999, but the majority of cases were brought last year. Many of the cases allege that Microsoft overcharged consumers as much as $40 per copy of Windows, exposing the company to potentially $7 billion in damages.

But Microsoft successfully convinced judges to throw out many cases under Illinois Brick, a 1977 Supreme Court decision that determined indirect purchasers cannot directly sue manufacturers. Based on that ruling, many of the private lawsuits have no standing because consumers were not the direct buyers of Windows. Microsoft largely sold the operating system to PC makers or wholesalers, none of which have sued the software giant.

But California is one of a handful of states that allow indirect purchasers to sue manufacturers. In August 2000, a federal judge certified some of those cases for class-action status, setting a court date for early next year.

"California is a real problem for Microsoft," said Bob Lande, an antitrust professor with the University of Baltimore Law School. "Microsoft's liability could still be in the billions there."

But even in California, plaintiffs face a tough job proving damages. Part of the problem facing the lawyers are the limits of the antitrust ruling against Microsoft, which was found to have only illegally maintained a monopoly.

"Nobody is contesting how Microsoft came to be a monopoly, which means that charging a monopoly price is lawful under our antitrust laws," Gavil said. "It's going to be very difficult to demonstrate what portion of the monopoly profit is specifically attributable to Microsoft's anticompetitive maintenance conduct. If you can't show what portion is specifically attributable, you've got no damages."

Foer charged that Microsoft through the settlement was attempting to exploit a division between those lawyers with cases that could go to trial and those that are essentially dead in the water because of Illinois Brick.

"Microsoft has cleverly engineered the fracture to the point where one group of lawyers...who had lost their case and now have only the bargaining leverage of relinquishing their right of appeal, willingly enters a nationwide settlement that gives them--but not the class they represent--a little something, including attorneys' fees, while appearing to sell out consumers in the repealer states, whose indirect purchaser claims have not yet been heard," Foer wrote in his letter to Motz.

No matter what the eventual outcome of the settlement, one group is sure to benefit.

"You can rest assured the attorneys will walk away with their attorneys' fees and it will be an OK deal for them," Gavil said.