States' slip-up gives Microsoft leverage

The software giant appears to be using the error--a failure to get certain pretrial depositions entered into the trial record--to limit the amount of new evidence the states can introduce in the nearly 4-year-old case, legal experts say.

On Friday, Microsoft whisked Ballmer off its witness list, along with OEM (original equipment manufacturer) account manager Gayle Brock. Earlier in the week, Microsoft chopped another eight people from its list.

The states could have used the testimony of at least three witnesses--Ballmer, Brock and Richard Fade, the Microsoft executive in charge of relations with OEMs--to, among other things, attack the legitimacy of a separate settlement the company made with the Justice Department and nine of 18 states.

Nine states and the District of Columbia are pursuing stiffer sanctions against Microsoft than those contained in the November settlement deal, which U.S. District Judge Colleen Kollar-Kotelly has yet to approve.

One option before the judge is to seek a single solution, either approving the Justice Department settlement and dismissing the states' claims, or rejecting the settlement and imposing a court-ordered remedy. She also can approve the settlement and impose a separate remedy, either the one proposed by the litigating states or another that she drafts. In December, Microsoft submitted the Justice Department settlement as its proposed remedy. Kollar-Kotelly's unusual number of choices is one reason why the blocking of new evidence could be so important.

The main trial concluded in September 1999, with U.S. District Judge Thomas Penfield Jackson later ruling Microsoft violated two sections of the Sherman Antitrust Act. He initially ordered Microsoft to be broken into separate operating systems and software applications companies. But in its unanimous ruling that upheld about a dozen separate antitrust violations against Microsoft, the U.S. Court of Appeals for the District of Columbia Circuit threw out the remedy for technical reasons. The proceeding now under way before Kollar-Kotelly is to determine a new remedy to Microsoft's antitrust violations.

Typically, the remedy proceeding would not be the place to introduce much new evidence. The proceeding, which enters its eighth week Monday, follows the conclusion of the trial by about two and a half years, and Jackson's ruling by more than two years.

Throughout its presentation of witnesses and cross-examination of Microsoft, the litigating states have attempted to show that the company continues to pursue business and technical tactics in new so-called middleware markets similar to those that led to two adverse court rulings. Because the remedy proceeding is not a trial, new evidence ordinarily can be introduced only while cross-examining a witness, and it must be pertinent to direct testimony.

Door closes on states
In a critical legal faux pas, the litigating states missed the deadline for requesting that certain Microsoft pretrial depositions be introduced into evidence, and now have little recourse in that regard. In early April, Kollar-Kotelly refused to admit the requested depositions.

"Typically you would want to get the depositions into the record, because that's the best way to make sure the witnesses show up in court," said Rich Gray, a Menlo Park, Calif.-based lawyer closely following the trial. "This opened the door for Microsoft."

If a witness doesn't testify, portions of taped depositions could have been shown in court and some new documents potentially introduced with them, although the states would not have had the advantage of directly cross-examining the witness.

"Microsoft has effectively closed the door on the states," Gray said. "Because these witnesses can't be subpoenaed, there really is no other way to get the testimony to be heard in court."

Last Tuesday, the states' attorneys made an impassioned plea to introduce 14 documents--later knocked down to 12--that would have been used during the cross-examination of Fade. Some of them supposedly further bolstered state claims that Microsoft is using a provision of the Justice Department settlement to force new, prohibitive licensing agreements on PC makers. Had Brock testified, the states might have been able to use anywhere from four to eight of the documents then.

"The judge is more likely to get overturned on appeal for keeping evidence out than for letting it in," said Andy Gavil, an antitrust lawyer with Howard University's School of Law. But that doesn't mean Kollar-Kotelly will ultimately admit the documents, he added.

Fade's pretrial deposition did not go well for Microsoft, so the company may have good reason to keep him off the witness stand. Among other things, the executive conceded that the new uniform licensing provision of the settlement would raise PC makers' cost for Windows by about $4 per copy. Depending on volume and lucrative marketing development discounts, PC makers pay anywhere from $65 to $90 per copy of Windows, computer manufacturer sources said. According to court records, Hewlett-Packard and Sony complained about new, onerous licensing agreements. Later, a Gateway executive testified on behalf of the states.

The issue of how Microsoft treats its customers is perhaps central to the case and any eventual remedy, Gavil said.

The trial was really "about channels of distribution," he said. "OEMs are the best way to get software to the customer. If you can convince OEMs to alter their packaging, the implications are self-evident." Microsoft's "chokehold is over OEMs. They're the customers."

Locking it tight
Ballmer's testimony could have raised other problems for Microsoft. The software titan may have pulled Ballmer over concerns the states would use his testimony to introduce e-mail or other evidence that would either call the company's conduct into question or expose the Justice Department settlement to further scrutiny, legal experts say. Ballmer had been expected to testify about how the company would follow the Justice Department settlement.

"There's nothing more the states would like than to get (a Microsoft executive) to compare and contrast the proposed settlement with the states' remedy," Gray said. The cross-examination by states' attorneys could have put Ballmer in the position of defending the settlement versus the states' proposed remedy.

The states had tried for this when Microsoft Chairman Bill Gates spent three days on the witness stand two weeks ago. But Gates' written testimony did not touch upon the Justice Department settlement, leaving little room to explore the matter during cross-examination. Microsoft's chairman aggressively attacked the states' proposal, which he called ambiguous and "impossible" to follow. Gates also fiercely criticized the states' definition of so-called middleware as overly broad.

Stuart Madnick, an information technology professor at the Massachusetts Institute of Technology, made a similar claim in testimony last week, but backpedaled during cross-examination.

When asked if the middleware definitions put forth in Microsoft's remedy proposal--the same as the Justice Department settlement--are ambiguous, he agreed that they are.

"I believe so," Madnick testified. "Based upon my reading of it at this moment. I somehow think there is something missing, but I can't spot it right at this moment."

States' attorneys could have probed Ballmer on this and other issues had he testified.

Microsoft made Ballmer's deposition and that of Jim Allchin, the senior executive overseeing Windows, public in March, after Kollar-Kotelly granted media access to them. Allchin takes the witness stand this week.

Microsoft may have another reason for pulling back Ballmer and other witnesses: confidence that the litigating states have not done as well in court as they could have.

"We made decisions on who would testify in the case based on the reviewed progress we made with our witnesses, as well as an assessment of the states' witnesses and what we believe are shortcomings in the states' case," Microsoft spokesman Jim Desler said. "We feel good about the record we've established and our success raising serious questions about the states' remedy proposals."