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Microsoft resolves class-action suit

update The company settles a California case, agreeing to hand out up to a total of $1.1 billion in vouchers good for products from Microsoft or others.

Declan McCullagh Former Senior Writer
Declan McCullagh is the chief political correspondent for CNET. You can e-mail him or follow him on Twitter as declanm. Declan previously was a reporter for Time and the Washington bureau chief for Wired and wrote the Taking Liberties section and Other People's Money column for CBS News' Web site.
Declan McCullagh
3 min read
update Microsoft said late Friday that it has settled a California class-action lawsuit for up to $1.1 billion, a move that would end the largest suit of the kind against the giant software company.

The settlement, which arose from claims that Microsoft unlawfully wielded its Windows monopoly to overcharge consumers for the operating system, allows individuals and businesses in California who bought Microsoft products during a five-year period to apply for vouchers with values of $5 to $29. The vouchers can be used to buy most hardware or software products from any manufacturer.

Although the maximum value of the settlement is $1.1 billion, Microsoft could end up paying as little as $367 million in cash to California public schools. If all vouchers are claimed, Microsoft pays the maximum.

The payout depends on how many customers make claims.

"Eighty percent of the (Windows) licenses were licensed to businesses in California," said Richard Grossman, a partner at San Francisco law firm Townsend and Townsend, which brought the suit. "Businesses are likely to have thousands, if not hundreds of thousands, of dollars in claims. Even the smallest business, with 10 or 20 computers, will have a substantial claim."

Grossman said a firm with 400 desktop computers might expect vouchers totaling $25,000.

The lawsuit, filed in February 1999, claimed that Microsoft violated California antitrust laws by overcharging by as much as $40 for every copy of Windows 95 and 98. Microsoft dominates the desktop marketplace, and a federal judge ruled in November 1999 that the company violated U.S. antitrust laws.

"This settlement represents a refund of nearly 30 percent of all money that California businesses and consumers paid for Microsoft products over a seven-year period," Grossman said. "That is a gigantic refund."

In a conference call late Friday, Microsoft said it would disclose the settlement's expected financial impact in an earnings telephone call on Jan. 16.

"We believe that this agreement makes a significant step forward to resolve our antitrust legal issues," Microsoft General Counsel Brad Smith said.

The case, which covers more than 50 million product licenses, was set to go to trial before California Superior Court Judge Paul Alvarado on Feb. 24. The agreement is subject to Alvarado's approval.

The settlement affects individuals and businesses in California that purchased Windows or certain Microsoft application software between Feb. 18, 1995 and Dec. 15, 2001.

They will have a four-month period, beginning when the judge approves the settlement, to claim the vouchers, which can be used for laptop, desktop or tablet computers and related software from Microsoft or other companies. The vouchers will be valid for four years.

Of the money that is not claimed by people seeking vouchers, one-third will be retained by Microsoft. Two-thirds of the unclaimed money will go to California public schools in a mix of donated Microsoft software and cash grants.

Townsend and Townsend's attorneys fees are not included in the settlement figure, and will be set by the judge. Microsoft is also liable for those fees.

Similar class-action lawsuits against Microsoft are pending in 16 state courts: Arizona, New Mexico, Kansas, South Dakota, North Dakota, Minnesota, Iowa, Wisconsin, Tennessee, Mississippi, Florida, West Virginia, Montana, North Carolina, Massachusetts and Vermont. Another is pending in the District of Columbia.

Legal observers had expected the California suit to be particularly difficult for Microsoft to defend, since the state has a law allowing indirect purchasers of Windows software--end-users who are consumers and businesses--to file lawsuits alleging unfair competition. Most other states allow only direct purchasers of Windows licenses, namely computer makers, to sue.

Other class-action lawsuits that were filed in federal court have been consolidated in Baltimore before U.S. District Judge J. Fredrick Motz, who in January 2002 rejected a proposed settlement under which Microsoft would have given $1 billion in money, software, services and training to about 12,500 underprivileged public schools.

Microsoft isn't the first technology company to pay large sums after finding itself a class-action defendant. In 1999, Toshiba settled a billion-dollar class-action lawsuit that arose from claims that the company sold notebooks with defective floppy drives. Immediately after the settlement, the same lawyers that pursued Toshiba sued Compaq Computer, eMachines, Hewlett-Packard, NEC, and Packard Bell NEC.