Judge rejects Microsoft settlement

Motz finds offer too self-serving

January 12, 2002|By Paul Adams | Paul Adams,SUN STAFF

A federal judge in Baltimore rejected yesterday Microsoft's plan to settle class-action lawsuits by giving needy public schools $1 billion worth of free computers and software.

The decision by Chief U.S. District Judge J. Frederick Motz handed the software giant another blow in a series of courtroom defeats as it tries to overcome accusations that it has used its monopoly power to overcharge customers.

Motz concluded that the proposed settlement would heavily favor the introduction of Microsoft software in schools eligible for the donations, dealing a competitive blow to rivals such as Apple Computer Inc., which controls about a third of the education market.

The 21-page decision will force Microsoft to return to the negotiating table or defend dozens of class-action lawsuits accusing it of using its market dominance to charge higher prices to customers dependent on the company's Windows operating system.

The proposed settlement between Microsoft and some of the plaintiffs' attorneys called for the company to donate software and refurbished computers to needy schools, in exchange for settling 150 lawsuits that were consolidated for pre-trial motions before Motz. The agreement also includes $400 million in cash to a private foundation, which schools could tap to buy non-Microsoft products.

But critics noted that the foundation set up by Microsoft and plaintiffs' attorneys would have to approve the purchases.

Motz said the agreement "raises legitimate questions, since it appears to provide a means for flooding a part of the kindergarten through high school market, in which Microsoft has not traditionally been the strongest player. ... "

"To put it bluntly, in the words of the opponents ... the donation of free software could be viewed as constituting court-approved predatory pricing," Motz wrote.

The class-action lawsuits are separate from an antitrust suit the Justice Department and nine states, including Maryland, agreed to settle in the fall in a 3 1/2 -year-old case against Microsoft. Nine other states have refused to sign that agreement, which would give computer manufacturers more freedom to promote non-Microsoft software. More hearings on the case are scheduled in March in Washington.

Legal experts said Motz's decision won't have any legal effect on the Justice Department's action, but the additional defeat could give a psychological boost to attorneys pursuing a tougher settlement in the federal antitrust case. It also delays any settlement of the software company's considerable legal battles.

"They've lost many cases in the courts now," said Robert Lande, an antitrust expert and law professor at the University of Baltimore. "They keep losing in court, so this is yet another Microsoft loss that could give sustenance to other attorneys pursuing the relief matter in Washington."

Motz's decision was praised by critics of the agreement, who argued that the settlement was too small and would only serve to increase Microsoft's market penetration. "We're delighted that the judge wrote a very considered and appropriate opinion," said Richard Grossman, an attorney for plaintiffs in California, who opposed the settlement.

Grossman said California consumers suffered an estimated $2 billion in damages as a result of anti-competitive behavior by Microsoft. Attorneys are preparing to go to court in the case in August, barring some sort of renegotiated settlement.

"We are happy to continue discussions with Microsoft on a settlement that would be legal and that Judge Motz could approve, but until Microsoft is willing to enter into serious discussions to that core, we'll be preparing for trial," Grossman said.

A lawyer for Microsoft said it is too soon to say whether it will enter into new negotiations with plaintiffs in the lawsuits.

"Microsoft really went the extra mile to put together this proposal," said Tom Burt, deputy general counsel for Microsoft. "The opinion today does provide a number of specific suggestions of things that could be done, and Microsoft ... is open to resolving litigation in fair and reasonable terms."

Microsoft shares closed down 67 cents yesterday to $68.61.

In his decision, Motz said he might approve a settlement if Microsoft agreed to provide more money for a proposed foundation that would be set up to distribute the donations to poor schools. The settlement's proposed $400 million for the foundation was dismissed by Motz as inadequate. A larger endowment would free more cash for schools to purchase rival software, he said.

Analysts said Motz's decision is no more than a minor setback for Microsoft.

"I don't think it means much in terms of a financial or business impact. It simply prolongs and delays the inevitable," said Ken Kiarash, an analyst with Buckingham Research Group in New York. "Microsoft will eventually have to pay a substantial sum to pay off these lawsuits."

Jonathan Geurkink, a senior analyst with Wells Fargo Securities in Seattle, said Microsoft has been unfairly painted as a villain.

"Microsoft is a business, and they're going to propose things that are within their interest. Having kids getting used to using PCs and Windows could provide Microsoft with benefits down the road, but it could help a lot of kids down the road, too."

Geurkink said the judge's decision just stalls the case.

"I had hoped this would be the year they would get a lot of this litigation behind them," he said. "This looks like it will drag on longer and be more fragmented than the kind of settlement we hoped it would bring."

Sun staff writer Andrea Walker contributed to this article.

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