Microsoft cuts another antitrust deal

The software titan, poised to end a series of private lawsuits, once again may snatch a victory at the settlement table that it might not have been able to achieve in the courtroom.

7 min read
Microsoft once again may have snatched a victory at the settlement table that it might not have been able to achieve in the courtroom.

The Redmond, Wash.-based software titan has cut a deal that would dismiss more than 100 pending private antitrust cases against the company. Lawyers brought the majority of the cases last year after a federal judge ruled that Microsoft had violated two sections of the 1890 Sherman Antitrust Act.

If approved by a federal judge in Baltimore, the agreement could help Microsoft increase its presence in schools, where rival Apple Computer has traditionally had a leading presence. Under proposed terms of the settlement, Microsoft would donate software, services, training and software licenses for reconditioned computers--an array valued at more than $1 billion--to qualifying schools, said lawyers representing consumer plaintiffs.

"We have reached a settlement with Microsoft for what we believe are the consumer portions of the civil complaints, and we're going to submit it to the court tomorrow," said Michael Hausfeld, a partner with Cohen Milstein Hausfeld and Toll in Washington, D.C., and the lead attorney representing the cases.

U.S. District Judge J. Frederick Motz in Baltimore is expected to hold a hearing on the proposal next Tuesday.

"The settlement provides more than $1 billion for training, support, hardware and software to thousands of schools with the greatest needs all across America," Microsoft CEO Steve Ballmer said Tuesday during a conference call with the media.

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 Microsoft.

"It is a settlement that avoids long and costly litigation for the company, and at the same time I think really makes a difference in the lives of millions of school children in some of the most economically disadvantaged schools in the country," Ballmer said.

Microsoft said Tuesday that if the settlement is approved, it will take a pretax charge of approximately $550 million in the current fiscal quarter, ending Dec. 31.

While the settlement is "intended to provide a nationwide program," lawsuits in California could be excluded from the deal, Hausfeld said. "California has not been shy in registering their unwillingness to be included, but this clearly is the (judge's) decision."

But Tom Burt, Microsoft's deputy general counsel, said that if Motz chooses to include California, the issue is settled.

"If the federal judge...concludes this a fair and adequate settlement and enters the settlement as the final settlement in the case, then the claims that have been alleged in all these cases around the country will be released, and all of those lawsuits will ultimately be dismissed," he said.

In some ways, the settlement is not typical. Often consumers receive coupons for discounted products or small paybacks, but the plaintiffs' lawyers did not want that option in this case.

"We wanted to avoid a situation where consumers received a coupon for a dollar or less or had to purchase another piece of equipment," Hausfeld said. "So we tried to aggregate the clients and come up with the greatest social benefit."

Helping schools made the most sense, he emphasized.

The changing legal battlefield
Less than two weeks ago, Microsoft scored another settlement victory in its landmark antitrust case when the U.S. Justice Department and a number of state attorneys general reached a settlement with it. A number of other states, however, refused to comply with the deal and are pressing forward with litigation. European Union's Competition Commission, meanwhile, is ramping up for December hearings into its investigation of Microsoft.

The Justice Department agreement, which still must be approved by a federal judge, did not lift from Microsoft the burden of the private lawsuits.

"The private lawsuits are unaffected by the government settlement," said Bob Lande, an antitrust professor with University of Baltimore School of Law. "The Court of Appeals' June 29 ruling still stands, and the facts found by U.S. District Judge Thomas Penfield Jackson still have precedence."

In June, the U.S. Court of Appeals for the District of Columbia upheld a previous ruling that Microsoft used illegal conduct to retain its operating system monopoly. The private lawsuits can make use of that ruling and related evidence.

Should Motz approve the deal and include the California lawsuits, Microsoft would be able to dispatch one of its biggest legal liabilities. But should the California cases continue, the company could face a bitter battle that could expose it to billions of dollars in damages.

Microsoft successfully whittled down the number of cases by relying on a 1977 U.S. Supreme Court ruling that only the first purchaser of a product has a right to sue on grounds of antitrust behavior. Most of the pending private lawsuits have been brought on the behalf of consumers, who in most cases cannot be considered first purchasers because Microsoft generally sells its software to PC makers or wholesalers. The consumer plaintiffs, who are not Microsoft's direct customers, are not eligible to sue Microsoft under federal law.

