February 28, 2002 7:45 AM PST

Microsoft, DOJ tweak settlement terms

WASHINGTON--In expected legal filings, the Justice Department and Microsoft on Wednesday night rebuffed some of the stiffest critics of their landmark antitrust settlement.

They also had some concessions to offer, as the software titan and the Justice Department, as previously reported, for the second time made minor modifications to their early November settlement deal.

The first set of modifications allowed nine of 18 states to join the settlement. Nine other states and the District of Columbia rejected the deal, choosing to continue on with the litigation.

The settlement modifications, some addressing issues the litigating states raised, and a legal brief filed Wednesday asking U.S. District Judge Colleen Kollar-Kotelly to dismiss the states' claims, appear to be part of a strategy to put an end to the antitrust case with the settlement, legal experts say.

The changes address some concerns that the proposed deal is not in the public interest, as mandated by the Nixon-era Tunney Act. Kollar-Kotelly is expected to accept or reject the settlement largely based on the public interest issue sometime after a March 6 hearing.

For the most part, the settling parties tightened up the language of the proposal, addressing concerns about ambiguity in the language and also making clear their intent behind the deal's major sections, such as technology sharing, contractual restrictions, and Microsoft's business relationships with PC makers and other companies.

One important clarification would ensure that Microsoft provides equal access to competing middleware technologies such as Web browsing, instant messaging, and media playback in Windows. Another addressed concerns raised by Sony and the litigating states that new uniform licensing agreements would pilfer PC manufacturers' intellectual property.

see special coverage: Microsoft, DOJ reach settlement "The modifications lay down a case for Microsoft and the Justice Department as being responsive and responsible," said Emmett Stanton, an antitrust lawyer with Fenwick & West in Palo Alto, Calif. "If you're a Microsoft you have to draw the line somewhere. You can't change everything. The prudent thing to do is to make some changes, as long as they don't affect your core requirements for the settlement."

The Justice Department initially said that commenters opposed the settlement by a 2-to-1 margin. But in its final tally, 12,500 opposed the deal, 10,000 were in favor, and 9,500 did not express a view one way or another.

"Clarifying changes"
In its filing on the changes, the Justice Department made clear it believes that the settlement proposal "as originally filed with the Court effectively remedied the violations sustained by the Court of Appeals and would be in the public interest," but made changes to "respond to specific concerns raised in the public comments."

"After reviewing the public comments on the settlement, the Department of Justice and Microsoft have proposed a number of clarifying changes to more accurately reflect the intent of the parties and address some of the misperceptions of the proposed decree," said Microsoft spokesman Jim Desler.

In separate filings, the Justice Department and Microsoft focused their responses on issues raised by the 47 most substantive of the comment submissions. Lawyers for both parties waited almost until the last minute, close to midnight Wednesday, to file the briefs with the court.

Settlement critics included the American Antitrust Institute; AOL Time Warner; the litigating states; Sen. Herb Kohl D.-Wisc., chairman of the Senate Subcommittee on Antitrust; consumer advocate Ralph Nader; Novell; Palm; ProComp; Red Hat; SBC Communications; Sony; and Sun Microsystems.

The Justice Department reserved its responses to several broad areas: contentions that the lawsuit was unjust and should never have been brought, allegations of political influence, the litigating states' remedy proposal, and a Dec. 12 Senate hearing.

The 248-page document also delves into detail about issues affecting PC makers, software developers, and Microsoft business practices. The Justice Department also addressed the Tunney Act process, including the form of next week's hearing.

Federal trustbusters also asserted that the litigating states' proposal for harsher sanctions was "not appropriate as a remedy for the violations found by the Court of Appeals."

The document made clear that the Justice Department believes the settlement is the only remedy to Microsoft's antitrust violations: "We have addressed the differences between the litigating states' proposal...and have responded to the comments that address these differences."

In its 46-page filing, Microsoft addressed some of the same issues and also staked out the position that the non-settling states had not wholly acted in good faith, choosing to pursue "an agenda largely dictated by Microsoft competitors resident in some of their jurisdictions."

Microsoft also argued that the settlement was in the public interest because the Justice Department achieved through the proposed deal "all that it could have achieved in litigation, plus several key remedies that it could not have obtained from this court."

Arduous task
As the case moves forward, Kollar-Kotelly has the arduous task of choosing between two possible sets of sanctions against Microsoft. The settlement would impose some restrictions on Microsoft's business practices but have little impact on how the company develops or releases software.

The litigating states want much more. In a December remedy proposal, they said Microsoft should give away the source code for its Internet Explorer browser, license through auction its Office software for use on competing operating systems, and carry Sun's Java in Windows for 10 years.

The litigating states also have set their sights on Microsoft's crown jewel, the Windows XP operating system, which would remedy what they contend is a major shortcoming of the Justice Department's settlement.

"Typically, antitrust remedies are forward-looking, seeking not only to remedy the anti-competitive behavior but prevent future anti-competitive acts," Stanton said. "It would appear the state attorneys general believe this is something missing in the settlement proposal."

The litigating states would like Microsoft to sell a stripped-down version of Windows without the so-called middleware technologies. Such a version of Windows, they contend, would benefit competition.

The Gatekeeper:
Windows XP Microsoft has argued that what the states are asking for is not technically feasible. To find out, Kollar-Kotelly agreed to a request by the states for access to the Windows XP Home, Professional and Embedded source code, which is being reviewed by University of Utah professor Lee Hollaar.

Until Wednesday, Kollar-Kotelly's options in the case appeared to be fairly straightforward. She could approve or reject the settlement, on one track, and move ahead with the remedy proceeding on the other. In that instance, she would treat the two proceedings separately.

But the judge also could hold off her decision on the settlement, awaiting the outcome of the remedy hearing that begins March 11. In that scenario, she could weigh the two sets of sanctions against each other and choose one, rather than treat them as separate proceedings.

Another option would be to signal that changes should be made to the settlement in an effort to get all parties to go along with the deal, although Kollar-Kotelly's authority essentially would extend only to approving or rejecting the deal. Rejection would require a determination that the deal would not be in the public interest.

Andy Gavil, an antitrust professor at the Howard University School of Law, said people are reading too much into how Kollar-Kotelly is handling the two tracks of the case.

"You have to remember that her role over the Tunney Act proceeding for the settlement is very limited," he said. "Essentially, her power is to approve or reject. But her authority on the states' case is much broader. It would not be inconsistent at all or unreasonable for her to order something completely different in track two than track one, because it's more a reflection of her authority in track two."

But Microsoft on Wednesday offered the judge another option, by asking the judge to dismiss the litigating states' claims. Microsoft argued in part it is the Justice Department that determines antitrust policy, not the states.

Gavil said the argument would likely have more standing for an appeal than the trial. "It's unlikely the judge is just going to say, 'Oops, you're right. Let's dismiss the case,'" he said.

But Stanton strongly disagreed.

"Those of us who have done antitrust defense out here in California have been frustrated for years by this dual-sovereignty problem," he said. "There haven't been many successful challenges to that, but this is a unique context. The federal process builds in a means for everybody to participate and the court to make a fairness determination," Stanton said.

Much could depend on how much the judge is persuaded that the modifications to the settlement address issues the states plan to raise and that the revised proposal satisfies the June 2000 ruling by Court of Appeals that Microsoft violated U.S. antitrust law.

The judge could conclude "there's nothing new in that that helps her to rethink this, and then it's end of story," Stanton said. "She rejects their offer of proof."

"That would really bring down the curtain on the litigation," he added. "Here we thought we were looking forward to a couple of years of trench warfare and appeals and, lo and behold, it could be over with the settlement."

 

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