Top Stories of 2001, #2: Microsoft Spends the Year in Court

When I started researching the top stories of 2001, I thought the Microsoft antitrust case would be the most important story of the year, but two facts altered that assumption. First, the list of Microsoft's security problems from last year far outweighed the coverage I gave the trial, making security the top story. Second, my review reminded me that the antitrust trial wasn't the company's only legal problem in 2001. That case is front and center, of course--how could it not be? The trial is probably the story of the decade, one that will shape the future of the software industry, for better or worse. But Microsoft's legal problems go far beyond this one case. When I think back on all the legal news in WinInfo Daily UPDATE last year, I almost have to laugh. So rather than choose the antitrust trial, I'd say that the real story is just how much time Microsoft spends in court. Consider the following legal problems from 2001, which represent only a subset of the company's total.

Microsoft vs. Sun, Java
In late January 2001, Microsoft and Sun Microsystems settled their 3-year dispute over the Java programming language. Under terms of the agreement, Microsoft paid Sun $20 million and could no longer use Sun's Java Compatible trademark. Although Microsoft can continue to use Java in its products for 7 years, the Java version that the company must use was already out of date at the time of the settlement. Not coincidentally, Microsoft was developing a Java replacement called C# while the Java lawsuit was still active, and that language, along with the .NET Common Language Runtime (CLR) environment, became a standard by late 2001. Take that, Java.

In August, Microsoft revealed that it was working on a new version of its Java development environment--news that raised some eyebrows. But Microsoft didn't design Visual J++ .NET to make Java development easier; instead, the language was clearly just a way to make Microsoft's Java-environment users move forward to .NET, where they could pick up Visual Basic .NET or C#.

Microsoft Racial and Gender-Discrimination Lawsuits
In mid-March, Judge Thomas Penfield Jackson excused himself from another court proceeding that involved Microsoft. Several ex-employees sued the company for refusing to grant promotions because of gender or race, and when lawyers collected the suits for a class-action application, they valued the suits at more than $5 billion. After Jackson stepped down, the court randomly assigned the suits to a different judge.

In mid-November, a federal judge in Seattle denied the racial and gender lawsuits class-action certification. US District Court Judge Marsha Pechman concluded that "Microsoft's managerial system is not inherently flawed, and ... the statistical data belies the existence of any class-wide pattern of discrimination."

AT&T Patent-Infringement Lawsuit
In June, AT&T sued Microsoft for including its patented TrueSpeech "digital speech coder" technology in several Windows versions. Microsoft also distributed TrueSpeech (which appears in Windows 2000, Windows NT, Windows Me, and Windows 9x) through the company's Web site by including it in standalone products such as Microsoft NetMeeting. AT&T sought unspecified damages and reimbursement of court costs from Microsoft.

European Antitrust Investigations
Microsoft started 2001 with two related European investigations hanging over its head. One investigation involved an attempted monopoly expansion: The European Union (EU) accused the company of muscling into the server market and using its dominance in desktops as a wedge. The second investigation involved interoperability: Sun and other companies complained to the EU that Microsoft didn't document all its server APIs, increasing the difficulty of writing applications and services that work with Windows server products.

When the US Court of Appeals for the District of Columbia issued its verdict in Microsoft's appeal in June, EU officials said that the US decision didn't affect Microsoft's European legal challenge because the US case revolved around the desktop and the EU cases focused on server issues. By November, the EU had scheduled December hearings for its Microsoft cases, but the company elected not to attend, stating that the record was already clear. This move didn't stop the EU from holding the hearings, however, and the EU invited Microsoft's competitors to attend. Early in 2002, the EU's antitrust arm will examine the information and present its final decision.

