Antitrust litigation against Microsoft in the United States appears to be winding down, with the rejection of a challenge to Microsoft's settlement with the U.S. Department of Justice (DoJ) and the settlement of several more class-action antitrust suits brought by American consumers. However, antitrust and unfair competition litigation remains more troublesome overseas, where Microsoft is appealing orders by the European Commission and the Japanese Fair Trade Commission and faces a new private antitrust lawsuit in South Korea.

In other legal news, the United States Patent and Trademark Office has agreed to reexamine a Microsoft patent on the File Allocation Table (FAT) disk formatting system granted in Dec. 2003, but this investigation should not have any short-term effect on Microsoft's patent licensing program for the FAT.

Antitrust in the U.S.

The following antitrust cases in the United States were resolved in June and July 2004:

DoJ settlement upheld. The U.S. Court of Appeals for the District of Columbia Circuit ruled unanimously (6-0) that Microsoft's antitrust settlement with the DoJ and 18 states is in the best interest of consumers and upheld the settlement in full. In an 83-page decision filed on June 30, 2004, the court rejected appeals from the state of Massachusetts and two trade organizations, the Computer and Communications Industry Association (CCIA) and the Software and Information Industry Association (SIIA), which argued that the settlement does not do enough to curb Microsoft's anticompetitive behavior.

The appeals court praised the settlement, which was approved by a lower court judge in Nov. 2002, for "remedying the anticompetitive effect of commingling" by forcing Microsoft to make it easier for OEMs and consumers to hide access to so-called middleware (such as Internet Explorer and the Windows Media Player) and for accomplishing this goal "without intruding itself into the design and engineering of the Windows operating system"—that is, without forcing Microsoft to remove these functions entirely or create multiple versions of Windows with different functionality. This aspect of the verdict is consistent with this court's Aug. 2001 ruling in the same case, which found that Microsoft should not be subject to a blanket ban on adding application-like features to Windows.

The plaintiffs could appeal to the U.S. Supreme Court, but would be unlikely to succeed—the Supreme Court chooses to hear only about 100 of the thousands of cases referred to it every year, and usually limits hearings to cases in which lower courts have disagreed. Therefore, this probably marks the end of the federal antitrust case first filed by the DoJ on Oct. 30, 1997. The settlement will remain in effect until 2007, and Microsoft has agreed to extend one aspect of it—the Microsoft Communications Protocol Program (MCPP), under which Microsoft licenses protocols used by Windows clients to communicate with Windows Servers—until 2009.

Class-action settlements. Microsoft has reached preliminary settlements in class-action antitrust suits brought by consumers in Arizona, Massachusetts, Minnesota, and Vermont. (The Massachusetts class-action case was separate and unrelated to the state's appeal of the DoJ settlement.) These lawsuits alleged that Microsoft's monopoly in desktop OSs enabled it to overcharge consumers for Windows and certain desktop productivity applications. Judges have given preliminary approval to all four settlements, but must give final approval (including approving attorneys' fees) before they are implemented.

The Arizona, Massachusetts, and Vermont deals are very similar to settlements Microsoft has reached in 10 similar cases over the last 18 months: Microsoft will offer vouchers, redeemable for computer products from Microsoft or other companies, to consumers who purchased desktop versions of Windows, the Office suite, or Word or Excel as stand-alone applications, during a certain time period (the period varies with each settlement, but ranges from 1995 to 2002). After the deadline to claim these vouchers passes, Microsoft will donate one-half of the amount of the unclaimed vouchers to school districts in each state, with Microsoft retaining the remainder of that unclaimed amount. The settlements will cost Microsoft up to US$104.6 million in Arizona, up to US$34 million in Massachusetts, and up to US$9.7 million in Vermont.

The Minnesota settlement is slightly different: Microsoft will offer US$174.5 million in vouchers to consumers and will donate the entire amount of the unclaimed vouchers to school districts. Microsoft will also give US$2.5 million in cash and US$2.5 million in vouchers to the Minnesota University Institute of Technology, and pay US$2.5 million in cash to the Minnesota Legal Aid Society. Microsoft and the Minnesota plaintiffs announced the deal in Apr. 2004 in the middle of a trial, but details of the settlement were not revealed until the judge granted preliminary approval in July.

Microsoft has now settled 14 such class-action suits, and another 15 have been dismissed. The company still faces five of these suits in Iowa, Nebraska, New Mexico, New York, and Wisconsin, as well as private antitrust lawsuits from RealNetworks and Burst.com. However, with the DoJ case finally behind it and settlements with deep-pocketed adversaries such as Time Warner and Sun Microsystems, Microsoft's antitrust troubles in the U.S. have been significantly reduced.

Antitrust Overseas

Microsoft also faces a number of antitrust or unfair competition actions overseas, including the following:

EC appeal in motion. Microsoft has appealed a Mar. 2004 antitrust order from the European Commission (EC), the administrative body that oversees antitrust law for the European Union (EU). Unlike the courts in the DoJ case, the EC specifically tried to restrict Microsoft from adding certain application-like features to Windows. This is the main reason that Microsoft is appealing the case.

