Believing that Microsoft's proposed antitrust settlement with the Department of Justice (DoJ) and nine states is too lenient, the remaining states have filed for significantly harsher restrictions on Microsoft's behavior.

In other legal actions, Microsoft agreed to settle private antitrust suits by donating software and cash to school districts; declined an opportunity for a hearing in the antitrust investigation being conducted by the European Union (EU); and announced that Chief Counsel William H. Neukom will retire in June 2002.

What the States Want

On Dec. 7, the lawyers representing Washington, D.C, and nine states that did not sign the first proposed settlement (California, Connecticut, Florida, Iowa, Kansas, Massachusetts, Minnesota, Utah, and West Virginia) filed a brief asking for much more stringent restrictions on Microsoft. Many of these restrictions would involve products and technologies—such as Office and .NET—that have not been part of the case.

Mandatory Actions

The dissenting states want a court order forcing Microsoft to take certain actions.

Create alternate versions of Windows. Microsoft integrated its Web browser, Internet Explorer (IE), with Windows 98 and claimed that removing it would break Windows. The states would allow Microsoft to "bind" IE and other applications into its operating system (OS) in this fashion—but only if the company also produces a completely functional and less expensive version of Windows with these applications absent.

The states believe that this provision will pave the way for wider acceptance of non-Microsoft middleware (such as Web browsers or media players). Application developers could then write to the APIs exposed by this middleware, rather than to Windows APIs, and could port their applications more easily to other platforms. This would help lower the "applications barrier" created by Microsoft's desktop OS monopoly (i.e., because Microsoft controls the OS market, few companies want to create applications for competing OSs, which thereby perpetuates Microsoft's dominance).

Distribute Java. Citing fears of legal action from Sun Microsystems, Microsoft chose not to distribute its Java Virtual Machine (JVM), which allows Web-based Java applets to run natively on Windows, with Windows XP or IE 6. (See "Java Out of Windows XP" on page 20 of the Sept. 2001 Update.)

The states want to force Microsoft to distribute some JVM—its own or a competitor's—with all of its Web browsers and OSs for the next 10 years. The states believe this is justified to ensure "that Java receives the widespread distribution that it could have had absent Microsoft's unlawful behavior." They also hope this will reduce the barrier to entry for new applications, which could be written for the JVM rather than using Windows APIs.

Port Office to other platforms. The states want to force Microsoft to port each version of Office to the Mac platform 60 days after it's introduced for Windows and to auction licenses to allow companies to port Office to other OSs. Like the other restrictions, this is also designed to reduce the barrier to entry for new applications.

License IE source code. According to the states, an appropriate remedy must include mandatory source code licensing for all of Microsoft's Internet browsers, including IE and MSN Explorer. This is mainly a punitive measure designed to ensure that Microsoft "cannot benefit unduly from the browser dominance that it gained as part of its unlawful monopolization of the operating system market."

Broader Definitions

The proposed settlement with the DoJ limits the definition of "middleware" to a few selected products (see "Settlement Terminology Defined"). But the dissenting states want middleware to include many other Microsoft applications and technologies, such as Office, Exchange, enterprise management software, digital imaging software, directories and directory services software, and the Common Language Runtime (CLR) of the .NET Framework. Similarly, the states want "operating system" to specifically include OSs for servers, handheld devices, and TV set-top boxes. Finally, the states want the definition of "communication interface" to include authentication protocols, among other things.

By changing these definitions, the states would make it easier for companies to create a wide range of competing products that had all the functionality of Microsoft's own products. For example, Microsoft would have to document all APIs that Office uses to communicate with the desktop version of Windows, potentially simplifying the development of competing business software suites. It would also have to disclose (without licensing limitations) its proprietary extensions to Kerberos, which could let a competitor create a product that mimics the functionality of a Windows 2000 domain controller.

Enforcement and Accountability

If approved, the DoJ’s proposed settlement will be enforced by a three-person technical committee, one of whose members will be appointed by Microsoft. This isn't strict enough for the dissenting states. Instead, they want the court to appoint a single "Special Master" with the power to take "all acts and measures he or she deems necessary or proper" to enforce Microsoft's compliance with the final judgment or settlement. The states also want their own legal representatives to have the right to inspect "all books, ledgers, accounts, correspondence, memoranda, [and] source code." Finally, the states want Microsoft to appoint a "Compliance Committee" consisting of three members of the board of directors—none of whom can have been a Microsoft employee at any time—to oversee compliance internally.

