Uncertainty now clouds Microsoft outcome

WASHINGTON -- The Microsoft antitrust case lurched into uncharted territory yesterday when half of the states suing the software maker agreed to settle the case while the rest said they would go to court to get tougher sanctions.

The split among the once unified states thrust the case onto two separate tracks that must be reconciled by a federal judge before Microsoft and the public will know what penalty the company faces for violating antitrust law.

"We've parted ways in some respects today," said Iowa Attorney General Tom Miller, a leader of the state coalition opposing Microsoft.

One track, required under the Tunney Act, is a 60-day public examination of the settlement struck Nov. 2 between Microsoft and the U.S. Justice Department. Representatives of Ohio, North Carolina, New York, Michigan, Kentucky, Illinois, Maryland, Louisiana and Wisconsin told U.S. District Judge Colleen Kollar-Kotelly they would accept the terms. Kollar-Kotelly is expected to rule whether to accept the settlement by early spring.

The second track involves the nine other states, including California, Kansas, Massachusetts and Minnesota, that said the agreement was weak and difficult to enforce. Attorneys from those states said they would press the case for tougher penalties in court. The hearing is scheduled to begin in March and a decision could be rendered by summer, legal analysts said.

The split among the 18 states suing Microsoft capped four days of furious negotiation between the software maker, the federal government and the states seeking to find a settlement that could be embraced by all sides. Yesterday marked the deadline set by Kollar-Kotelly for the states to declare whether they would accept the settlement. Microsoft agreed to what were considered to be some relatively minor clarifications during the talks.

But it all leaves a great deal of uncertainty.

"These are uncharted waters to have a Tunney Act proceeding and a remedy proceeding both in play at the same time," Miller said. "The judge will really be charting a course that hasn't been chartered before."

The two proceedings could have different results, legal experts said. If so, the judge would be free to reconcile the differences and determine an outcome.

In citing his objections, California Attorney General Bill Lockyer said, "While the settlement proposals are a step forward, they fail to provide adequate remedies for Microsoft's illegal use of its monopoly power to crush innovative technology."

Among the most notable of the group backing the settlement was New York, which had long pressed for tough terms. But the state's Attorney General Eliot Spitzer said the revised settlement adequately addressed the violations, adding that if the other states squeeze out more concessions "I will be thrilled."

The sequence of events yesterday dampened hopes that the settlement announced Friday between Microsoft and the federal government would bring a quick and unified end to a case that has been bitterly contested for three years.

"My present intention is to proceed in the litigation," said Connecticut Attorney General Richard Blumenthal, warning that the agreement as written is not robust enough to ensure that Microsoft changes its behavior.

"It is good, but it may not be good enough in some of the key areas that have been central in our efforts to protect consumers against misuse of monopoly, to prevent the recurrence of the violation of law and to restore competition in this industry," Blumenthal said, referring to the settlement as "hope over history."

Blumenthal and other holdouts have concerns about the definition of "middleware" in the agreement as well as the level of protection provided to Microsoft's competitors to retaliation and the amount of information Microsoft has to disclose.

Middleware refers to programs that are integrated into the company's Windows operating system such as e-mail, instant messaging and media players.

Miller, like other holdouts, said they might reconsider signing the settlement if additional changes are made, but an attorney for Microsoft told Kollar-Kotelly that negotiations are over.

"Microsoft believes the settlement process has come to an end," attorney John Warden told the court. "The issues in this case have been beaten to death, and they have been beaten to death by people who are worn out."

Microsoft Chairman Bill Gates said in a statement that the company worked to satisfy the misgivings of the states but was only partially successful.

"We made every effort to reach a compromise to address the states' concerns and allow everyone to move forward," he said.

"We made some additional revisions to clarify the proposed decree and better capture the intent of the parties. We hope that the remaining states will join in this agreement so that everyone can focus on the future and avoid the unnecessary costs and delays of further litigation," he said.