Microsoft Antitrust Trial
Everyone's favorite high-tech trial entered 2001 with Microsoft filing the final paperwork in its appeal--a 75-page document that explained why the company shouldn't be broken up. In an interesting tactic, the company attacked Judge Jackson's behavior in its filing, and a week later the US Court of Appeals for the District of Columbia agreed to investigate whether the judge was biased against the company. The Appellate Court wasn't finished giving Microsoft good news, either: In late February, the court began to oversee Microsoft's appeal and immediately grilled US Department of Justice (DOJ) lawyers about their handling of the case. Chief concerns included the fact that the Web-browser market wasn't all that important and which of Microsoft's competitive actions were acceptable. One fact became clear, even at this early stage of the appeal: When a Microsoft lawyer began a rote argument about how the company wasn't a monopoly, the court quickly shot him down, noting that both Windows and Microsoft Office command more than 90 percent of their respective markets and have no viable competitors. That theme would eventually haunt Microsoft and prove to be the appeal's central issue.

In mid-June, the Appellate Court fueled speculation when it hinted that a decision was due soon in the Microsoft appeal. And sure enough, on June 27, the court handed down its long-awaited verdict. Although the court decided to reverse the decision to break up Microsoft, it concluded that Microsoft owned a monopoly in the OS market and that the company broke the law when it attempted to maintain and extend that monopoly. And although the Appellate Court decided that Windows and Internet Explorer (IE) integration was "technically unjustified," the big news was the monopoly charge and the decision that Microsoft did indeed break the law. For example, the court said that Microsoft unfairly favored certain PC makers with friendlier Windows contracts, illegally threatened partners such as Intel and Apple, designed Windows so that it was more difficult to install Netscape's browser product, and attempted to undermine Sun's Java programming language. If upheld, these decisions will open up Microsoft to scores of legal challenges on several fronts.

When the monopoly charge squandered hopes of a favorable settlement, Microsoft acted quickly. The company announced that it would dramatically alter its Windows licensing terms and let PC makers modify the Windows desktop and Start menu and remove any IE icons--key concessions the company had fought for years. Two days later, the company's efforts paid off when the state of New Mexico privately settled its case against Microsoft. The decision surprised the remaining 18 states, however, and they vowed to continue fighting. The DOJ reacted even more strongly, immediately requesting that the courts send Microsoft's case back to the lower court as quickly as possible so that an effective remedy for the company's transgressions could be found. The fear, of course, was that more states would drop out, weakening the alliance against Microsoft.

In late July, Microsoft asked the court to rethink its decision about Windows and IE code commingling, fearing that the decision would affect the release of Windows XP, which was nearing completion. Behind the scenes, however, settlement talks had already started in secret. But the government wanted to include XP in any settlement, which was unacceptable to Microsoft, and these talks soon broke off.

In early August, the Appellate Court shut down Microsoft's stalling attempts, reaffirmed that the company was a monopoly, and denied its requests for hearings on the Windows and IE code-commingling question. The court then handed the case back to the US District Court for the District of Columbia for a remedy rehearing. Microsoft appealed to the US Supreme Court, again hoping to buy time. It was a smart move; the upper court wouldn't meet again until early October, well after the company would complete XP. But the Appellate Court was wise to Microsoft's ploy and denied the company a stay, which meant that the remedy hearings could continue immediately rather than wait for a Supreme Court decision. So right on schedule--7 days later--the court chose a new judge, Colleen Kollar-Kotelly. And the Microsoft antitrust remedy phase began.

In early September, the DOJ shocked the high-tech industry when it announced that it wouldn't seek to break up Microsoft in the upcoming remedial hearings. Instead, the agency said it would seek conduct-related remedies. Most alarmingly to the people who had hoped to see Microsoft punished, however, was news that the DOJ was also dropping the Windows-and-IE integration complaint. This step effectively removed a central argument in the case and freed Microsoft to release XP; settlement talks began anew. Judge Kollar-Kotelly gave the two sides an October 15 deadline for settling, after which time she would assign a mediator.

On October 9, the US Supreme Court wasted no time in rejecting Microsoft's request to overturn the earlier Appellate Court verdict against it. The decision came without comment or dissent, meaning that none of the Supreme Court justices weighed in with any opinions in the case. A few days later, Judge Kollar-Kotelly assigned a law professor and recognized expert in out-of-court dispute resolution to mediate the Microsoft settlement because the two sides weren't able to reach an agreement. And in early November, Microsoft and the DOJ announced that they had agreed on a proposed settlement. Several states immediately spoke out against what they termed "a sweetheart deal, riddled with exceptions." The general feeling was that Microsoft had again dodged a legal bullet.

