Microsoft, Justice Department reach tentative settlement

By D. Ian Hopper and Ted Bridis

Associated Press

WASHINGTON – Microsoft Corp. and the Justice Department, urged on by a judge concerned with the national psyche, tentatively agreed to settle the historic antitrust case already won by the government. Attorneys general from 18 states are weighing whether to sign onto the deal.

They are deciding whether they can be satisfied with proposed penalties Microsoft would face for at least the next five years, according to people familiar with the negotiations, and are seriously considering whether to ask a federal judge for more time to talk.

An agreement could offer the economy and technology industry a glimpse of national optimism when both have been battered amid concerns about terrorism and the dramatic downturn in financial markets.

U.S. District Judge Colleen Kollar-Kotelly, the new trial judge, had set a deadline of Friday for any settlement, citing “the recent tragic events affecting our nation.” Absent a settlement, the next stage of the trial begins to decide how to punish Microsoft.

Assistant U.S. Attorney General Charles James revealed the prospective agreement to state officials Wednesday and told them Microsoft had already largely accepted it, sources said, speaking only on condition of anonymity.

Secret talks in downtown Washington continued this morning among the state attorneys general and top lawyers from Iowa, New York, Connecticut and Wisconsin. If they reject the settlement, they can pursue several options, including continuing the suit on their own.

Terms of the settlement were closely guarded, and people close to the talks cautioned that precise language on important provisions was still being written. The Justice Department filed the case in 1998 under the Clinton administration.

President Bush has been relatively cold toward the lawsuit since his campaign, though the White House has said he hasn’t interfered in the case.

The settlement would impose some restrictions on Microsoft during the next five years and could be extended two more years – until 2008 – if the company violates terms of the deal, according to one person familiar with the agreement. A three-person panel would monitor Microsoft’s compliance. The current antitrust case is rooted in allegations that Microsoft violated a related 1995 agreement with the Justice Department.

Microsoft shares surged on news of a deal, rising $2.39 to $60.54 per share in late Thursday morning trading.

The prospective settlement would not require complete disclosures by Microsoft of the “source code” blueprints for its monopoly Windows operating system, the underpinnings of its multi-billion-dollar business, according to business analyst David Readerman of Thomas Weisel Partners in San Francisco. But portions of the Internet Explorer Web browser would be disclosed.

Microsoft would have to offer a version of Windows without extra features side-by-side with versions that “bundle” those features. The settlement also would prohibit restrictive contracts between Microsoft and computer makers that would discourage them from buying the slimmed-down version, Readerman and other sources said. But it would permit Microsoft to continue to offer financial incentives, such as price discounts, to entice computer makers to sell the fatter Windows.

Other concessions by Microsoft include allowing customers to remove portions of Windows via an icon on the desktop – in current Windows versions, that icon is harder to find. The company also would continue to offer previous versions of Windows for a fixed period of time.

The settlement offer is closely modeled on penalties imposed by a federal judge last year. Under that language, while Microsoft would have to offer an “unbundled” version of Windows, the extra features would still be within the program – just hidden from view. Software makers could continue writing software that take advantage of those features.

A spokeswoman for the Justice Department, Gina Talamona, declined to comment on the negotiations.

Microsoft Chairman Bill Gates has hinted in recent days of successful talks, saying on “The Charlie Rose Show” last week that he was “fairly optimistic” an agreement would be reached. Microsoft spokesman Vivek Varma said Wednesday he would not talk about “any aspect of the confidential discussions” but added that, “We believe a settlement would be good for consumers and the overall economy.”

The states have in the past suggested they would press forward against Microsoft if the U.S. government settled the case in ways unacceptable to them.

A U.S. appeals court this summer agreed unanimously that Microsoft violated federal antitrust laws when it sought to maintain its monopoly over computer operating system software. But the court reversed an order to break up Microsoft and threw into question another key element of the case.

The Justice Department laid foundations for new settlement talks last month, when James, the U.S. antitrust chief, announced that the government would no longer seek a breakup of Microsoft and would drop part of its original lawsuit. He also decided against trying to block Microsoft from the release last week of Windows XP, the newest version of its flagship software.

The computer industry has eagerly been monitoring the talks, looking for a possible settlement and hoping it would combine with the release of Microsoft’s new Windows XP operating system to invigorate the lagging industry that has helped drag down the stock market.