MS/DOJ: Gateway hits MS licensing terms in court

A witness for PC maker Gateway testifying today was sharply critical of Microsoft's new "uniform" licensing terms as a way for the company to gain "additional control over Gateway in the guise of a remedy." The terms are part of the Bush administration's proposed settlement in the case.

Gateway general counsel Anthony Fama appeared in court as a witness for nine nonsettling states, as well as the District of Columbia, which are seeking tougher remedies in the Microsoft antitrust trial.

Fama's testimony is, in effect, the first public review of Microsoft's new licensing terms to PC makers. Microsoft was required to put the terms into effect in December even though the settlement hasn't received final approval. Although the settlement requires Microsoft to set uniform terms for PC makers, Fama asserted in his written testimony that the new license sets "one-sided terms that benefit only Microsoft."

Fama said the uniform terms include provisions that are more restrictive on PC makers than the ones they had reached in separate agreements with the software maker.

For instance, Microsoft can terminate the Windows licensing agreement that San Diego-based Gateway needs to sell PCs with Windows products if the company violates the license twice, a "two strikes" provision, as Fama put it. Previously, it took three strikes for PC makers to put themselves in similar jeopardy.

The pricing scheme also gives the highest advantage to volume distributors, Fama claimed. Although the license costs were removed from Fama's testimony, licensing is divided into four tiers of PC makers, with the lowest being those who sell between one and 599,999 units and the highest including those that sell 16 million or more.

The practical effect of the pricing schedule is to give preference to Gateway's larger competitors, such as Dell Computer Corp., said Fama.

Under the uniform terms, Gateway would face problems if it shipped a PC to customer without an operating system, and every computer that Gateway ships must have an operating system or a license for an operating system.

That provision, said Fama, would prevent Gateway from selling a computer without an operating system to a customer who already has the software from another source. Gateway could find itself in the position of selling a PC to a customer without an operating system and still be paying a royalty to Microsoft, he said.

"Microsoft's purported rationale for this provision is that it helps fight software piracy," Fama said. "This rationale, however, ignores the possibility that customers may have legitimate licenses for an operating system that they obtained from other sources."

Microsoft issued a statement today in response to Fama's testimony, saying that Microsoft "must comply with the terms of this settlement and has done so. As we have implemented the uniform terms provisions of the agreement, we continue to seek feedback from the hundreds of other [resellers] and system builders around the world."

Microsoft also said that many PC makers are "pleased with the uniform terms."

That settlement isn't yet final, and U.S. District Court Judge Colleen Kollar-Kotelly is still considering whether to accept it. But as part of the settlement agreement reached with the settling parties reached last fall, Microsoft agreed to begin implementing some of its terms.

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