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States to sharpen claws in Microsoft case

Attorneys general who didn't join the DOJ settlement plan to propose stiff sanctions that could include further opening the Windows source code, sources say.

WASHINGTON--A group of nine states plans to propose stiff sanctions against Microsoft that could include further opening the Windows source code and could extend to technologies not directly covered by the landmark antitrust case, sources say.

The states are preparing to deliver a remedy proposal to U.S. District Judge Colleen Kollar-Kotelly on Friday to meet a court-imposed deadline. Microsoft has until Dec. 12 to respond to the legal filing.

The remedy, if accepted, could go well beyond last month's settlement between the company and the government, which includes the Justice Department and half the states that were co-plaintiffs with the federal agency.

The nine states and the District of Columbia--groups that didn't sign onto the settlement deal--are taking aim at what they consider to be glaring weaknesses in the agreement, which was widely considered to be a victory for Microsoft.

One of their areas of focus, sources said, is middleware, which is software such as Web browsers that runs atop an operating system to perform specific tasks.

Microsoft's bundling of its Internet Explorer browser with its Windows 95 and 98 operating systems was one of the cornerstones of the Justice Department case. Some of the state attorneys general believe that the settlement almost completely ignored that issue, said sources familiar with the matter.

The dissenting states also are looking at the possibility of extending their remedy proposal to include Windows XP, streaming media and Microsoft's .Net software-as-a-services strategy.

However, it remains to be seen just how strong the coalition of the dissenting states will be. Some, including Iowa, which has been a leader among the states in pursuing Microsoft on antitrust grounds, gave signs last month that it would still be willing to settle with the software maker under the right circumstances.

On Tuesday a spokesman for Iowa Attorney General Tom Miller would only say that the proposal would be filed Friday.

Recent victories
Microsoft recently has made a number of gains in the antitrust cases against it. Less than three weeks after reaching its settlement with the Justice Department, it cut a deal that would dismiss more than 100 private class-action antitrust cases with donations to public schools valued as high as $1 billion. In both the federal and private cases, the proposed settlements still have to be approved by a judge.

Also pending are hearings set for this month before the Senate's Judiciary Committee and before a federal judge overseeing the private class-action suits.

Even as the dissenting states finalize their remedy proposal, some members of the group aren't waiting until Friday to take action against Microsoft. On Monday, West Virginia sued the software giant, contending that the company's business practices violate state consumer-protection laws.

The West Virginia lawsuit is largely an attempt to collect damages from Microsoft, legal experts said, and other states may follow suit. The Justice Department case did not include a monetary provision.

"With the settlement of the class-action lawsuits with what many people regard as a pittance, more states will be encouraged to look at monetary remedies. At the very least, there is the possibility of substantial damages similar to the tobacco issue," said Glenn Manishin, an antitrust attorney with Vienna, Va.-based Kelley Drye & Warren.

Microsoft spokesman Jim Desler declined to comment about what the remaining states might or might not do.

"We believe we've reached a fair and reasonable compromise with the Department of Justice and nine of the states," he said. "We feel that any proceedings moving forward should use the narrowed liability of the Court of Appeals decision as a road map."

Advantage: Microsoft
The remedy proposal seems set to open another chapter in the long-running antitrust saga, in which Microsoft has increasingly had the upper hand. In June, a federal appeals court delivered the software giant an unexpected defeat when it unanimously upheld eight separate antitrust violations against the company. When Kollar-Kotelly joined the fray in late summer, she indicated a desire to see the matter settled swiftly.

"Microsoft is very fortunate with what it has gotten in the government case," said Jonathan Jacobson, an antitrust attorney with Akin, Gump, Strauss, Hauer & Feld in New York. "Microsoft has gotten what has to be viewed as a victory and is trying to lock it in."

California, Connecticut, Florida, Kansas, Massachusetts, Minnesota, Iowa, Utah and West Virginia, along with the District of Columbia, are the states that decided to continue with the litigation, which would lead to a remedy hearing in March.

Brendan Sullivan, who is with the law firm of Williams & Connolly in Washington, represents the states in the proceeding.