Among the concessions made by Microsoft include a provision requiring the company to provide more information to rivals about software it makes to power computer servers for businesses on the Internet. The Justice Department agreed to the change, calling them "clarifications" that did not change the substance of the agreement.

Analysts contacted yesterday were divided on whether the split among the states will affect Microsoft's stock price. Shares closed up $1.51, or 2 percent, at $64.78, dropping 18 cents in after-hours trading.

"The feds have said it looks reasonable, half the states agree, and the other half are still trying to fight battles that probably have less to do with antitrust than with jobs in their own back yard," said Scott McAdams, an analyst with McAdams Wright Ragen Inc. in Seattle. "I think the market will see through that and move on."

But Rob Enderle, an analyst with Giga Information Group, said yesterday's results "cast a cloud. I think it should have some downward pressure."

While financial analysts may differ, legal analysts said the states are in a strong position because they can do no worse than the settlement as currently written.

"The states are in a no-lose proposition, other than the money, of course," said University of Baltimore professor Robert Lande, an antitrust expert who has closely followed the case.

"They get whatever Justice has negotiated, and maybe they can get something better as well. The states can't do any worse by definition, and they might do better. Whatever they can get, that's gravy."

Charles James, head of the Justice Department's antitrust division, expressed confidence that the agreement he largely negotiated will be upheld in the end.

"We have a settlement on the table that fully and demonstrably remedies the case," he said.

"We think, at the end of the day, the resolution that's before the court today will be the resolution of the Microsoft antitrust litigation."

PARALLEL PROCEEDINGS

Two legal proceedings will unfold in parallel in the Microsoft antitrust case:

Up to nine of the 18 plaintiff states will pursue a remedy in the Washington, D.C., courtroom of U.S. District Judge Colleen Kollar-Kotelly. Four states are committed to this course: California, Kansas, Massachusetts and Minnesota. They could be joined by the states of Connecticut, Florida, Iowa, Utah and West Virginia, and the District of Columbia. Both sides' proposed final judgments are due next month, discovery ends Feb. 22 and hearings are set to begin March 11.
Under the federal Tunney Act, the public has 60 days to comment on the settlement agreed to by Microsoft, the Justice Department and the other nine states: Illinois, Kentucky, Louisiana, Maryland, Michigan, New York, North Carolina, Ohio and Wisconsin. That period could begin early next month. Then the Justice Department has 30 days to respond to comments. Finally, probably in late February, Kollar-Kotelly will decide whether the agreement is "in the public interest." If it is, she will make it law.

-- Dan Richman

THEY SAID IT

Comments from Microsoft, the Justice Department and state attorneys general on the Microsoft antitrust case:

"Microsoft believes the settlement process has come to an end. The issues in this case have been beaten to death, and they have been beaten to death by people who are worn out."

-- Microsoft attorney John Warden

"While the settlement proposals are a step forward, they fail to provide adequate remedies for Microsoft's illegal use of its monopoly power to crush innovative technology."

-- California Attorney General Bill Lockyer

"That agreement fails to protect consumer choice and promote competition by leaving Microsoft free to continue to abuse its monopoly."

-- AOL Time Warner general counsel Paul Cappuccio

"The battle has been won. It is time to move on."

-- Illinois Attorney General Jim Ryan

"While this decree will place significant restrictions on our business, we believe this is a fair and reasonable settlement that will be good for consumers, good for the high-tech industry and good for the economy."

-- Microsoft Chairman Bill Gates

"Right now, for Michigan consumers and taxpayers, the benefits of continuing prolonged litigation against Microsoft do not outweigh the potential disadvantages."

-- Michigan Attorney General Jennifer Granholm

"Let there be no misunderstanding: Ohio's approval of this settlement does not mean we will turn our backs and let Microsoft operate without oversight."

-- Ohio Attorney General Betty Montgomery

P-I reporter Charles Pope can be reached at 202-943-9229 or charliepope@seattlepi.com P-I reporter Dan Richman contributed to this report.

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