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Microsoft settlement expected Friday

The software giant and the Justice Department are expected to deliver a proposed antitrust settlement Friday to the federal judge overseeing the case, but states may want more time.

WASHINGTON--Microsoft and the Justice Department are expected to deliver a proposed settlement Friday to the federal judge overseeing the landmark antitrust case.

The two parties and 18 states will update U.S. District Judge Colleen Kollar-Kotelly on settlement talks during a 6:00 a.m. PT status hearing. Kollar-Kotelly had set a Friday deadline for reaching a settlement.

The states are expected to ask for more time to review the proposed settlement, said sources familiar with the matter. Last week, the states hired Brendan Sullivan, of the law firm of Williams & Connolly here, to lead their portion of the case. He will make the request on behalf of the states.

A significant turning point in the case could be the states not signing off on the settlement proposal. The Justice Department and Microsoft appear to have largely worked out the tentative agreement without the states, said sources familiar with the matter.

The states would have the option of pursuing the case even if federal trustbusters cut a deal with Microsoft. Rumblings from within the states' camp indicate that they might not be in agreement with the proposal, said sources familiar with the matter.

One version of the proposal largely deals with Microsoft's business behavior and does not address some of the middleware issues central to the case--to further open up access to Windows code or allow PC makers any more freedom customizing the desktop than icon changes Microsoft made in July, said sources familiar with the matter. The proposal also would not restrict Microsoft from tying products together in a way that would compel consumers to take one piece of software with another as the company did with Windows 98 and Internet Explorer.

Those issues are not among those central to the core of the case: That Microsoft illegally maintained a monopoly in Intel-based operating systems. In a June ruling, in fact, the U.S. Court of Appeals for the District of Columbia Circuit upheld eight separate antitrust claims against Microsoft.

"A toothless remedy"
"It is the minimum you could do in order to establish some kind of a remedy," said Andy Gavil, an antitrust professor with Howard University School of Law. "It doesn't appear to be very forward-looking, and it doesn't appear to address the persistence of the monopoly."

Glenn Manishin, an antitrust attorney with Kelley Drye & Warren in Vienna, Va., agreed. "This is a toothless remedy that doesn't even come close to getting at the core violations the Court of Appeals unanimously affirmed 7-0," he said.

Some states apparently complained the tentative deal lacks the bite they also were looking for. But one source described the states as "waffling" on whether to back to proposed settlement.

Some states initially reacted negatively to the limited scope of the settlement proposal, said sources familiar with the matter. But given the state of the economy and the national crisis, there may not be the will to go on without the Justice Department.

"The mind is willing but the flesh is weak," mused Emmett Stanton, an antitrust attorney with Fenwick & West in Palo Alto, Calif.

Another source said that if California decides to pursue the matter, other states are more likely to follow.

"It's an extraordinary thing to ask of them," said Ed Black, president of the Computer & Communications Industry Association (CCIA). "It's not that easy all of sudden for them to say we're going to go against the U.S. government. Microsoft's PR machine is going to paint them as radicals."

CCIA opposes the proposed settlement, which Black described as "total capitulation" on the part of the Justice Department.

The states have been sending out warnings for month they would be willing to go their own way if necessary.

In a statement announcing Sullivan's hiring, for example, California Attorney General Bill Lockyer reiterated that the states were prepared to go to trial if necessary to protect consumers and businesses.

Settlement not the end
Friday's hearing before Kollar-Kotelly would only start the process of approving a settlement and crafting a binding consent decree. The judge also must hold additional hearings under the Tunney Act to ensure the settlement was not politically motivated.

If some or all of the states are not in agreement with the Justice Department and Microsoft, "the states will say that this is a sellout and wimpy settlement" during the hearing, said Bob Lande, an antitrust professor with the University of Baltimore School of Law.

Kollar-Kotelly's inexperience with the case could work to the advantage of a settlement, Lande warned.

"You have a judge that doesn't know the facts of the case yet and who said in the strongest possible terms, 'Please, please, please settle,'" he explained. "Forgetting the merits of the case, it would be easy for her to rubber-stamp whatever the DOJ and Microsoft come up with. If the states want to howl, well, too bad."

Kollar-Kotelly took on the landmark antitrust case in late August. In its June ruling upholding eight separate antitrust claims against Microsoft, a federal appeals court removed U.S. District Judge Thomas Penfield Jackson from the case.

Ultimately, Lande believes a Microsoft-Justice Department settlement could be approved even without the states.

"The easy way out is to rubber-stamp, and I'm afraid the judge just might do that," he said. "The states must be thinking the same thing, too, so this puts a lot a pressure on them, particularly the states that aren't as gung ho. So we may see some states dropping out."

If nothing else, the states pushing forward could solidify any eventual remedy, even if it goes no further than a Justice Department-Microsoft consent decree, said Gavil, the Howard University law professor. Conflicting interpretations of a 1995 consent decree between the two paved the way for the current case and another in 1997. But a remedy imposed by a judge would carry more weight than a settlement and offer less room for interpretation.

"Future disagreements will be a function of interpreting the intentions of the parties in the settlement agreement," Gavil said. "That's how Microsoft dodged the bullet in the first consent-decree case."

The first hints of settlement emerged late Wednesday, with word the Justice Department and Microsoft had hammered out a deal independent of the states.

On Thursday evening, the Justice Department issued a statement that Attorney General John Ashcroft and Assistant Attorney General Charles James would hold a news conference at 7:00 a.m. PT on Friday regarding an antitrust matter. No further details were available, but sources familiar with the press conference said that the Microsoft case would be the topic.