Microsoft Returns to Court With Nine States Still Opposed

The antitrust case against Microsoft may seem like old news, but don't write off the case just yet.

More legal risk may creep back into the company's stock during a month-long series of meetings that resumes Wednesday. Nine states that don't agree with the settlement could still force some significant changes.

"Investors have moved beyond the trial, sort of assumed this will end and nothing will happen and the settlement is a nonmaterial event," said Erik Olbeter, an analyst with Schwab Capital Markets Washington Research Group. "There is probably a lot more risk here than investors want to 'fess up to."

On Wednesday, U.S. District Judge Colleen Kollar-Kotelly will hold a hearing to determine if the proposed settlement between Microsoft and the U.S. Justice Department is in the public interest. Next Monday she begins hearings on the tougher sanctions being sought by the nine dissenting states that refused to approve the settlement, reached in November. Those hearings, expected to last roughly four to five weeks, will feature dozens of witnesses.

It's possible that the judge won't issue a ruling on whether the settlement serves the public interest until after the hearings on the dissenting states' sanctions.

But investors already have made up their minds, said James Lucier, Prudential Securities' senior Washington research analyst. "The market appears to have priced into the stock right now the anticipation that the final outcome of the case will be reasonably close to the settlement with the Department of Justice," Lucier said.

In a signal of how the settlement approval is already priced into the stock, investors pushed shares down $1.85 Feb. 20 after Kollar-Kotelly ordered Microsoft to turn over source code to computer experts.

Antibundling

Still, the dissenting states represent the biggest potential monkey wrench in the case. The nine states want Microsoft to offer an alternate version of its Windows operating system without "bundled" software programs such as Windows Media; to ensure that its Office software is compatible with non-Windows systems; and to include the Java programming language in Windows XP.

By contrast, the DOJ's proposed settlement calls for Microsoft to open up parts of the source code for Windows to enable competitors to more easily write software to run with it. Microsoft also would be prohibited from issuing exclusive licensing deals, intimidating computer manufacturers from doing business with other software companies and being coy about how its operating system works to make it difficult for competitors to write software that runs well with it.

Given how the judge pressured both sides to come up with that settlement, Kollar-Kotelly is likely to take a similar approach with the dissenting states, leading to minor refinements to the DOJ settlement, said Stephen Margolis, a professor of economics at North Carolina State University and co-author of Winners, Losers and Microsoft. "The settlement is, I think, fairly reasonable in light of what's left of the case," said Margolis, noting how the U.S. Court of Appeals and Justice Department have scaled back the case. "I think it's unlikely she's going to find much reason to reopen the whole thing."

Antitrust

In June, the U.S. Court of Appeals only upheld the view that Microsoft violated antitrust law in the way it maintained its Windows monopoly and left open the question of whether Microsoft engaged in monopolistic activities by tying its Internet browser to the Windows operating system. Then, in September, the Justice Department said it would not seek a ruling on whether Microsoft illegally tied software to its operating system and it would not seek to break up the company.

The judge also is likely to find that the settlement is in the public interest because the standard for such a finding is relatively low: The judge must merely find that the settlement is not unreasonable, given legal and economic considerations.

That said, there may be some likely areas of the settlement subject to fine-tuning. Margolis said he believes the judge is likely to consider changes that close loopholes or deal with new unanticipated scenarios.

Olbeter suggested that the judge may be most likely to consider the claims from Sony (SNE Quote) and other computer makers. Indeed, last week Microsoft and the Justice Department agreed to delete one provision of the settlement that Sony had said would hurt its ability to assert its patents.

Antisettlement

Lucier, meanwhile, argues the dissenting states will never settle and raised the specter of the case dragging on considerably longer. If they refuse to settle, the judge may be forced to issue her own ruling, which Lucier would expect to offer only minor modifications to the proposed DOJ settlement. That would then lead to more appeals.

"The nonsettling states have absolutely no incentive to settle whatsoever," Lucier said. "They're hoping to get more by holding out."