Academics, competitors and other parties consulting on the proposal are expected to see parts of the rough document Tuesday. If the states stick to their timetable, a near-final draft will be prepared Wednesday.

The states hope that their remedy proposal will close what they consider to be loopholes in the settlement negotiated by other the other states and the Justice Department, said sources familiar with the strategy. Signing on to the settlement with the Justice Department were Illinois, Kentucky, Louisiana, Maryland, Michigan, New York, North Carolina, Ohio and Wisconsin.

A main concern of the dissenting states appears to be application programming interfaces, or APIs, which are essential to making sure third-party software works well with an operating system. Although Microsoft agreed in the settlement to open some software code, including server operating system APIs as well as those for the desktop, some states want to lock down what they consider to be loopholes in the agreement.

In an interview with CNET News.com late last month, Brad Smith, Microsoft's incoming general counsel, made it clear that abiding by the terms of the settlement will be a top priority for the company. Microsoft wants to establish a "strong track record complying to this consent decree," he said. "It's obviously of enormous importance to the company to make this work well."

The Justice Department last week published the proposed settlement and Competitive Impact Statement in the Federal Register, as part of a 60-day period of public comment. This process, mandated by the Tunney Act, is part of a stringent review process that must occur before a federal judge can approve this kind of settlement.

The dissenting states could oppose the proposed settlement during the Tunney Act process. But they have all but decided not to divide their energies by opposing the larger settlement through the process defined by that act and by simultaneously continuing with the litigation. Still, sources familiar with the matter warned that the state attorneys general are not in total agreement on this strategy.

The Senate's powerful Judiciary Committee, meanwhile, has scheduled a hearing for Dec. 12 that could compel Assistant Attorney General Charles James to justify the settlement, which many legal experts characterize as favorable to Microsoft. Senators Patrick Leahy (D.-Vt.) and Orrin Hatch (R.-Ut.) are expected to take center stage during the proceeding. Microsoft competitors have operations in both senators' states--IBM in Vermont and Novell in Utah--among other locations.

But the hearing ultimately could have very little impact on the Tunney Act process, as the legislative branch of federal government would have no jurisdiction over the judicial matter without passing a new law.

Calling on competitors
Microsoft competitors and trade groups representing them have worked feverishly to influence the states' remedy proposal. The Software & Information Industry Association (SIIA) is among the groups offering the states guidance on their remedy proposal. Microsoft quit the trade group last year.

Although former federal antitrust head Joel Klein frequently conferred with Microsoft competitors, his successor, James, met directly with only AOL Time Warner, said sources familiar with the matter. James' former firm, Jones Day, represented the media giant.

"It's not surprising Microsoft competitors regard this settlement as bolstering Microsoft's market power and dominance," said Hillard Sterling, an antitrust attorney with Gordon & Glickson in Chicago. "It's not surprising they would not stand still for this agreement."

Pressure overseas
Competitors also are ramping up their campaign overseas, where the EU continues its investigation of Microsoft. The company had been scheduled later this month to defend allegations it had used dominance in desktop operating systems to unfairly gain ground in server software. But in a push for settlement, Microsoft pulled out of the Dec. 21-22 hearing.

The political and regulatory climate overseas is potentially more favorable for Microsoft competitors hoping to influence the process, said legal experts. Unlike the United States, where antitrust laws are designed more to protect consumers, the EU's rules take into account the competitive impact of a monopolist's business practices.

Amelia Torres, a spokeswoman for the European Commission, the EU's executive arm, said that a decision is expected "sometime next year." She would not discuss Microsoft's settlement overture, but emphasized that the "investigation would continue normally" regardless of the company's decision to forgo the hearing.

"It is much too early at this stage to speculate on what the commission's final decision would be," she added.

If the European Commission rules against Microsoft, the regulatory body could slap the company with a fine of up to 10 percent of its annual revenue, or about $2.5 billion.

One Brussels-based lawyer, who asked not to be identified, said that the EU is not likely to settle simply because U.S. trustbusters did.

"The commission does not regard this investigation to be the same as the other one in the States," he said. "Your case addressed browsers and the desktop; the commission is looking at servers."