The transition from 2002 to 2003 was a busy one for Microsoft's legal team as the company reached a potential settlement in 27 California class-action antitrust suits; faced an injunction from a federal judge requiring it to distribute the most recent version of Sun Microsystems' Java run time environment; and was sued by wireless phone manufacturer and former partner Sendo for conspiracy and fraud, among other things.

The activity emphasizes the fact that Microsoft continues to face fallout from the antitrust case filed by the Department of Justice (DoJ) in 1998, even though the DoJ and most of the other plaintiffs in that case have accepted a settlement. (See "Two States Appeal; Other Legal News" on page 28 of the Jan. 2003 Update.) In particular, the findings and judgments from the DoJ case are now being applied to private antitrust lawsuits. The company will reach settlements where possible to avoid further damage to its reputation.

California Settlement Proposed

Microsoft and lawyers representing California consumers have proposed a settlement for 27 class-action antitrust lawsuits. If the case had gone to trial, it would have begun with a reading of the findings of fact from the DoJ's antitrust case, reminding the public of the company's past illegal activity. The case would have been a difficult one for Microsoft to win because California law allows consumers to use evidence reached in other cases—in this instance, the DoJ case—and to sue monopolies directly for overcharging, even if the plaintiff bought the product in question through a reseller (such as an OEM). To avoid a difficult legal fight that could have resulted in further damage to its image, Microsoft is making an effort to settle the case.

The proposed settlement, which was entered on Jan. 10, 2003, in the San Francisco branch of the Superior Court of California, would require Microsoft to issue up to US$1.1 billion worth of vouchers to consumers and pay additional legal fees. If approved by Superior Court Judge Paul Alvarado, California consumers who bought certain Microsoft software between Feb. 18, 1995, and Dec. 15, 2001, would get one voucher for each license purchased. The vouchers would have to be claimed within four months and would be worth US$29 for each Office license, US$26 for standalone copies of Excel, US$16 for Windows, and US$5 for Word or Works; no proof of purchase would be required for claims under US$100. Once claimed, the vouchers would have to be used within four years and could be redeemed for a variety of software and hardware, including products from companies other than Microsoft.

After four months, Microsoft would add up the dollar amount of the unclaimed vouchers, then donate two-thirds of that amount to approximately 4,700 California schools in underprivileged areas. The school donations would be in the form of Microsoft software, as well as vouchers that could be used for non-Microsoft software, hardware, and professional services to help install the products and train teachers to use them. The remaining amount of the unclaimed settlement would revert to Microsoft (standard practice in class-action settlements). The proposed settlement does not include any admission of guilt on Microsoft's part, and thus could not be used as precedent in other cases.

The proposal is similar to one submitted to a federal court in Jan. 2002, which would have ended these California class-action suits as well as class-action suits from consumers in other states. (The attorneys for some of the California plaintiffs refused to sign that proposed settlement, paving the way for the case underway in San Francisco.) In the previous proposal, Microsoft planned to donate about US$1 billion in software and training to about 16,000 schools across the United States. But Judge Frederick Motz of the U.S. District Court of Maryland rejected that proposed settlement because it provided insufficient funding for training and support and would have encouraged schools to purchase Windows-based PCs instead of Macs, which would have had an anticompetitive effect on Apple Computer. (For details, see "January Brings Legal Setbacks" on page 23 of the Feb. 2002 Update.) Apple has objected to the proposed California settlement on similar grounds.

To pay for the proposed settlement, Microsoft has taken a US$210 million charge against its Q2'03 earnings. (See "Dividend, Split Announced as Revenue Tops US$8 Billion".) This is in addition to the US$660 million charge it took last year when it thought the earlier settlement would be approved; this earlier charge will now be applied toward the California settlement.

The company continues to face class-action antitrust lawsuits in 16 other state courts and could face a similar class action from consumers in the consolidated federal antitrust case being tried by Judge Motz. (So far, Motz has dismissed some claims from consumers and has not yet granted class-action status to the others.)

