--Microsoft returns to the hot seat in yet another antitrust trial.
Microsoft just can't seem to stay out of the courthouse. In early March its lawyers were off to a surprising venue, the Hennepin County district court in Minneapolis, to once again defend the company against charges of being an unfair, rapacious bully. Even more surprising: Chairman Bill Gates and Chief Executive Steve Ballmer are slated to take the witness stand if the trial gets into full swing.
It's a remarkable twist in the company's decadelong antitrust odyssey. Although Microsoft has been working steadily to settle all the cases against it, this one seems headed to a jury trial. At stake is close to a billion dollars--along with the beleaguered reputation of the software giant and its chairman.
"When you don't have competing products, innovation suffers, quality of product suffers, and you pay too much. That's what this case is about," says Richard Hagstrom, partner with Zelle, Hofmann, Voelbel, Mason & Gette, the firm leading the charge in Minnesota. His firm is calling for damages that range from $283 million to $425 million, a figure that could triple under antitrust law if Microsoft loses.
Hagstrom says his team has fresh evidence extending over a decade that shows how Microsoft unfairly tried to snuff out competitors and overcharge consumers--and that Gates personally directed many of the anticompetitive activities.
Microsoft's attorneys are primed for the fight. "The basic premise, that Microsoft did something that causes higher prices for consumers, is just wrong," says David Tulchin, a senior partner with Sullivan & Cromwell, which is representing Microsoft. "There's a big number at stake," Tulchin says. "We're going to trial because we want to win. The right number is zero," he says.
Microsoft was pelted with 140 private class actions after it lost to the federal government in U.S. district court in 2000. After those cases were consolidated, Microsoft struck settlements with 11 groups (representing customers in nine states, the District of Columbia and a group representing online purchasers). A few states still have class suits pending, but so far the face value of those 11 deals is $1.6 billion. California, where the first settlement was reached, captured the biggest plum at $1.1 billion. (The California legal team may score nicely, too. It is asking a judge to make Microsoft pay $260 million to cover fees and costs.)
The Twin Cities lawyers, rejecting the token payoff most states received, are gambling they can get a deal more like California's. The basic settlement calls for Microsoft to issue vouchers, good for any technology purchase--Windows XP, an iPod, a Dell laptop, you name it--to those state residents who bought Microsoft software between 1996 and 2001. Most of the settlements averaged $11.50 per state resident (see chart), but in California, thanks to its uniquely plaintiff-friendly antitrust laws, lawyers were able to wrangle a deal worth $31 per state resident. A portion of unclaimed funds--two-thirds in California and half in the other states--will go to schools in low-income neighborhoods. Microsoft gets to keep the rest.
Microsoft wants to crush the plaintiffs at trial because a settlement for more than that $11.50 amount could prompt a rush to other state courts to sweeten many of the earlier arrangements. Most of them are still pending a judge's final approval. "Microsoft would have to do some explaining to the courts," says Kieran Shanahan, with the Raleigh-based Shanahan Law Group, the lead counsel in North Carolina. Estimates of possible revised settlements push Microsoft's total penalty into the $2 billion-plus range.
The Minnesota lawyers are emboldened by their knowledge of the California antitrust case, which was steered by antitrust veteran Eugene Crew of San Francisco's Townsend and Townsend and Crew. That team, which included lawyers from the Zelle, Hofmann firm, amassed 6 million pages of documents and 162 depositions, including some with Gates and other senior Microsoft officials. Among the juicier details exhumed was the story of a defunct startup, GO Corp., that built an operating system for pen-based and notebook computers in the early 1990s. According to the documents, Gates and other Microsoft executives discouraged chipmaker Intel from working closely with GO. "I guess I've made it very clear that we view an Intel investment in GO as an anti-Microsoft move, both because GO competes with our systems software and because we think it will weaken the 386 PC standard," wrote Gates in a note to Intel's then-chief executive, Andrew Grove.
Microsoft settled three weeks before the California case was due in court. Zelle, Hofmann has since tapped Crew's firm to be co-counsel. Declares Zelle's Hagstrom: "Since Minnesota law is better than California law, and since we have successfully overcome legal challenges by Microsoft that were still pending in California at the time of the settlement, we see no reason why Minnesotan consumers would not be entitled to at least what's being paid to Californians." Given that Minnesota has only 5 million residents, the plaintiffs would still fall well short of the $283 million-plus range they're seeking, even if they manage to get a settlement of $30 per resident.
But Microsoft lawyers say Minnesota is no California, where it had every reason to avoid a trial. If Microsoft had lost a trial in California, the court could have ordered the company to pay additional damages based on behavior it considered "unfair," regardless of federal law, says Sullivan & Cromwell's Tulchin. Those damages could have topped billions of dollars, Tulchin adds.
Even pro-plaintiff groups concede that Microsoft is unlikely to shell out all the money set aside for settlements. Not every consumer of its software will go through the work of filling out the paperwork needed to get the vouchers. "I'll be shocked if half the money is claimed," says Howard Yellen, founder of the Settlement Recovery Center, a San Francisco-based firm that helps organizations and businesses file their voucher claims.
Microsoft is weighing what to do with the accumulated $53 billion in cash now on its balance sheet. The Twin Cities lawyers have some ideas.
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By the Numbers
Microsoft has so far settled antitrust class actions (listed below in chronological order) for a total of $1.6 billion.
CALIFORNIA
$1.1 billion
$31.00 per person
FLORIDA
$202 million
$11.87 per person
MONTANA
$12.3 million
$13.40 per person
WEST VIRGINIA
$21 million
$11.60 per person
DISTRICT OF COLUMBIA
$6.2 million
$11.00 per person
KANSAS
$32 million
$11.75 per person
NORTH DAKOTA
$9 million
$14.20 per person
TENNESSEE
$64 million
$10.96 per person
SOUTH DAKOTA
$9.3 million
$12.17 per person
NORTH CAROLINA
$89 million
$10.59 per person