But California is one of a handful of states that have adopted indirect-purchaser statutes, which may make the cases there a more serious threat to Microsoft. During the company's federal trial, the government theorized that Microsoft could have overcharged consumers as much as $40 per copy of Windows.

The majority of the lawsuits alleged overcharging, something Burt rebutted during the media conference call.

"We have not overcharged consumers at all," he said. "We nevertheless decided to enter into the settlement now in order to resolve a very large number of pending lawsuits in a way that is beneficial to the company and the schools."

No matter what happens during next Tuesday's court hearing, Microsoft won't be free of Michael Hausfeld and company. His law firm represents plaintiffs suing Microsoft for racial and sex discrimination.

A public relations victory
Gartner Dataquest analyst Michael Silver praised Microsoft's savvy at turning cases about overcharging consumers for Windows into a business and public relations victory.

"This gets Microsoft out of all these lawsuits in one fell swoop," he said. "It's a penalty, but it makes Microsoft look good and gives schools PCs, and in so doing would give Microsoft an even larger installed base than they already have."

Some lawyers on the case seem to share those sentiments and would like to see Motz reject the settlement.

Lande isn't surprised. "Microsoft wants to settle literally for pennies on the dollar," he said. Though there is a training component to the proposed settlement, Lande described it as inadequate.

"The rule of thumb is you spend $3 in training for every dollar on software," Lande said. "There is almost no money for training. Those computers are going to sit there and rot in the schools, and they're already obsolete to begin with."

But Hausfeld defended the training commitment.

"The level of training would only be limited by the limits of the foundation, and there are none. If the foundation gets the matching grants, there will be plenty of money," he said. "We believe that the level provided now is clearly sufficient."

Microsoft will spend $90 million on training over the next five years, Hausfeld said. "There also is a $160 million cash guarantee on support."

Still the deal would set minimum standards for PC configurations, as well as set up an independent foundation to administer the giveaway program.

"There is a $150 million commitment to the foundation and another $100 million committed on a matching 1-to-2 basis," Hausfeld said. "For software we're estimating in excess of over $500 million."

Microsoft would deliver the money over five years to the foundation, which would be a permanent establishment.

The effect on Apple
But Apple might not share enthusiasm for the deal. In the second quarter, the company held about 23 percent of the computer market share in kindergarten through grade 12 schools in the United States, according to IDC.

Microsoft's promoting the donation of refurbished PCs to schools for free will present a challenge to competitors such as Apple, which is already in a fierce battle with Dell Computer in the education market, to compete on pricing. Dell had 37 percent system market share in the second quarter based on unit shipments, according to IDC. Apple's installed base is larger, however.

"If the agreement specifies Intel PCs, then Apple has some reasonable gripe," Silver said. "Free is better than fee."

But Ballmer insisted the deal does not specify PCs running on Intel processors. "The benefits we provide can be used for PCs or Macintoshes," he said. "It can used for PC software or Macintosh software. Certainly the money can be used for non-Microsoft software, so I don't view it as some big thing about market share."

Still, 10,000 eligible kindergarten through grade 8 schools would receive a "virtually unlimited" amount of free software from Microsoft. Such a large contribution--potentially $500 million or more at academic pricing--from a company that makes mostly Windows applications could hurt Apple in the education market.

Microsoft estimates that about 12,500 schools, representing 7 million students and 400,000 teachers, would be eligible to participate in the program. It also plans to provide free Windows licenses for about 1 million reconditioned computers donated through nonprofits.

Conceivably, those donations could displace Macintosh computers. "This is about hooking kids on Microsoft software as opposed to Apple," Lande asserted. "This is one of Apple's remaining markets. Microsoft wins anyway."

Gerard Klauer Mattison analyst David Bailey said it's too early to tell what effect the Microsoft settlement will have on Apple, but said Microsoft could wind up "undercutting everyone in the education market." The best-case scenario would be that Microsoft increases the overall level of PCs in schools without directly harming a company like Apple, he said.

Apple was not immediately available for comment.

News.com's Larry Dignan contributed to this report.