January 11, 2002 3:25 PM PST

Judge tosses Microsoft schools settlement

A federal judge in Baltimore on Friday rejected a controversial settlement that would have ended more than 100 private class-action lawsuits against Microsoft, dealing the software maker its second legal setback in less than a week.

In his 21-page ruling, U.S. District Judge J. Fredrick Motz agreed with opponents that the proposed deal in the antitrust cases would itself be anti-competitive. He also said that the private cases had not been developed far enough to determine the extent of damages that could have been obtained through litigation.

Under terms of the proposal, Microsoft would have given $1 billion in money, software, services and training to about 12,500 underprivileged public schools. The company also would have given about one million Windows licenses for refurbished PCs donated to the schools.

The judge concluded that the level of funding for the schools and for a private foundation to administer the donations was insufficient, a shortfall that was "more acutely problematic when viewed in the context of the proposed settlement's potential adverse impact on competition."

Opponents of the settlement proposal, including Apple Computer, had argued that the proposal was anti-competitive, as it would help Microsoft make software gains in the education market.

Microsoft expressed dissatisfaction with the ruling--and optimism that it would eventually carry the day in the court proceedings.

"Microsoft really went the extra mile in trying to put together this settlement proposal," said Tom Burt, Microsoft's deputy general counsel, during a conference call with the media on Friday afternoon. "We thought it was creative, we thought it was a way to resolve litigation and bring some real benefits to the neediest school children in the country."

Burt could not immediately say if new negotiations were possible, but he emphasized, "Microsoft has no plans to appeal this determination," referring to the ruling.

On the surface, Motz wrote, the proposal would appear to be "platform neutral...However, the agreement raises legitimate questions since it appears to provide a means for flooding part of the kindergarten through high school market--in which Microsoft has not traditionally been the strongest player, particularly in relation to Apple--with Microsoft software and refurbished PCs."

Motz noted that refurbished computers donated to schools largely come from government agencies, "and 95 percent of them use PCs rather than Macs." He concluded that this factor would lead to an "increase in the number of PCs, both absolutely and in comparison to Macs, being used by eligible schools." The likely outcome would be a decline in the development of software designed for use in the Apple computers, further reducing the attractiveness of Apple products over time, he said.

Giving away software to schools also raises antitrust concerns, Motz concluded. He agreed with opponents who argued that the software giveaway could be viewed as "court-approved predatory pricing."


Gartner analyst David Smith says although the initial Microsoft settlement was interesting, perhaps it was too good to be true.

see commentary

"Good for the judge," said Bob Lande, an antitrust professor with University of Baltimore Law School. "The judge is protecting the public from getting ripped off by Microsoft and the coalition of greedy plaintiff attorneys."

Motz also rejected the deal because he concluded that the court record had not been developed enough to reasonably assess what damages the plaintiffs might have obtained in court. He added that the $1 billion value did not fall into "the range of possible approval."

"In other words, it is too low," Lande said.

In December, Apple suggested that Microsoft give $1 billion in cash, letting the schools buy whatever software or computers they wanted. Apple could not yet be reached for comment on Friday's ruling.

Plaintiff attorneys split
Microsoft wasn't the only party dismayed by Motz's ruling on Friday--so were a number of the plaintiffs.

"We're disappointed, of course, in the outcome," said Dan Small, an attorney with Washington, D.C.-based Cohen Milstein Hausfeld and Toll. The firm represented the largest group of the cases, those that had been consolidated in federal court.

"We worked hard to put together a settlement that we believe would have done a lot of good for the most disadvantaged schoolchildren in this country," Small said. "But we respect and understand the court's decision, and we are now prepared to aggressively litigate the case against Microsoft."

Another group of attorneys, led by Eugene Crew of Townsend, Townsend & Crew in San Francisco, led a California coalition of plaintiff attorneys who opposed the deal.

Small took a dim view of the possibility that the settlement would be revived. "The court gave a pretty clear road map what we would need to do to fix the problems," he said. "But, of course, it depends on whether Microsoft wants to proceed down that path."

First and foremost, Microsoft would have to cough up more money to fund the foundation. The software maker would have contributed about $400 million to that organization.

"The judge made it clear that without more money, he doesn't think the foundation can accomplish its purposes without avoiding any anti-competitive effect," Small said.

For its part, Microsoft is considering the options laid out by Motz for fixing the settlement.

"We're considering all of those," Burt said, "and remain open to resolving the case if we can do so in a way that's fair and reasonable to Microsoft and our customers." But it is too early to say whether negotiations would resume or not, he emphasized.

Lawyers started filing the cases in February 1999 based on Microsoft's larger antitrust battle with the Justice Department and 18 states. The majority of cases were filed in 2000.

In their lawsuits, plaintiff attorneys alleged Microsoft overcharged consumers as much as $40 per copy of Windows sold. But Microsoft successfully whittled down the number of cases by relying on a 1977 U.S. Supreme Court ruling that says only the first purchaser of a product has a right to sue on grounds of antitrust behavior.

Most of the pending private lawsuits have been brought on the behalf of consumers, who in most cases cannot be considered first purchasers because Microsoft generally sells its software to PC makers or wholesalers. The consumer plaintiffs, who are not Microsoft's direct customers, are not eligible to sue Microsoft under federal law.

But California is one of a handful of states that have adopted indirect-purchaser statutes, which may make the cases there a more serious threat to Microsoft.

"We're delighted," said Rick Grossman, an attorney with Townsend, Townsend & Crew, of Motz's ruling. "We're preparing for our trial in August. This case will be, one way or the other, resolved quite soon through a jury verdict in August or, if Microsoft wishes, a reasonable and legal settlement any time they wish."

The cases in Mississippi also are scheduled to go to trial this summer.

Discovery in the cases that had been stayed during the settlement process resumes Jan. 20.

"It is likely, in our view, in light of the effort that's been put into this settlement and the stay of litigation, that those trial dates will be modified until some later time," Burt said.

A string of setbacks
Rich Gray, a Silicon Valley-based attorney closely following the matter, said that Motz's conclusion--that the cases are not developed sufficiently for the judge to be comfortable with a billion-dollar settlement--bodes ill for the software maker.

That "is potentially ominous news for Microsoft," Gray said. "It does not guarantee that the ultimate number for a new settlement will be significantly higher, but it certainly suggests that as a possibility."

see special coverage: Microsoft, DOJ reach settlement Motz's rejection of the settlement is the second court setback for Microsoft this week, and a possible foreshadowing of more trouble ahead. In a separate antitrust case, U.S. District Judge Colleen Kollar-Kotelly on Monday rejected a request that would have delayed a remedy hearing by four months.

In November, the Justice Department and nine of 18 states settled Microsoft's nearly 4-year-old case. Nine other states and the District of Columbia decided to continue litigating the case, which would lead to a March remedy hearing.

In court on Monday, Kollar-Kotelly indicated that she would not necessarily separate the Justice Department's proposed settlement from a harsher proposed remedy put forth by the nine states that have continued the litigation. Options would include a single remedy or new round of settlement talks.

"One has to start wondering if the positive momentum Microsoft had with its two settlements at the end of 2001 has not been severely set back by this ruling (in the class-action lawsuits), combined with the ruling in the government case earlier this week," Gray said.

The latest developments, Gray said, suggest that the remedies sought by the dissenting states, not the Justice Department settlement, "will define the outer limits of the injunction ultimately entered against Microsoft in the government lawsuit."

 

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