Microsoft Settlement Talks Break Down

Last Friday, it became apparent that the talks aimed at settling the antitrust lawsuit against Microsoft by 19 states and the US Department of Justice (DOJ) had reached an impasse and broken down. By Sunday, most major news outlets (i.e., the New York Times, Boston Globe, Washington Post, CNN) had begun to report on some of the details of the recent and last round of negotiations between the two parties. A little more than a week ago, Microsoft began what looked like a serious last attempt at negotiation prior to Judge Thomas Penfield Jackson issuing his Findings of Law in the case—a final conclusion to the suit followed by a remedies phase in which the judge spells out corrective action that the government will impose on Microsoft. Judge Jackson delayed his findings, giving the two parties and their mediator, Judge Richard Posner of the US District Appeals Court of Chicago, a last minute chance to resolve their differences. After the two sides had rejected more than 20 drafts of settlements, Judge Posner issued a statement saying that the differences between the two parties were “too deep-seated to be bridged” and that “the quest has proved fruitless.” You can read the full text of Judge Posner's statement, which was made last Saturday, online. Microsoft has issued its own statement as well. Under a veil of secrecy surround the negotiations, it's impossible to know the exact details of what Microsoft and the DOJ have offered or rejected. In general, however, Microsoft apparently offered to unbundle Internet Explorer (IE) from the Windows OS, change some of the company's OS licenses, accept some government oversight, and make public key parts of its Windows source code. For its part, the DOJ has apparently decided that breaking up Microsoft isn’t playing well to the general public and has dropped its insistence to dismantle the company. However, several news agencies have reported that a small number of the states involved have decided that only the harshest penalty will prevent Microsoft from future monopolistic behaviors, and those states held out for provisions that Microsoft wouldn’t accept. With an end to the talks, Judge Jackson will issue his Findings of Law for this case sometime this week, perhaps as early as today. Given Jackson’s harsh Findings of Fact, many expect that the Findings of Law will rule that Microsoft had committed serious violations of federal antitrust law, and that Microsoft has used its monopoly in the Windows OS to transgress against its competitors and damage other businesses. The case originally hinged on Microsoft’s actions in incorporating an Internet browser into Windows and in related aggressive marketing of that browser aimed at diminishing the market for Netscape’s products. Over the course of the trial, the case has expanded to include Microsoft’s behavior in licensing its Windows OS to competitors. In the remedies phase, which according to one legal expert will take until mid-summer, it's reasonable to expect that Judge Jackson will impose serious fines on Microsoft aimed at penalizing the company for its behavior. The judge might also impose remedies in both the manner in which the company does future business and in the structure of the company itself. Some industry insiders speculate that Jackson will rule that Microsoft has to be broken up into several smaller companies along different lines of business. Others speculate that Judge Jackson will order Microsoft to make public some of the source code underlying its Windows OS. Obviously, Microsoft will appeal the ruling and might take its case straight to the Supreme Court. Bill Neukom, Microsoft’s head attorney in the case, said he expected to appeal immediately after Judge Jackson hands down a final verdict. Neukom will ask for an expedited appeal and a stay of any injunction that Judge Jackson imposes on Microsoft. Neukom expects that either Judge Jackson or the appeals court will allow that appeal and leave Windows 98 and Windows 2000 (Win2K) unaffected by the judgment until the court of appeals makes its final ruling. Neukom has also said that he expects the appeal to take about a year, depending on how significant and far-reaching Judge Jackson’s imposed remedies are. Neukom went on to say that he expects Microsoft can limit this case in appeals court to the issues surrounding inclusion of a browser into the OS, and that an appeals court already allowed this issue as not violating law or previous agreements. Neukom also believes Microsoft will escape any class-action lawsuits that might appear after this lawsuit, and that these suits would only prove troublesome if the appeals court ultimately decides against Microsoft. Although Microsoft is hoping what Neukom says will ring true, the case against the company is just as likely to expand in scope when it moves on to appeals. Microsoft will be exposed to a large number of lawsuits that will use Judge Jackson’s Findings of Law as a basis for proof of damage. Although most analysts believe that Microsoft will find a much friendlier reception in the appeals court, it is unlikely that Microsoft will escape this process without being damaged or changed. Although several of Judge Jackson's cases have been reversed on appeal, the scope of his findings are likely to be so broad and encompassing that it will be hard for an appeals court to reverse all of his findings. Bill Gates and his executive team believe that they can win their case on appeal. Given the length of the appeal, it's possible that a Republican administration with a new set of political appointees in charge at the DOJ will take a different view of the case. This scenario is similar to what happened in IBM’s antitrust lawsuit. George W. Bush is on record as saying that he believes government should confine antitrust enforcement mainly to combat price-fixing. By contrast, Vice President Al Gore has expressed support for the government’s lawsuit against Microsoft. Analysts predict that Microsoft will take a beating this week on the stock market. Of the several analysts that the media polled over the weekend, most expected an immediate drop of 10 percent in the value of Microsoft’s stock. By as early as 10:30 EST on Monday, Microsoft stock had dropped immediately 10 points or 11 percent confirming these early predictions.

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