Microsoft class-action deal questioned

A federal judge yesterday questioned whether Microsoft Corp.'s $1 billion plan to give poor schools computers and software to settle consumer antitrust claims would give it an unfair advantage in one of the few markets where it faces competition from Apple Computer Inc.

Yesterday's hearing was part of a class-action suit by millions of U.S. consumers who say Microsoft abused its Windows monopoly by overcharging. It is separate from another antitrust action brought by 18 states and the U.S. Justice Department.

In the consumer action yesterday, U.S. District Judge Frederick Motz asked lawyers for class-action plaintiffs who negotiated the settlement to respond to criticism from Apple, Red Hat Inc. and industry groups that letting Microsoft donate software and refurbished PCs would entrench the company's Windows monopoly.

Microsoft last week agreed to deliver a million reconditioned computers with free copies of the Windows operating system to schools in poor neighborhoods. Doing so might "have an indirect anti-competitive effect" because schools would choose to receive computers compatible with Microsoft software "as opposed to buying" from Apple, the judge said. Apple now has a 47 percent share of the market for U.S. school computers, while Windows powers 53 percent.

If schools are offered free copies of Windows, "the school is going to act, if it is acting in a rational economic way" by opting for what "would get the most bang for its buck," the judge said.

Microsoft shares closed down $1.40, or 2 percent, at $63.74, regaining 1 cent in after-hours trading.

The judge also questioned "the integrity of the negotiating process" after an economist for the plaintiffs, the University of Washington's Keith Leffler, found math errors in his presentation. Leffler said he should have concluded plaintiffs in the pending cases could get $5.1 billion in damages. Instead, he wrongly concluded they were entitled to $2.1 billion.

He also said he should have concluded that damages might total $13 billion, not $5.5 billion, if every class-action claim went to trial.

"It seems to me you've got to go back to square one to get back to square five," Motz said after the mistakes were revealed.

The agreement would resolve more than 150 class-action suits claiming the company overcharged consumers. The pact would also apply to any pending claims that accuse Microsoft of using its Windows monopoly to charge extra money for the operating system and popular software programs like Microsoft Office.

Motz yesterday said he will decide by mid-December whether to give preliminary approval to the settlement. Such approval would be followed by a hearing on whether the plan is fair and adequate.

Plaintiffs attorney Michael Hausfeld told the judge that class-action lawyers are in negotiations with Red Hat for the company to provide free copies of its Linux-based operating system for each copy of Windows that Microsoft gives to schools.

Lawyers representing California consumers say they will urge Motz to reject the settlement because it would deny their clients the opportunity to seek as much as $9 billion in damages.

"We have 13 million consumers who are relying on us to represent them," said San Francisco antitrust lawyer Eugene Crew, representing plaintiffs who sued in California state court.

"The settlement is grossly inadequate."

Lawyers for plaintiffs in the District of Columbia, Minnesota, New Mexico, New York, North Carolina and North Dakota also oppose the settlement.

Plaintiffs lawyers who negotiated the $1 billion settlement in the consumer cases say it is fair because the cost of notifying each consumer would far exceed the damages that would be paid.

Motz seemed to accept the assertion that giving settlement proceeds to schools might be more efficient than accepting claims for damages by individual consumers, who may not have proper documents to show they had bought a Microsoft product.

Seattle P-I reporter Dan Richman contributed to this report by Bloomberg News.

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