Over the weekend of November 3, the 18 US states allied against Microsoft reviewed the terms of the deal, and at least one state, Massachusetts, almost immediately cried foul and refused to sign on. By the following Tuesday, the states had split: Nine had agreed to sign the settlement after Microsoft made subtle backroom concessions, and nine had refused, promising to continue the fight. Judge Kollar-Kotelly denied a Microsoft request to halt proceedings and spelled out the schedule for the next few months. First, the dissenting states would have 3 months to draft a detailed analysis of the proposed settlement, which would explain why the states consider the settlement "ineffectual" and list their proposed remedies. The judge then planned to hold hearings on the new proposed remedies in March 2002.

In late November, Microsoft Lead Counsel Bill Neukom announced that he was leaving the company after 22 years of service. Neukom led Microsoft's 200 lawyers and 400 other legal staff and weathered many legal challenges by the end of his tenure; when he began at Microsoft, the company had less than a dozen employees.

In December, a Senate Judiciary Committee briefly examined the Microsoft settlement and will hold hearings again in early 2002. The hearings came just days after the nine remaining states issued their list of proposed remedies--a scathing and far-reaching plan that would force Microsoft to forfeit its source code and impose severe behavioral restrictions. Microsoft blasted the proposal, and the judge set hearings for early 2002 to determine how the case would proceed.

Class-Action Lawsuits that Arose from Microsoft's Guilty Verdict
In the days after the court found Microsoft guilty of violating US antitrust laws, hundreds of lawsuits sprang up around the country. Many of these suits were based on the ruling that Microsoft had overcharged for Windows, and lawyers collected more than 100 of them into a single class-action lawsuit. In late November 2001, Microsoft reached a preliminary settlement with most of the participants in the private class-action lawsuits, agreeing to give more than 12,000 of the nation's poorest schools a reported $1 billion worth of software, reconditioned computers, and training. The deal would span 5 years.

This proposed settlement has many problems. First, the settlement doesn't address the class that brought the lawsuit--consumers. Second, the deal's worth is vastly overvalued because Microsoft counted each piece of software at full retail price, despite the fact that it would cost the company almost nothing to provide software licenses. Finally, the deal would give Microsoft inroads into one of the few markets it doesn't yet dominate--schools. The deal didn't sit well with Apple, obviously, or other Microsoft competitors. Red Hat Software announced a solution that would require Microsoft to redirect the "money" that would have gone toward software to new PC hardware. Then Red Hat would supply free copies of its Linux distribution for installation on all those new PCs. The net result would be more PCs for the schools. "By removing Microsoft's higher-priced software from the settlement equation, Microsoft could provide the school districts with many more computers, greatly extending the benefits it seeks to provide school districts with [its] proposed settlement," said Matt Szulik, CEO of Red Hat Software.

"We think people should know that the actual costs to Microsoft for [the] donated software [it will provide under terms of the settlement] will likely be [less than] $1 million," said Apple CEO Steve Jobs. This number is a far cry from the $800 million figure Microsoft placed on the software (the remaining amount would go toward refurbished PCs). But Jobs has a solution, too, and it's simple and elegant. "We think a far better settlement is for Microsoft to give [its] proposed $1 billion--in cash--to an independent foundation, which will provide our most needy schools with the computer technology of their choice," Jobs said.

Ultimately, the court will delay the class-action settlement until 2002. The federal judge overseeing the case postponed his decision until sometime this month, giving the two sides more time to reach a new compromise settlement.

2002 and Beyond
Microsoft didn't cleanly resolve any of its legal issues in 2001, so most of them will continue to make headlines in the months to come. Judge Kollar-Kotelly will have the busiest schedule for the short term, with hearings on the DOJ settlement and states' new remedy proposals scheduled for early this year. I'm astonished to realize how much time has passed since this case first appeared. And yet, here we are, years later, with no end in sight.