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September 10, 2001

Microsoft Drafts Settlement Proposal,
Hoping to Resolve Antitrust Lawsuit

By John R. Wilke
Staff Reporter of The Wall Street Journal

WASHINGTON -- Microsoft Corp. is drafting a settlement proposal for a new round of talks with the government this week, aimed at resolving the landmark antitrust suit against it, lawyers close to the case said.

The overture comes in response to the government's decision last week to narrow legal issues in the case and not seek a breakup. It will be Microsoft's first substantive effort to settle since a June 28 ruling by the federal appeals court here that upheld the core of the government's case.

Earlier settlement efforts have failed and the government is continuing to draft a broad set of restrictions on Microsoft's business conduct that it will ask a federal court to impose. These rules are intended to take the place of a breakup, a remedy that was thrown out by the appeals court in June and formally abandoned last week by the Justice Department and 18 states involved in the case.

The proposed restrictions will be the subject of hearings here this fall before U.S. District Judge Colleen Kollar-Kotelly, who has asked for briefs from both sides by Friday and an initial hearing on Sept. 21. The government will seek rules that allow computer makers to choose among rival software products rather than being forced to take what Microsoft demands when it licenses its widely popular Windows operating system software, among other provisions, those close to the case said.

Software features or programs will be covered under the government's approach if they are seen as potential threats to Windows, these lawyers said. This category of products is almost certain to include Internet browser software and Sun Microsystems Inc.'s Java software, which were both cited by the court as having been targeted by Microsoft, along with other current and future technology that may threaten the Windows monopoly.

Examples of non-Microsoft products that PC makers would be free to adopt could also include multimedia software plug-ins and instant-messaging software, among other technologies, though these definitions are still being worked out, the lawyers said.

Microsoft is expected to fight the restrictions now under development. Last year, its chief executive, Steve Ballmer, called proposed conduct rules "just as damaging" as a breakup and said that they would force the company into court-ordered regulation.

Details of Microsoft's settlement proposal couldn't be confirmed. In a prior effort to settle two years ago, Microsoft's proposal offered to end a number of contract and licensing provisions, to provide for more disclosure about the inner workings of Microsoft's products to software developers and others and to more fully open the Windows "desktop" or first screen. The government rejected these provisions as inadequate to restore competition.

A spokesman for the Redmond, Wash., software maker declined to comment. But a second Microsoft official confirmed that William Neukom, the company's chief legal officer, will be here this week and is expected to present Microsoft's new settlement proposal to state and federal antitrust enforcers.

On Friday, state officials warned that they would press for tough conduct restrictions in the forthcoming hearings. "It is imperative that Microsoft not have another opportunity to use Windows XP to suppress competition in emerging Internet areas," said a statement by New York Attorney General Eliot Spitzer and the California attorney general, Bill Lockyer.

Messrs. Spitzer and Lockyer also delivered a veiled warning to the Bush administration. "We look forward to continuing to work with the Department of Justice in the proceedings that are about to begin before the trial court, but will, if necessary to protect the public, press for remedies that go beyond those requested by the department," the officials said.

In particular, some state officials are concerned about enforcement of conduct restrictions. "There will have to be active oversight of compliance," said Richard Blumenthal, Connecticut's attorney general. "Enforcement has proved to be the quicksand for past conduct-based remedies."

Even as it seeks to resolve its long legal battle with the government, Microsoft faces a widening investigation by European antitrust enforcers and the prospect of private suits from a number of companies, especially Sun and AOL Time Warner Inc., whose former Netscape unit was at the heart of the U.S. antitrust case.

Neither company has said whether it would sue Microsoft, though AOL executives have said recently in interviews that the appeals court ruling would give them powerful ammunition in a private suit. Sun's general counsel, Mike Morris, said Friday, "we are evaluating that carefully, on behalf of our shareholders, our customers and the industry." Indeed, given the huge damages award that could be at stake, "we'd be remiss in our fiduciary responsibility if we didn't take a hard look at a private antitrust action," Mr. Morris said.

Any new restrictions on Microsoft's conduct will likely come too late to affect the initial release of Windows XP, the next version of Microsoft's monopoly operating-system software. Though it isn't set to hit stores until Oct. 25, some consumers could get it much earlier: At least two major computer makers, Gateway Inc. and Compaq Computer Corp., have said people can order and start receiving Windows XP-powered machines by late September.

Antitrust enforcers have made it clear that Windows XP won't be immune after it is shipped. "When the judge enters a decree, it will be forward-looking and apply to all of Microsoft's products, including Windows XP," said Iowa Attorney General Tom Miller. "If XP is out of compliance, Microsoft would have to bring it into compliance as soon as possible," or face court sanctions, he said.

Windows XP will contain a number of features that could fall under the government's evolving definition of a competing "middleware" technology, including an Internet browser, media player and instant-messaging software, plus tight links to Microsoft's new e-commerce services. It is unclear whether other new features, such as video-editing or digital-photography software, would fall under rules being developed. "The issue isn't simply whether or not [Microsoft] is extending Windows, but how that stuff gets packaged and sold," said Drew Brosseau, an analyst with SG Cowen in Boston.

-- Rebecca Buckman in San Francisco contributed to this article.

Write to John R. Wilke at john.wilke@wsj.com

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