Java Injunction Approved

Separately, Judge Motz approved Sun's request for a preliminary injunction requiring Microsoft to "set up Sun's most current Java runtime environment to be installed on any product containing .NET," including Windows XP and Internet Explorer. The order, filed on Dec. 23, 2002, represents the first legal judgment against Microsoft in the private antitrust suits that were filed by Sun, AOL, Be, Burst.com, and private consumers, and subsequently consolidated under Motz in summer 2002.

In general, a judge may not impose a preliminary injunction unless the plaintiff would suffer immediate and irreparable harm without it. Motz believes that Sun's request meets this requirement. Looking back at the DoJ antitrust case, Motz agreed that Microsoft distorted the market for "general purpose, Internet-enabled distributed computing platforms" by creating a Java Virtual Machine (JVM) that was incompatible with Sun's, and then promoting it with misleading campaigns and illegal incentives. In Motz's view, this bought Microsoft seven years to develop the .NET platform as a competitor to Java.

In the near future, Motz wrote, "there is a serious risk that…the market will tip in favor of NET." Moreover, the market in which Java and .NET compete has natural network effects—once either platform becomes dominant, developers will avoid the other one. Thus, if this "tipping" occurs, Sun "will have lost forever its right to compete." On these grounds, Motz agreed to the injunction.

The last judge in the DoJ antitrust case, Colleen Kollar-Kotelly, refused to grant a similar injunction requested by some plaintiffs in that case. However, Motz wrote, this case includes different evidence, and serves a different purpose, akin to the difference between a criminal and civil suit. That is, rather than considering whether to approve an "external governmental mandate" (the consent decree in the DoJ case) to stop an antitrust violator from breaking the law in the future, Motz is considering how to "correct a private wrong done to Sun and the other members of the Java community."

At press time, Motz had not yet determined exactly which Microsoft products would have to be retrofitted with Sun's version of Java, but said that Microsoft would have to begin obeying the injunction by May 15, 2003.

Microsoft will appeal to the 4th Circuit Court of Appeals on an expedited basis to try to get the injunction stayed or reversed within that time frame. If the appeal fails, the next service pack of Windows XP is likely to ship with Sun's JVM and Java class libraries.

Sendo Alleges Conspiracy

Sendo, a wireless phone manufacturer based in the United Kingdom, has filed a complaint accusing Microsoft of conspiring to drive it out of business and steal its trade secrets. According to the 27-page complaint, which was filed on Dec. 20, 2002, in the U.S. District Court for Eastern Texas, Microsoft promised that Sendo would be its "go-to-market" partner for wireless phones based on the Smartphone platform (code-named Stinger and based on Windows CE), and that a viable version of Smartphone would be available for Sendo to use by June 2001. Microsoft also agreed to invest in Sendo.

The former partner alleges that Microsoft did not deliver Smartphone on time, causing Sendo to suffer cash-flow problems; imposed unreasonable conditions for its investment that delayed production further; and finally used Sendo's intellectual property to help a Taiwanese manufacturer, High-Tech Computer, launch the first Smartphone-based phone. (For background, see "Smartphones Arrive as Sendo Departs" on page 16 of the Dec. 2002 Update.) Sendo alleges that these actions were all part of a "secret plan" to "plunder the small company of its proprietary information, technical expertise, market knowledge, customers, and prospective customers." Sendo is now suing Microsoft on nine counts, including misappropriation of trade secrets, conspiracy, and fraud.

Sendo's story is similar to allegations from Burst.com being considered by Judge Motz. According to that lawsuit, Microsoft met with Burst.com to consider licensing its technology for delivering digital media over the Internet, then used this information in its own Windows Media Technologies without compensation.

Although the truth of these allegations will only be determined through trials, the negative publicity surrounding them could give companies pause when considering whether to partner with Microsoft.

Resources

A transcript of a Microsoft press conference in which its lawyers answered questions about the proposed California class-action settlement is available at www.microsoft.com/presspass/legal/ca/01-10-03newstranscript.asp. The proposal itself was not available online at press time.

Motz's order approving Sun's injunction request is available in PDF format at www.mdd.uscourts.gov/Opinions152/Opinions/SunPI1202.pdf.

A copy of Sendo's complaint is available in PDF format at www.txed.uscourts.gov/502cv282/doc1.pdf.