IBM has reached an US$850 million antitrust legal settlement with Microsoft that will resolve all antitrust claims between the companies, except for claims of harm to IBM's server business, which IBM may not pursue for two years. The deal brings Microsoft one step closer to ending the financial fallout from the antitrust case brought by the U.S. Department of Justice (DoJ).

DoJ Fallout Continues

The latest legal dispute between the two archrivals arises mainly from the Findings of Fact and subsequent legal judgments in the DoJ's antitrust case against Microsoft. Although the DoJ and Microsoft settled in 2001, the case has provided ample legal ammunition for rivals whom Microsoft harmed through its illegal activity.

In the 1990s, IBM sold PCs preloaded with OS/2 and SmartSuite, alternatives to Microsoft's two most profitable and important products, the Windows desktop OS and the Office productivity suite. IBM also supported the Java programming language, which theoretically lets applications run on multiple OSs, threatening Windows' dominance. According to legal documents from the DoJ case, Microsoft retaliated by charging IBM more than other OEMs for copies of Windows and engaging in other tactics, such as withholding Windows 95 so IBM could not sell PCs preloaded with the OS on its release date.

Rather than suing Microsoft publicly and risking exposure of private information such as e-mail and business arrangements between the companies, IBM and Microsoft entered negotiations. In 2003, the companies agreed to extend the statute of limitations stemming from the DoJ case for another two years; this extension was due to expire in July 2005.

On July 1, the companies announced the basics of their settlement, as follows:

• Microsoft will pay IBM US$775 million in cash and offer a US$75 million credit toward IBM's purchase of Microsoft software; US$550 million of this amount was already applied against Microsoft's Q3'05 earnings and the rest will be applied against Q4'05 earnings
• Microsoft will drop all antitrust claims and counterclaims against IBM
• IBM has released Microsoft from all antitrust claims except those pertaining to IBM's server hardware and software business
• IBM will not pursue monetary claims for harm to its server businesses until July 1, 2007, and will not seek to recover damages from events occurring before June 30, 2002.

Microsoft has now paid nearly US$4 billion to settle claims based on the Findings of Fact in the DoJ case, including US$750 million to AOL (which owns Netscape) in May 2003, US$23 million to Be in Sept. 2003, US$1.95 billion to Sun Microsystems in Apr. 2004, and US$150 million to Gateway in Mar. 2005. Some of these deals also included a payment for patents.

However, this is probably not the end of the financial fallout from that case: RealNetworks has sued Microsoft for damages that could amount to more than US$1 billion, based partly on information from the DoJ case, and the Findings of Fact named several other companies, including Apple, Hewlett-Packard/Compaq, and Intel, that were harmed by Microsoft's actions.

The current antitrust litigation brought by the European Union (EU) against Microsoft could result in a similar chain of settlements, even though the case itself is years from resolution. For example, Microsoft reached a US$536 million antitrust settlement with Novell in Nov. 2004 that was based partly on findings in the EU case, and IBM might use findings from this case to sue Microsoft over harm to its server business.

The Findings of Fact from the DoJ-Microsoft case are posted at www.usdoj.gov/atr/cases/f3800/msjudgex.htm.