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Major setback in Microsoft settlement talks

The judge mediating settlement talks between Microsoft and the Justice Department says the negotiations are at an impasse and that he has ended his role in the landmark antitrust case.

The judge mediating settlement talks between Microsoft and the Justice Department declared today that the negotiations are at an impasse and he has ended his role in the landmark antitrust case.

"I regret to announce the end of my efforts to mediate the Microsoft antitrust case," Richard Posner said in a statement.

Posner, who heads the U.S. Court of Appeals for the 7th Circuit in Chicago, had given the talks until Wednesday but called it quits early. Today's setback opens the door for a final ruling on the case at any time from U.S. District Judge Thomas Penfield Jackson.

In addition, Microsoft's shares could be under pressure Monday. In recent days, the shares have climbed when a settlement appeared possible and dipped when the talks seemed to stall.

"Unfortunately, the quest has proved fruitless," Posner wrote in the statement. "After more than four months, it is apparent that the disagreements among the parties concerning the likely course, outcome and consequences of continued litigation, as well as the implications and ramifications of alternative terms of settlement, are too deep-seated to be bridged."

Joel Klein Assistant Attorney General Joel Klein said in a statement that the DOJ "would have preferred an effective settlement to continued litigation." But "settlement for settlement's sake would be pointless," he added.

In a conference call this afternoon, Microsoft chairman Bill Gates praised Jackson for creating the mediation, saying he thought "Judge Posner showed a great effort and tenacity."

Gates said problems occurred because the DOJ and states were not working together. "There were divisions and extreme views on the other side that brought us to the point where mediation wasn't going to be successful," he said.

Iowa Attorney General Tom Miller issued a statement on behalf of the states, stating: "The states, together with the Department of Justice, exerted their best efforts to make this process succeed during the four months in which we participated in this mediation."

Miller said the states were "committed to our objectives and look forward to achieving them in the continuation of the litigation," but that they would "remain open to any meaningful dialogue with Microsoft."

Microsoft's day in court William Neukom, Microsoft executive vice president and general counsel, referred to a sentence in Posner's statement that he said indicated why the talks collapsed.

In his statement, Posner praised the efforts of the DOJ and Microsoft, but made no mention of the states.

"I think Judge Posner's statement speaks for itself," Neukom said. "It was, of course, a process involving more than those two parties."

Dissension among the states and the DOJ has plagued the negotiations, so much so that Posner had tried streamlining the process, said sources close to the discussions.

The action was designed to get a basic settlement agreement in place, which the states would then have two days to approve.

George Washington University Law School professor Bill Kovacic said Posner 's action likely irked some of the states. "Clearly, you have a situation where the kids wanted to sit at the table with the adults," he said.

"But these are no ordinary kids. They have nuclear bombs, and that makes them very dangerous," said Kovacic, referring to the states' ability to reject any settlement proposal.

The states yesterday responded with new demands, directly leading to the talks' collapse, said several sources close to the negotiations.

One demand renewed an earlier request that Microsoft be compelled to develop a version of Microsoft Office for the Linux operating system, said a source familiar with the discussions. Another would give each of the 19 states the power to independently enforce any consent decree coming out of the negotiations.

"There are situations where any party can enforce an injunction, but it can be a logistical nightmare," said University of Baltimore School of Law professor Bob Lande. "As a practical matter, there's no way Microsoft wants 19 people breathing down their throats. But I can understand from the states' point of view why overseeing the consent decree would be such a nightmare (that) they all wanted to do it."

Microsoft, already at odds with the states over other settlement proposals, would not accept the demand for enforcement by 19 separate entities as well as the DOJ, said sources familiar with the talks.

The company invested more than 3,000 hours trying to settle suit, with good reason, say legal experts. Jackson's ruling, if it goes against Microsoft, could be used as ammunition in the more than 115 class-action suits pending against the company.

"Microsoft is sailing into dangerous, uncharted waters with respect to these pending civil lawsuits," explained Rich Gray, an intellectual property attorney with Outside General Counsel Silicon Valley of Menlo Park, Calif. "Once Jackson decides on a remedy and issues his final judgment, that judgment can be used to great advantage in these civil lawsuits even while Microsoft appeals the ruling."

Neukom made it clear that Microsoft would be ready to appeal the case, which could end up at the Supreme Court in as little as 24 months. But first Jackson must rule and then set hearings for remedies--or what to do about Microsoft's alleged misbehavior.

"I would expect we'll get a decision from Jackson next Friday, and I expect it will be ugly for Microsoft," Gray said.