Looking Into the Pit of Civil Litigation Against Microsoft

I've said here a number of times that I think the biggest threat to the future health of Microsoft (MSFT) may not be the remedies sought by the Justice Department and the 19 state attorneys general cooperating with it, but rather the danger of huge and almost endless civil litigation by government agencies, businesses and individuals.

By seeking cash compensation for damages they suffered because of the actions defined by Federal Judge Thomas Penfield Jackson in his November findings of fact, and this week's findings of law as antitrust violations, those litigants could turn the Justice Department action into a relative sideshow.

Because those claims could be so numerous; because Jackson's findings provide an admissible "proof" of Microsoft's alleged misdeeds; and because the amounts sought could be vast, these class actions against Microsoft could keep the company tied up in risky litigation for many years, with both big legal bills and steep settlement or judgment costs along the way.

A number of readers have written to ask how this might work. So all week I've been talking with plaintiffs' lawyers already involved in, or planning, these suits. In a perhaps oversimplified explanation, this is a four-step process:

1. Determination of Monopoly -- Microsoft must be shown to have created, and acted as, a monopoly. Remember that, contrary to most Americans' understanding, and the usual if mistaken definition of that heavily freighted word monopoly, it is not illegal to become, and do business as, a monopoly. Monopolies just have to follow a different set of rules. Judge Jackson's Conclusions of Fact, delivered in November, largely solve this problem for plaintiffs' attorneys, who can introduce those findings as a substantial (but still challengeable) determination that Microsoft was and is a monopoly.

2. Determination of Illegal Actions as a Monopoly -- To succeed, plaintiffs must prove that Microsoft failed to follow those rules for monopolies. Again, Jackson's Conclusions of Law, released this week, pretty much solve this one for plaintiffs' lawyers.

3. Existence of Damages -- Plaintiffs' lawyers must then prove that someone was actually harmed by Microsoft's illegal acts.

4. Proving Up the Damages -- Finally, plaintiffs' counsel must show that their clients were among those specifically harmed by Microsoft's actions, and prove-up, or quantify, the extent of those damages.

The rewards of success here are great: Damages proven at trial are trebled in the final awards.

The vehicle for most of this litigation will be a series of class actions, in which one plaintiff, say, Mary Smith, is deemed to be a representative of a whole class of injured parties, say, residents of New Jersey who bought a computer between 1995 and 1997.

New Jerseyans who meet that test may choose to opt out of the class, either because they disagree with the action or because they want to pursue their own, independent action against the defendant. As a matter of practice few ever opt out, either because they don't know they're part of the class, or don't care. And very, very few opt out because they want to launch their own lawsuits, because the cost would be horrendous.

Indeed, one of the presumed benefits of class actions is that the costs of pressing the litigation are spread across such a large number of defendants that it becomes possible to effectively sue for, recover and distribute relatively small claimed damages for each member of the class.

Another advantage, not subject to dispute, is that class actions become gold mines for the handful of members of the plaintiffs' bar who specialize in them. We've seen that, for example, in the fallout from the past decade's tobacco litigation, where a small number of attorneys have gotten very rich from the awards to injured plaintiffs.

I don't say that as criticism -- the class-action approach is well established in American law -- but only to suggest that when we see awards of, say, $2 billion to the members of an aggrieved class, less than half that sum may in the end trickle down to the group of plaintiffs, after expenses and substantial lawyers' fees are deducted.

More than once I've been an (unwitting) member of a class, only to open a surprise letter from the court at the end of the proceedings, with the good news that I have recovered a whopping $50 or $60 in damages, after costs and fees.

---

In case you missed the news Wednesday, after a conference with Microsoft and Justice Department lawyers, Judge Jackson announced an aggressive schedule for completing his work.

Jackson directed the Justice Department and its state attorneys general partners to have their proposed penalties ("remedies") in his hands by April 25 to 28, and set a hearing date of May 24 for the announcement of his decision on which of those penalties he will apply.

He also agreed to support a fast-track appeals procedure for Microsoft, allowing the inevitable appeal of his ruling to move directly to the U.S. Supreme Court. (The court would not, of course, have to accept that appeal, but could instead simply let Jackson's ruling stand.)

Most observers agree that this very short period to conclude the trial and assess penalties is a good sign for Microsoft. If Jackson were going to break up Microsoft, he almost certainly would not have set such an aggressive schedule. Defining the specifics of a breakup would require far longer.

Thus, the judge seems to be leaning toward the kind of milder -- if still tough -- "conduct" remedies available to him.

Next: A talk with one of the lawyers organizing the civil suits against Microsoft.

>To order reprints of this article, click here: Reprints