November 2, 2001 12:00 PM PST

Microsoft, Feds reach a deal

WASHINGTON--Microsoft and the Justice Department on Friday settled their acrimonious antitrust battle, an agreement that many called a victory for Microsoft and that could run into resistance from state attorneys general.

The proposed deal would impose relatively mild restrictions on the software maker compared with earlier rulings in the 3-year-old case, focusing largely on tweaking Microsoft's competitive behavior.

Among other provisions, the company promised to refrain from contracts and related activities that compel other companies to do its bidding. The Windows operating system, at the heart of a court ruling that branded Microsoft a monopolist, would emerge largely unchanged, and Windows XP--once a focal point of further proceedings--will be free of any significant restrictions.

The settlement with the federal government, however, is not the final word in the three-year-old case. The 18 states that are part of the lawsuit have until Tuesday to respond to Friday's proposal, which will then be reviewed by U.S. District Judge Colleen Kollar-Kotelly.

If approved, some analysts said the agreement could greatly benefit computer manufacturers, which would have the freedom to substitute non-Microsoft applications on Windows, including Web browsers, e-mail clients, media players and instant-messaging applications.

Microsoft Chairman Bill Gates described the agreement as "fair" and necessary, despite the restrictions on his company.

"While the settlement goes further than we might have wanted, we believe that settling this case now is the right thing to do to help the industry and the economy to move forward," Gates said. "This settlement will help strengthen our economy during a difficult time and ensure that our industry can continue delivering innovation."

Gates added: "We recognize that the success of our products has created concerns. This settlement addresses those concerns in a fair...manner, enabling Microsoft to continue innovating and pushing technology forward."

See MS-DOJ timeline During a Friday-morning news conference, Attorney General John Ashcroft called the proposed settlement "strong and historic" and said that it would end "Microsoft's unlawful conduct."

Ashcroft said that a competitive software industry is vital to the U.S. economy and that effective antitrust enforcement is crucial to preserving competition in the high-tech arena.

"With the proposed settlement being announced today, the Department of Justice has fully and completely addressed the anti-competitive conduct outlined by the Court of Appeals against Microsoft," he said.

One of the settlement's enforcement mechanisms would be a technology-oversight team installed at Microsoft with access to Windows source code, the Justice Department revealed during the press conference.

What will the states do?
One complicating factor is that the 18 states that are co-plaintiffs in the landmark case are not yet onboard. The judge gave them until Tuesday to decide whether they would back the agreement.

Tom Miller, Iowa attorney general and one of the leaders of the state coalition, emphasized that he and his peers had "taken an active role" in the negotiation and mediation process ordered by Kollar-Kotelly.

"While there have been some promising developments in the mediation over the past few days," he said, "the states have not joined today in the settlement agreement reached between the Department of Justice and Microsoft. As elected law enforcement officials, we believe that it is imperative that we fully assess the specific language of the agreement."

Friday's agreement, which is less onerous than the final proposal submitted during last year's failed settlement discussions, has some legal experts and high-tech trade organizations crying foul. The settlement, they say, lacks the bite warranted by an appeals court ruling in June that upheld antitrust claims against Microsoft, most notably that it illegally maintained a monopoly in Intel-based operating systems.

The new proposal puts forward "a very mild remedy," said Emmett Stanton, an antitrust lawyer with Fenwick & West in Palo Alto, Calif. "What of Microsoft's monopoly maintenance conduct is actually being remedied? If they're not opening up the APIs, (and if) the tie-in agreements are not in place, what's going to be different? It doesn't sound like Microsoft is giving up very much."

Many of the provisions of the settlement reflect changes already made by Microsoft.

Besides the provision regarding competing applications, the proposal submitted Friday requires that Microsoft disclose server protocols to ensure that it cannot make Windows desktop software work better with its server software than with that of competitors.

In addition, the company agreed not to retaliate against PC manufacturers or software developers for supporting some kinds of competing products. To help enforce this provision, Microsoft agreed to license Windows to computer makers uniformly, rather than offer better pricing only to some, for a period of five years.

Microsoft also is prohibited from engaging in exclusive contracts that would prohibit software developers or PC makers from using competing products.

The proposed settlement would be in effect for five years, with the possibility of a two-year extension.

"Each of these things is capable of being evaded, which Microsoft has successfully done in the past," said Bob Lande, an antitrust professor with University of Baltimore School of Law. "I don't have any confidence that these provisions are going to be effective."

Lande criticized the agreement for not offering enough means of enforcement and for failing to ensure that there are no shenanigans.

"So you're going to let (PC makers) take off the Microsoft media player and put in another media player if they want?" he asked. "But what if every 5 seconds a notice pops up and says, 'Are you sure you wouldn't like the Microsoft media player?'"

