MS/DOJ - Settlement reached in Microsoft antitrust case

The U.S. Department of Justice (DOJ) announced Friday that it has reached a settlement with Microsoft Corp. in the government's historic antitrust case against the software giant.

The agreement "imposes a broad range of restrictions that will stop Microsoft's unlawful conduct, prevent recurrence of similar conduct in the future and restore competition in the software market, achieving prompt, effective and certain relief for consumers and businesses," according to a statement from the DOJ.

The 18 states participating in the lawsuit did not immediately agree to the settlement, however, and are requesting more time to craft a reply to the consent decree announced by the DOJ, according to Bob Brammer, spokesman for Iowa Attorney General Tom Miller. A hearing on the matter has been set for 9 a.m. Tuesday, Brammer said.

Under the agreement, Microsoft must license its operating system to key computer manufacturers on uniform terms for five years. The agreement also bans retaliation against manufacturers electing to use non-Microsoft middleware software. Microsoft must disclose its middleware interfaces, or Application Programming Interfaces (APIs) -- used by software developers to write Windows-compatible code -- and it must disclose its server protocols so non-Microsoft server software can work with Windows on a PC the same way that Microsoft servers can. The settlement also bans exclusive agreements for support or development of certain Microsoft software.

Key points of the settlement include:

-- A broad definition for middleware products, including browsers, e-mail clients, media players, instant messaging software, and future middleware developments.

-- The freedom for computer manufacturers and consumers to substitute competing middleware software on Microsoft's operating system.

-- Compulsory licensing of any intellectual property necessary for computer manufacturers and software developers to exercise their rights under the deal.

-- A panel of three independent, on-site, full-time computer experts to assist in enforcing the settlement, with full access to Microsoft's books, records, systems, and personnel, including software source code.

Among the first reactions to the news was a comment from Ed Black, CEO of the Communications Industry Association, who on CBS Radio Friday morning called the settlement "such a weak deal, after the government won an overwhelmingly powerful case."

For Microsoft, which earlier faced the threat of a breakup imposed by the first trial judge in the case, the proposed settlement is widely viewed as essentially favorable, and a wide range of observers echoed Black's sentiment in the hours following the announcement of the deal.

The settlement is "a great deal for Microsoft," said Neal Goldman, research director of application infrastructure at Yankee Group Inc. in Boston.

While the agreement imposes behavioral restrictions on Microsoft, it bodes well for Microsoft's .Net plans, which would have been much more difficult to carry out had the company been split into two independent companies, Goldman said. Under the .Net initiative, Microsoft intends to incorporate a range of Internet-based communication and data services throughout its operating system and application software.

The settlement does, however, constrain Microsoft to let users and manufacturers and other third parties remove "middleware" functions and applications -- for example, its media player or its Internet Explorer browser -- and package or use other such applications with Windows. Microsoft must deliver functions, such as add/remove options, to allow PC makers and users to mix and match Windows with third-party middleware, within 12 months of the final judgment or with Service Pack 1 for XP -- whichever comes first, according to the settlement deal.

But this still allows Microsoft to go ahead with incorporating a range of Internet services and middleware into Windows.

Microsoft Chairman and Chief Software Architect Bill Gates said that the settlement will allow the company to "continue delivering important new innovations."

The settlement proposal is not a done deal, however. If the plaintiff states reject it Tuesday, it is possible that Microsoft may enter into a settlement with the DOJ, but still have to continue litigation with the states, legal observers noted. In addition, the presiding judge, District Court Judge Colleen Kollar-Kotelly, may want to discourage such a separation of the case. In any case, Kollar-Kotelly must give her final judgment, or approval, on any consent decree, taking into account various documents -- such as an economic impact statement by the government -- that still must be filed by the sides in the case. Her final judgment may also come under review by an appeals court.

Separately, the European Union is also pursuing an antitrust case, which European officials have said would not be influenced by the U.S. case. EU officials were on holiday and not available for comment Friday.

In one of her first actions after taking the high-profile case in August, Kollar-Kotelly ordered the software titan to go into intense settlement talks with the U.S. Department of Justice (DOJ) and 18 state attorneys general, hoping to bring an end to years of litigation.

Kollar-Kotelly's order that the two sides go into settlement talks, negotiating 24 hours a day, 7 days a week if necessary to put an end to the case, was seen as a last-ditch effort at a compromise.

If the two sides did not reach an agreement by Nov. 2, the case would go back to trial, where Kollar-Kotelly would craft a remedy to impose on the software maker. Once in Kollar-Kotelly's courtroom, Microsoft could again try for an appeal.

Kollar-Kotelly took on the case after the U.S. Court of Appeals for the District of Columbia in June overturned part of a ruling, including remedies, that was decided by the first trial judge in the case, Thomas Penfield Jackson. The appeals court ordered the case back to a trial court. It also ruled that some of Jackson's comments against Microsoft, made to the media and outside the courtroom, gave rise to the appearance of partiality, and ordered that the case be picked up by another judge.

The U.S. Supreme Court has already denied Microsoft's appeal to overturn Jackson's ruling that the software maker violated antitrust laws by holding a monopoly in the PC operating systems market.

Although it still faced the threat of remedies, Microsoft in September escaped the threat of being split into two companies when the DOJ announced that it was dropping its breakup effort to focus on restricting the company's business practices. However, the DOJ's change in strategy gave rise to other issues among the government plaintiffs. Shortly after the DOJ ditched its breakup effort, two of the 18 state attorneys general suing Microsoft released a statement saying they would continue litigation against Microsoft if they were not satisfied with a settlement reached by the DOJ.

(Sam Costello and Scarlet Pruitt in Boston, Matt Berger and Ashlee Vance in San Francisco, and Juan Carlos Perez in Miami contributed to this report.)

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