Microsoft private case settlement stirs controversy

A Baltimore hearing called Tuesday to examine and resolve questions about a proposed settlement between Microsoft and attorneys representing plaintiffs in a myriad of private lawsuits has instead highlighted protests against the deal and heated up controversy.

Courtroom drama during the hearing -- including questions about attorneys' integrity, court jurisdiction, legal doctrine and even simple arithmetic -- nearly eclipsed the issue of whether the settlement would be adequate, considering the charges brought against Microsoft. Those charges, brought against the company in over 100 private antitrust suits filed in both federal and state courts, allege that Microsoft overcharged millions of consumers for its software.

Just weeks after Microsoft proposed a settlement with the U.S. Department of Justice (DOJ) and nine states to the government's broad antitrust case against the company, it announced last week that it reached a deal to settle the bulk of the private cases filed nationwide. The proposed settlement for the private suits would give more than 16,000 schools in the nation's poorer districts US$1.485 billion worth of software, hardware, training, and support that Microsoft will donate, via an independent foundation, in lieu of paying damages to the plaintiffs.

Attorneys representing private lawsuits that have been gathered into a federal class action case overseen by U.S. District Court Judge J. Frederick Motz in Baltimore argued Tuesday that this settlement is preferable to pursuing remedies through litigation, since the scope of the overcharging cases is so broad.

"The individual recoveries would be of small to no value to the tens of millions of individuals affected," said Michael Hausfeld, plaintiffs' counsel and an attorney with Washington, D.C., law firm Cohen, Milstein, Hausfeld & Toll. He estimated that affected individuals -- essentially all of the people and companies using Microsoft software in the U.S. -- would receive between $6 and $25 in remedies, once administrative and transaction fees associated with finding and paying these people were assessed, if litigation were to continue and be resolved against Microsoft.

The settlement proposal, first discussed publicly last Tuesday, brought forth a flood of criticism that crested in the Baltimore courtroom as Judge Motz listened to testimony from many experts and educators called to lend credence to the assertion that the deal is adequate and fair.

Some of the most pointed criticism of the testimony came from attorneys who represent plaintiffs in cases that have not been consolidated under Motz. All private cases involving overcharging that were filed in federal courts, plus some suits that have a large scope but which were filed in state courts, have been consolidated under Motz's jurisdiction. However, some cases of smaller scope that were filed in state courts are still being litigated separately.

Supporting testimony for the proposed deal was clearly compromised in Judge Motz's eyes Tuesday when one of the plaintiffs' counsels expert witnesses admitted he made a mathematical error in calculating the damages that would be covered by the settlement. Following his court appearance earlier that morning when he outlined a damages estimate of $2.1 billion, University of Washington economist Keith Leffler again came before the court in the afternoon to say the estimate should have been $5.15 billion. Lawyers supporting the settlement had hired Leffler to calculate this and other figures to be used in arriving at a settlement with Microsoft.

Leffler's admission of miscalculation led Judge Motz to question the integrity of the negotiating process involved in the settlement agreement.

"As I understand it, plaintiffs' counsel in negotiating were 2.5 times off the coverage damages. Integrity involves accurate information," he said.

The plaintiffs' attorneys countered that they used a range of cash values when calculating damages during settlement negotiations, and that Leffler's corrected figure is still within that range.

Among the many critics of the settlement at Tuesday's hearing was attorney Daniel Furniss, a partner with Townsend, Townsend & Crew, a firm that is leading the fight against the settlement on behalf of a coalition of lawyers representing plaintiffs in California state cases. The terms of the deal are not objectionable, Furniss said, stressing that criticism centers on the fact that plaintiffs wouldn't be given the opportunity to decide whether they would want to donate their recovery proceedings to equipping schools with technology. This type of remedy, where payment is not made to the plaintiff but to another party with goodwill intentions, falls under the doctrine known as "cy pres."

"It can't be forced ... charity cannot be done that way," Furniss said.

Furniss and other critics claim that the settlement favors Microsoft software and will bolster its standing in the education market, perhaps the only market in which Apple Computer Inc. has found a dominant position, though its share is shrinking.

In the proposal, the settlement's foundation would offer schools free Microsoft products, or it would pay for competing products if educators preferred titles from other vendors. However, the amount spent on procuring competing software would come out of the total technology spending that the proposal allots to each qualified school. Therefore, schools could get more out of the foundation if they opt for the free Microsoft software, the critics point out.

That would constitute "a massive subsidy for the acquisition of Microsoft technology," said George Riley, attorney with O'Melveny & Myers and counsel for Apple, during a short court appearance Tuesday night.

An expert witness for the California coalition -- Jeffrey MacKie-Mason, a professor of economy and public policy at the University of Michigan -- declared the proposed settlement a recipe for disaster, and offered an alternative. Microsoft should make an all-cash donation, instead of a cash and software mix, and an independent foundation would distribute the funds to qualifying schools, he suggested. That way, if Microsoft's software truly succeeds because of its own merits and not because of a monopoly position that the company holds, the proceeds will come back to Microsoft when schools choose to purchase its software, he said.

Another element of the settlement that critics object to is the fact that it was reached without consulting counsel for all plaintiffs in all the private cases filed against Microsoft.

"The (plaintiffs') lawyers ... had neither the leverage nor the incentive to negotiate a fair and adequate settlement with Microsoft," read a press statement distributed by Townsend, Townsend & Crew at the hearing Tuesday. "How could you leave a major player like California out" of the settlement talks, Furniss asked during his statement to the judge Tuesday evening. Furniss and others are hoping to block the settlement because such a deal could affect the type of recovery lawyers in the state cases could request.

Attorneys representing plaintiffs in a number of so-called repealer states, including California, are particularly disturbed by the settlement. These states have repealed a federal antitrust law that says consumers who purchase goods indirectly cannot sue the goods' manufacturer, which in this case means that users who obtain Microsoft software via bundling with hardware or through a reseller or other indirect means -- representing the vast majority of Microsoft's installed base -- are not eligible to sue.

Noting that plaintiffs in repealer states would have a stronger case than those in non-repealer states, Furniss suggested that Judge Motz allow for the creation of a subclass to let attorneys for those plaintiffs litigate separately.

The one group that kept relatively quiet during the hearing was counsel for Microsoft. The company's team of lawyers, seated across from the plaintiffs' counsel, occasionally offered questions or comments, but largely stuck to an agreement struck with the judge early Tuesday morning that they will be heard from last. As Tuesday's hearing went on into the late evening, Judge Motz scheduled an additional hearing for Monday, Dec. 10.

Meanwhile, Motz said that he will make a preliminary decision whether to approve the settlement in mid-December. If he decides to preliminarily approve the deal, critics will get a further opportunity to object. The final decision by Motz, however, could also be appealed.

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