Bill Gates Isn't in the Clear Yet

Dissident states want to rewrite the settlement

After four years and endless days in court, you wouldn't think there would be a surprise left in Microsoft Corp.'s landmark antitrust case. Wrong. During a deposition of Microsoft (MSFT ) CEO Steven A. Ballmer that was made public on Mar. 4, he claimed the software maker would have to create millions of versions of Windows to comply with a remedy proposed by nine state attorneys general. Rather than do that, he said, he would pull Windows off the market.

Connecticut Attorney General Richard Blumenthal called this a "doomsday scenario." Still, on Mar. 4, the states retooled their proposal, making it clear that they aren't calling on Microsoft to create multiple versions of Windows. Instead, they want a single version that would be put together like Lego blocks so that PC makers can pluck out chunks such as a Microsoft browser or a media player.

What's going on here? Simple. It's the last-minute scramble before a crucial remedies hearing scheduled to begin on Mar. 11. Microsoft has asked for a two-week extension to deal with the states' modifications, so the hearing may be delayed. No matter when things get going, the stakes are sky-high. If U.S. District Court Judge Colleen Kollar-Kotelly is swayed by the states' arguments, she could undo a settlement between Microsoft and the Justice Dept. and nine other states--and stick the software giant with much tougher remedies.

The states are homing in on the very issue that prompted Ballmer's outburst: the "commingling" of Microsoft's computer code. The U.S. Court of Appeals affirmed last summer that Microsoft had unlawfully intertwined its operating system and its Internet Explorer Web browser in such a way as to prevent PC makers from deleting it and replacing it with a rival browser by Netscape Communications. The states argue that if Microsoft is allowed to freely weave software programs into Windows, it can use its monopoly to compete unfairly with companies producing alternative versions of browsers, e-mail, media creation and playback software, and voice recognition software. If these pieces of so-called "middleware" were modular, they say, PC makers would be able to easily pop Microsoft's products out and replace them with alternatives.

Some legal experts believe that the states have a solid chance of winning this argument. That's because the Justice Dept. agreement only requires Microsoft to allow computer makers and consumers to delete icons and menu items for programs such as Internet Explorer rather than the entire program. Opponents say that won't stop commingling. In contrast, the states' proposal directly addresses the court's concerns. "Given what the [appeals] court said, I think they're on very solid ground here," says University of Baltimore law professor Robert H. Lande.

Microsoft believes otherwise. It has acted as though it has the right to add anything it pleases to Windows. And it has its supporters among independent legal experts. Richard M. Steuer, a partner at Kaye Scholer LLP, says that in its ruling, the appeals court cautioned about judges interfering in software design. He believes that the states have a "less than 50-50" shot at winning on this issue.

Truth is, the appeals court seemed to want it both ways. Its intentions are anything but clear, and that leaves Judge Kollar-Kotelly leeway to do what she wants. "The judge has a lot of discretion," says New York University antitrust law professor Eleanor M. Fox. Kollar-Kotelly's previous rulings and writings don't provide many hints about which way she'll tilt. But in her court appearances so far, Kollar-Kotelly has signaled she'll give as serious consideration to the dissenting states' proposals as the Justice Dept.'s proposed settlement. So Microsoft isn't out of the penalty box yet.

By Dan Carney in Washington, D.C., with Jay Greene in Seattle

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