Jonathan Jacobson, an antitrust lawyer with Akin, Gump, Strauss, Hauer & Feld in New York, described the settlement as "pretty odd."

"It appears to do nothing more than what is utterly obvious from the Court of Appeals decision," he said. "It seems that what's missing here is one of the basic principles of antitrust remedies, which is that following a finding of antitrust law violations the defendant be fenced in from perpetuating the unlawful conduct. This decree seems not to do that."

Not a done deal
While Microsoft and the Justice Department may have reached an agreement in principle, the settlement is not a done deal until approved by Kollar-Kotelly after holding a Tunney Act hearing. That law emerged from a Nixon-era settlement with ITT that critics charged was politically motivated.

"The judge is required to review the public comments received, and she is permitted to undertake any evidentiary proceeding she wants, to make sure entry of the decree is in the public interest," said Glenn Manishin, an antitrust lawyer with Kelley Drye & Warren in Vienna, Va. "The whole point of this Tunney Act is to make sure there aren't any backroom, smoke-filled deals like there were with the ITT deal in the late 1960s."

Opponents of the settlement are likely to question the extent to which politics played a role in the agreement. The Justice Department has gone from advocating a breakup of Microsoft under the Clinton administration to accepting a much milder settlement at the behest of Assistant Attorney General Charles James.

"The obligation of Judge Kollar-Kotelly is to determine whether the settlement is the product of political influence or an objective appraisal of antitrust policy and precedent," Manishin said.

Despite the appeals court ruling, recent action by the Justice Department raises the specter of political maneuvering, critics charge. In September, with little consultation with the 18 states, the agency unexpectedly took breakup and the tying claim--whether Microsoft illegally integrated Internet Explorer into Windows 95 and 98--off the table.

"In no respect did the White House seek to shape or influence the outcome," Ashcroft said during the Friday press conference.

Judge could be overruled
Whatever Kollar-Kotelly does with the settlement, there is no guarantee that an appeals court would not later overrule her. In 1995, U.S. District Judge Stanley Sporkin refused to sign an earlier consent decree hammered out between the Justice Department and Microsoft.

"Sporkin got reversed because he relied on evidence that wasn't in the record before him," Manishin said.

A federal appeals court later replaced Sporkin with U.S. District Judge Thomas Penfield Jackson, Kollar-Kotelly's predecessor responsible for the landmark antitrust case.

After the two sides failed to settle before an earlier deadline, Kollar-Kotelly appointed Boston University law professor Eric Green to mediate the talks.

Lawyers for the Justice Department, Microsoft and 18 states were expected to deliver the proposed settlement to Kollar-Kotelly during a 6 a.m. PST status hearing.

There, the states were expected to ask the judge for more time to review the proposed settlement, which would be presented in the form of a consent decree, said sources familiar with the matter. About five states, among them California, led the coalition seeking more time to review the document and weigh continuing the case without federal trustbusters.

Wild cards
The states remain wild cards in the case. They could oppose the settlement during the Tunney Act hearing or pursue the case independently of the Justice Department.

"But that could be very tough to do," said Andy Gavil, an antitrust professor at Howard University School of Law.

One problem: The Justice Department could oppose the states' continuation. Some states also lack the will they once had to fight the case, particularly given pinched economic resources with a recession looming.

If the states do carry on the fight, they will likely rally around the appeals court's unanimous June decision upholding the eight separate antitrust violations against Microsoft.

"Just one (violation) is serious enough under antitrust law," Manishin emphasized.

Throughout the case, the states were the strongest advocates of breaking up Microsoft. But after the appeals court ruling, the Justice Department unexpectedly removed breakup from the remedy.

"Once you, as a practical matter, took breakup off the table, the question is what kind of conduct-remedies would a court impose?" said Fenwick & West's Stanton. "Part of the trade-off is, do you want some remedies sooner or some different ones much later on?"

With breakup no longer an option, the Justice Department may have decided to get as much as it could now rather than waiting.

"Tougher remedies might not get imposed for another six months or a year, another appeal or another generation of Windows," Stanton said. "If the trade-off is softer, milder (restrictions), but...in place now," that could have been more appealing to the federal government, he said.

The states now face a similar dilemma as they plot their next move. If they go it alone, they could appear before Kollar-Kotelly in March for a remedy hearing.

No matter what happens next, Microsoft's legal problems stemming from the case won't disappear.

"They were found to be a monopoly," said Gavil, who noted that the finding and supporting evidence could be used in a host of civil lawsuits pending against Microsoft. "It's not over yet."

 

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