January 11, 2000 4:00 AM PST

Caldera settlement shows a new side of Microsoft

Microsoft, the company that vowed never to quit, is learning the art of compromise.

In a surprise settlement yesterday, Microsoft ended its nearly four-year legal battle with Caldera. The private antitrust case was scheduled to commence a jury trial Feb. 1.

Licking its wounds from battle with the Justice Department and 19 states, Microsoft may have learned a lesson from the government's antitrust case and another brought against Intel.

Rather than fight, Intel in March 1999 settled its case, in which the Federal Trade Commission alleged the chip giant used monopoly power to illegally obtain rivals' intellectual property rights. By contrast, Microsoft has suffered the consequences of a federal judge's stinging 207-page findings of fact against the company, which has inspired a rash of class-action claims.

The settlement could also be a fairly cost-effective way of sweeping the case away and snuffing out the possibility that members of its lead management team would be cross-examined in a jury trial.

"This is a smart move by Microsoft," said University of Baltimore School of Law professor Bob Lande. "This allows them to do two things: build software, on the one hand, and fight the government on the big case, on the other."

Terms were not disclosed. Redmond, Wash.-based Microsoft, however, said that it would take a charge of 3 cents per share on earnings during the first calendar quarter. That comes to around $150 million, according to one analyst. Others said the settlement could easily be much more, depending on how Microsoft accounts for it.

Legal experts have long said that Microsoft's Vince Lombardi-like defense tactics in its ongoing government antitrust case constitute one of the core causes of its present troubles. "Giving a little could have greatly benefited Microsoft's defense," said Bill Kovacic, an antitrust professor at George Washington University Law School.

Having been put in a defensive position by findings of fact issued by U.S. District Judge Thomas Penfield Jackson, a humiliated Microsoft may be adding "compromise" to its legal playbook.

Microsoft also has been conducting settlement talks with the government before Jackson issues his next ruling, as early as March. Next week, Microsoft is scheduled to file a brief on proposed conclusions of law. The government filed a similar document on Dec. 6.

Legal experts say Microsoft had good reason to settle the Caldera case, especially with class-action suits mounting. While the antitrust battle does little to help other litigants, "A Caldera win would have strengthened many other suits," Lande said.

Dana Hayter, an antitrust and intellectual property attorney with Fenwick & West in San Francisco, explained, "A successful Caldera case could have expanded the number of facts available to be used in other litigation."

While other litigants might access some of the same information through discovery, getting it through the Caldera case--or even a Caldera win--would have been beneficial, said legal experts.

"The rumor was Caldera amassed a lot of information that was very, very negative for Microsoft," said Albert Foer, president of the American Antitrust Institute. "Presumably, part of the settlement would be to keep it forever proprietary, under lock and key."

Given the large number of class-action suits Microsoft faces, "It may have been very, very important for Microsoft to keep this information, whatever it was, from going public," Foer said. "They may have felt it better to fold than let that information come out."

Caldera's evidence included an email suggesting Microsoft sought to prevent competing operating systems, such as DR-DOS and IBM's PC-DOS, from working with Windows 3.x.

Caldera had alleged Microsoft illegally tied MS-DOS to Windows in a way that locked out competitors, such as DR-DOS, which the Orem, Utah-based company acquired from Novell in 1996.

While the terms of the settlement will be kept from the public, the government could issue a subpoena using what is a called a civil investigative demand. "The government might not be able to disclose the information, but it could use it in its own intelligence gathering," Hayter said.

Microsoft also may have settled in hopes of avoiding the potential public relations beating it took during the testimony in the government trial. The Caldera case would have brought many of the same Microsoft executives in the government case before a Utah jury.

Top-line Microsoft executives scheduled to testify included Steve Ballmer, Joachim Kempin, Paul Maritz, Brad Chase and former executive Brad Silverberg.

Neither side would disclose financial terms of the settlement, but Microsoft apparently admitted no wrongdoing. That could mean Microsoft's apparent softening is less than what it appears, Hayter said.

"If Microsoft doesn't have to change anything that they're doing and remove a potential liability for a relatively small payment, it doesn't mean they've changed their behavior," Hayter explained. "For Microsoft, money is cheap if they can continue to do business the way they do business."

The settlement surprised Lande and other legal experts, who said they expected Caldera to either fight or hold out for at least a $400 million settlement.

But Microsoft could easily make the true amount of the settlement difficult to ascertain, said analysts.

 

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