In addition to stricter enforcement, the states want greater accountability from a wider range of Microsoft employees. Specifically, they want each "officer, director, and manager, and each platform software developer and employee involved in relations with OEMs, ISVs, IHVs, or third-party licensees" to sign a statement saying that they understand they can be personally held in contempt of court for violating the terms of the final judgment or settlement.

A Long Legal Road

The dissenting states have numerous other demands: they want Microsoft to adhere to industry standards when it says it will; to be prohibited from asking Windows users if they want to switch their defaults from a non-Microsoft to a Microsoft product; and to give notice before making any changes to Windows that could affect the performance of third-party applications, among many other things.

In a Dec. 12 response to the proposal, Microsoft claimed that "the non-settling states seek to punish Microsoft and to advance the commercial interests of powerful corporate constituents…such as Sun Microsystems, Oracle, Apple, and Palm." As its suggested remedy, Microsoft simply resubmitted the consent decree it has already signed with the DoJ and nine other states.

District Court Judge Colleen Kollar-Kotelly is expected to hold hearings in Mar. 2002 regarding the dissenting states' proposed remedies, then reach a verdict later in the year. Her verdict could be appealed by either side, meaning that any restrictions would probably not take effect until 2003 or later. In the meantime, Microsoft has begun to make the necessary changes to comply with the consent decree it signed with the DoJ and the other states. (For details, see "Effects of the Antitrust Settlement".)

Class-Action Settlement Near

Microsoft is aiming to settle more than 100 private antitrust cases in which consumers accused the company of overcharging them for Windows. The suits are separate from the DoJ's antitrust case, but were filed after a federal judge in that case found Microsoft guilty of abusing its monopoly power. They were then consolidated in a single class-action suit before the Federal District Court of Maryland.

As of press time, Microsoft and lawyers representing most of the plaintiffs in the class had agreed on a settlement: rather than paying a small cash settlement to each Windows customer (estimates put the payout at less than US$10 apiece), Microsoft will distribute free software, hardware, technical assistance, and cash to about 16,000 of the poorest schools in the United States. Microsoft says that the material in the settlement is worth US$1 billion and would result in a US$550 million pre-tax charge on its next quarterly earnings statement.

The proposed settlement was immediately criticized by Microsoft opponents, who claimed that it is an attempt by Microsoft to boost its share of the education market at the expense of Apple Computer (which has 47% of the primary and secondary education market), and that the US$90 million it provides for training teachers is insufficient (one commonly cited rule of thumb says that three dollars in training are required for every one dollar in equipment). Apple filed a supplemental brief against the settlement, and Apple CEO Steve Jobs called for Microsoft to pay US$1 billion in cash to school districts, allowing them to spend it on whatever combination of hardware, software, and training they desire.

Lawyers representing some members of the class from California have said they would not agree to the settlement without further concessions. Microsoft and these lawyers will meet with a mediator, Kenneth Feinberg, on Dec. 18 for further negotiations. U.S. District Court Judge Frederick Motz says he will decide whether to approve any settlement by the end of 2001.

Other Legal News

• Microsoft told the EU it would pass up a chance for a hearing in Dec. 2001, sending a strong signal that it's interested in reaching a settlement in the EU's antitrust investigation before the case goes to trial. The EU is investigating claims that Microsoft refused to license information about how Windows 2000 desktops interoperate with Windows 2000 Server, thereby leveraging its desktop dominance to squeeze competitors out of the server market. The EU is also looking into whether Microsoft illegally tied the Windows Media Player to its desktop OS. According to reports of a leaked communication between the company and the EU, Microsoft is resisting licensing its source code as a condition of the settlement.
• Microsoft Chief Counsel William Neukom will retire at the end of Microsoft's fiscal year on June 30, 2002, the company announced. Neukom helped the company reach a favorable series of settlements in 2001, most notably turning the disastrous breakup order in the DoJ antitrust case into a settlement that will have minimal impact on Microsoft's business. Neukom also oversaw the private antitrust settlement discussed earlier, and a Jan. 2001 settlement with Sun Microsystems over Java. (See "Java Suit Settled" on page 31 of the Mar. 2001 Update.) Neukom's second-in-command, Brad Smith, will take over as general counsel and senior vice president of Microsoft Law and Corporate Affairs Group, reporting directly to CEO Steve Ballmer.