DOJ, state conflicts compromise Microsoft settlement

Growing tensions among the Justice Department and 19 state attorneys general have compromised settlement negotiations in the Microsoft antitrust trial, sources said today.

Increasing dissension among state plaintiffs may largely remove them from settlement negotiations in the trial, said sources close to the talks. The DOJ now finds itself at odds not just with Microsoft but with its partners in the case.

Also, there are indications that Microsoft may have drawn a line in its willingness to negotiate a settlement. Microsoft chief executive Steve Ballmer said yesterday that the company has already made more concessions during settlement talks than would be ordered by the courts should Microsoft be found guilty. Ballmer made his remarks yesterday in an email message sent to more than 30,000 Microsoft employees and examined by CNET News.com.

U.S. District Judge Thomas Penfield Jackson had been expected to rule yesterday but delayed action to allow settlement talks to continue.

The mediating judge in the case, Richard Posner, has set an aggressive meeting schedule through next Wednesday that would appear to favor DOJ negotiators, according to a report in The New York Times this morning.

Late yesterday, the extent of the states' role was not clear, other than that they have two days to ratify a settlement agreement, should there be one. But Posner could call the negotiations at an impasse if there is no agreement by next Wednesday. Jackson is expected to rule by the end of next week should talks stall.

"If only Microsoft and DOJ were talking, this would all be over now," said a person familiar with the talks.

Ballmer, in his email message, indicated that the software maker has reached the extent of its concessions. "We believe we've put more on the table than the judicial process would ultimately provide, even if we lost the case," Ballmer said. Ballmer also repeated a concern echoed throughout the proceedings: "Any settlement must preserve our ability to innovate and improve our products," he wrote.

Ballmer also indicated Microsoft's intention to hold its ground. "While we're very sure of our legal position and we're prepared to take it all the way on appeal, we've learned that discretion is the better part of valor, so we are working very hard to resolve the case through settlement," he wrote.

In recent weeks, the DOJ accepted that it might not get a decisive victory after a protracted appeals process and softened its stance on breaking up Microsoft. But some hard-liners among the states would rather take their chances with a ruling, said government sources.

Until last week, the talks proceeded along fairly quietly, an indication that both sides were negotiating sincerely, said Rich Gray, an intellectual property attorney with Outside General Counsel Silicon Valley in Menlo Park, Calif.

But a series of leaks about the settlement talks, which Posner ordered to be kept secret, "left little doubt the government camp is fragmented," Gray said.

Convincing any part of the government camp it needs to settle is the difficult task Jackson handed to Posner, who heads the U.S. Court of Appeals for the 7th Circuit in Chicago.

When Jackson issued his "findings of fact" on Nov. 5, he delivered to the government what appeared to be an almost certain victory and the means of breaking up the software maker.

That document was akin to winning the lottery and not knowing what to do with the proceeds, said legal experts. "You couldn't have convinced the Justice Department and the states when they started this thing they would get such a one-sided finding in their favor," George Washington University Law School professor Bill Kovacic said.

But in the months that followed, the DOJ and 19 states discovered their potential victory was bittersweet. The DOJ's change of heart may have a lot to do with the cool reception it got after attempting to win support from industry and consumers on breakup.

In a Valley visit last December, U.S. Assistant Attorney General Joel Klein failed to rally significant support for breakup among high-tech companies, said sources familiar with the trip. That trip, which involved high-level meetings with Oracle, Sun Microsystems and other staunch Microsoft critics, convinced few of Microsoft's adversaries that a breakup was warranted.

As Microsoft's stock dropped in February and March, state attorneys general started hearing from their constituents, among them institutional buyers affected by the stock changes and troubled about their investments, said several sources in the states.

Following final oral arguments last month, it was no longer clear the government would get a clean sweep, Kovacic said. The government might only win four of its six major arguments with Jackson's ruling. If an appeals court knocked out two more, there might not be enough left to warrant breaking up Microsoft.

While these factors mollified the DOJ and some states, hard-liners among the states held fast to their belief the only way to deal with Microsoft was to break it up, said sources close to the talks.

Even if Microsoft and the government's chief negotiators reach an agreement, all 19 states, as well as Jackson, must approve the deal for it to stand. The states could break their case off from the DOJ's, if they are dissatisfied with the outcome, although many legal experts said that would be unlikely.

If negotiations do collapse, the government's softened position for settlement is no guarantee it will seek only conduct remedies should Jackson rule in the case.

"This is absolutely what hard-line states want," said a source familiar with the discussions.