In June 2004, the EC agreed to temporarily suspend its order; an appeals court judge will meet with Microsoft and the EC on July 27 to consider whether to extend this suspension until Microsoft's appeal is completed. Without the temporary suspension, Microsoft would have had to begin offering a version of Windows XP without the Windows Media Player to OEMs in Europe in June and begin publicly sharing certain information about its server software in July.

The EC also fined Microsoft 497.2 million euros (about US$600 million). Microsoft has placed the full amount of the fine into an escrow account, but hopes to have the fine lifted on appeal.

Dispute over Japanese OEM contracts. The Japanese Fair Trade Commission (JFTC) has ruled that a former contract provision limiting OEMs' ability to sue Microsoft for intellectual property violations was illegal and should be invalidated retroactively. Microsoft says that the provision was meant to persuade OEMs to investigate new versions of Windows for potential intellectual property violations before shipping PCs with it, so as to avoid complicated legal disputes after that version of Windows had already been widely distributed. In Feb. 2004, Microsoft removed the contract provision in response to objections from Japanese OEMs—particularly Sony, which often incorporates its patented consumer electronics technology into its PCs.

In July 2004, however, the JFTC issued a warning (known as a "recommendation") that the provision was inconsistent with Japanese law and ordered Microsoft to notify OEMs that it will not enforce the provision on contracts signed prior to Feb. 2004. The JFTC did not levy any other fines or penalties as a result of its investigation. Microsoft plans to challenge the JFTC's recommendation, after which the JFTC will conduct hearings that could last up to three years.

Daum sues over IM. South Korean ISP and portal Daum Communications has filed a lawsuit accusing Microsoft of violating the South Korean Fair Trade Act by integrating the Windows Messenger instant messaging (IM) application into Windows XP. The US$8.6 million lawsuit notes that Daum's share of the South Korean IM market has decreased from 20.3% to 6.4% between Aug. 2001 and Apr. 2004, while Microsoft's share of the market grew from 29.9% to 75.4%. (Windows XP was released in Oct. 2001.) In Sept. 2001, Daum filed a complaint with the South Korean Fair Trade Commission over the same issue and asked for an injunction against Windows XP, but the Commission is still investigating that case and did not grant the injunction.

Given the relatively small amount of damages sought, Microsoft will probably try and settle this case but will reject any settlement that could restrict it from adding new application-like features to Windows in the future.

FAT Patent Reexamined

The U.S. Patent and Trademark Office (USPTO) has agreed to reexamine one of several Microsoft patents used by the File Allocation Table (FAT), a file indexing system used to describe where the parts of a file are stored on a physical storage medium, such as a hard drive or removable storage device. Manufacturers of PC peripherals that use removable media (such as digital cameras with flash memory) often use a FAT so their devices can more easily exchange data with Windows-based PCs. In Dec. 2003, Microsoft instituted a licensing program for the FAT that required these companies to pay US$0.25 per device shipped, up to a maximum of US$250,000 per company.

The patent under reexamination (number 5,579,517) was granted in Nov. 1996 and covers the FAT's ability to support long file names while retaining backward-compatibility with OSs that required "eight-dot-three" file names. In Apr. 2004, a nonprofit group called the Public Patent Foundation asked the USPTO to reexamine the patent, claiming that it should never have been granted because previous inventions incorporated similar technology. The organization's founder, Dan Ravicher, also expressed concerns that Microsoft would refuse to license FAT to open source developers, making it harder for open source software (mainly Linux) to exchange files with Windows PCs.

The USPTO agreed to reexamine the patent in June 2004. The agency invalidates or narrows the scope of about 70% of the patents it reexamines. However, because the FAT incorporates three other Microsoft patents and one pending patent, this challenge is unlikely to affect Microsoft's FAT licensing program.

Resources

The Microsoft-DoJ settlement and its effects are described in "Effects of the Antitrust Settlement" on page 13 of the Jan. 2002 Update. Massachusetts' appeal is covered in "Two States Appeal; Other Legal News" on page 28 of the Jan. 2003 Update. (West Virginia accepted the settlement and dropped out of the appeal in June 2003.)

RealNetworks' antitrust lawsuit is summarized in "RealNetworks Files Antitrust Suit" on page 27 of the Feb. 2004 Update.

The settlement with AOL Time Warner is covered in "Truce Reached with AOL" on page 20 of the July 2003 Update.

Microsoft's settlement with Sun Microsystems is described in "Sun Deal Signed, Litigation Ends" on page 33 of the May 2004 Update.

The EC's antitrust order against Microsoft is summarized in "EU Aims to Restrict 'Future Conduct'" on page 36 of the May 2004 Update. The complete order is available in PDF format at europa.eu.int/comm/competition/antitrust/cases/decisions/37792/en.pdf.

For background on the FAT licensing program and Microsoft's evolving patent strategy, see "Patent Licensing Broadened" on page 23 of the Jan. 2004 Update. To read the patent that's being reexamined, run a search on number 5,579,517 at www.uspto.gov/patft.