If O.J. Simpson's was the trial of the last century, Microsoft's (MSFT) - Get Report own legal travails should get billing worthy of twice that: The software giant's antitrust saga now spans two centuries, and the darn thing just seems to keep going.

James Lucier,
Senior Washington Research Analyst,
Prudential Securities

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On Wednesday, the Senate Judiciary Committee held hearings to vet last month's proposed settlement between the Justice Department, nine states and the company in the landmark antitrust case. That settlement is currently being reviewed by U.S. District Court Judge Colleen Kollar-Kotelly to determine whether it's in the public interest.

At the same time, attorneys general from nine other states and the District of Columbia who rejected the settlement deal are forging ahead with their own legal battle, trying to win tighter restrictions on Microsoft's future behavior.

And that's all separate from another settlement, proposed for more than 100 private class action suits against the company, that calls for Microsoft to donate $1 billion in software and equipment to schools. That proposal has met harsh criticism from Microsoft's competitors, specifically Apple Computer (AAPL) - Get Report, that claim Redmond is simply trying to extend its monopoly into the classroom, one of Apple's last significant markets.

Oh, and last week, West Virginia decided to sue Microsoft all over again in state court.

TSC caught up with James Lucier, Prudential Securities' senior Washington research analyst, who's been following Microsoft's ongoing saga closely. We talked about the implications of the Senate hearings and Microsoft's legal morass in general.

TSC: In your view, what is the significance of the Senate basically holding hearings to look into this settlement?


Well, congressional oversight is an important, necessary and appropriate part of the American process. Any major antitrust settlement in the United States is almost routinely reviewed by the Senate, and often by the House Judiciary committee as well. That's one of the reasons that the U.S. system is often very resilient, and adaptive to change, and capable of dealing with new events.

TSC: So then these hearings in some sense are routine?


Actually they are routine. There is a statutory requirement under the Tunney Act that Congress hold hearings after the Tunney Act process is done. The fact is Congress is there to oversee each and every function of the federal government. It's an important job for them to do.

TSC: In the hearings Wednesday, the Senate wanted to make sure this is in the public interest. Does the Judiciary Committee or the Senate have the authority to throw the settlement out at this point, or is that solely up to the judge?


That is solely in the realm of the judge right now. One of the reasons why oversight hearings tend to be very formal is that Congress has only indirect powers. They can do things such as withhold funds for the antitrust division for the Department of Justice. They have the power to make their displeasure felt, but as a practical matter they have very little influence, if any, over the course, which again goes back to our constitutional system of checks and balances.

One thing you need to realize is that the Senate Judiciary Committee has oversight responsibilities over antitrust and over the Department of Justice, and because this is their area of expertise, they take it very, very seriously. If you look at the Judiciary Committee, it is always institutionally going to lean in the direction of more antitrust enforcement.

TSC: Do you think this settlement is in the public interest?


Well, to begin with, this

Senate hearing is not a Tunney Act hearing. It is part of the general oversight and review function of Congress. The Department of Justice has made its filing and presented its reasons to the public, and placed the reasons in the Federal Register as to why they believe the settlement is in the public interest. That is to be judged by the general public and to be reviewed carefully. The DOJ has made their determination, though, based on their best estimate of the strongest remedy they can get in the shortest period of time.

TSC: Why is that important?


Well, because you want certainty, and you want effectiveness. You want swift justice -- if you seek something that is ultimately unattainable, or something that will be tied up in the courts for years and years, effectively you will have done nothing. It's the classic "bird in the hand worth two in the bush" situation.

TSC: So to those critics of this settlement who say it is too lenient on Microsoft, it sounds like you have to ask them, what better would they have to offer?


You've got to look at what the holdings of the courts have actually been. The initial complaint against Microsoft focused on four things. One, monopoly maintenance. Two, attempted monopoly. Three, tie-in, and four, foreclosure.

U.S. District Court Judge

Thomas Jackson

who presided over the initial hearings in the case himself dropped item number four. The appeals court reversed item number two. The appeals court did not reverse item number three, but it remanded that item back to the lower court, and further said that it should be reheard on rules that make it difficult for the prosecution to succeed. That leaves only point number one, the monopoly maintenance of the case, which was upheld on significantly narrower grounds on appeal than was in the trial final order.

That is significant because this is, with absolutely no doubt about it, a very serious liability finding for Microsoft. It is a very significant win for the states and federal government that they were able to brand Microsoft a monopolist, which means it is a company that is subject to special regulation and scrutiny in the future.

TSC: That also opens them up to lots of private litigation, doesn't it?


Yes, it does. That is one of the things that you can use as the basis for a private lawsuit. It is a very important decision, but it is not the sweeping decision based on very expansive theories of illegality that the trial court originally handed down. It is a much narrower ruling appeal. The appeals court itself said it expected to see any remedy based on something called the rule of reason that is a close economic analysis of the law, and that it wanted to see clear quantified studies of harm done to consumers. It said that Microsoft is going to have every opportunity to present its economic evidence that maybe these remedies are not in the public interest.

The big thing we haven't had in this case is a clear quantifiable description of the harm. There has been a lot of egregious behavior and bad conduct by Microsoft alleged and upheld by the court.

TSC: One thing brought up in the Senate Committee hearing today was the concern over whether the settlement was specific enough to not invite further litigation. Do you think this settlement achieves that?


The settlement is pretty specific in the sense that it requires Microsoft to publish a schedule of pricing for their software, and it requires Microsoft to have standard licensing agreements that apply to the major OEMs. It basically puts affirmative constraints on Microsoft that says you must do X, Y and Z.

The state attorneys general proposal is more regulatory. It says not only do you have affirmative provisions that Microsoft must act in a nondiscriminatory way, it sort of has negative provisions saying Microsoft must


do all kinds of things. So it creates grounds for complaints on just about every aspect that any kind of company might want to do. It's very open-ended.

TSC: What you're referring to there is the proposal put forth by the nine nonsettling states plus the District of Columbia who have not signed on to the settlement. Do you think there is any possibility down the road of some kind of marriage between the aspects of the proposed settlement and those that the nonsettling attorney generals are proposing?


It is always possible. It is possible that Judge Kollar-Kotelly could in fact add additional elements or sort of recast the final order, perhaps based on the settlement, but also include new elements from the state attorneys general. The state attorneys general have presented 21 remedy provisions in total, all of which are very different than that of the DOJ settlement. If even one of those things gets through, it still could have an important impact.

TSC: Today anybody who uses a PC knows that that PC does a lot more today than it did five years ago. It is a very hard argument to make that Microsoft's monopoly power has stifled innovation, isn't it?


I would agree with that. I would look at the private class-action lawsuits brought against Microsoft which may be in the process of settling now. One reason why these lawsuits settled is that the economic damages alleged proved almost impossible to quantify, and turned out to be very low at best.

TSC: We obviously have a lot going on here with Microsoft on the legal front. Given how this thing seems to continually mushroom, is there ever a point in the future that Microsoft has this behind it, and can just go on as Microsoft the business, and not Microsoft the antitrust target?


The fact is these lawsuits are not mushrooming. The lawsuits are in the process of winding down after many years. We have an appeals court judgment which upheld a liability finding against Microsoft. We've got a settlement between Microsoft and nine states and the DOJ that's part of the winding-down process. We are beginning the Tunney Act review, and really considering a much narrower antitrust case and appeal. In the case of the private class-action lawsuits, those are not new cases that are being filed, but rather existing cases that have an outstanding settlement offer -- it's the offer of settlement that is being considered.

In other words, the court is considering, OK, can we stop now? I would think that on the whole, the situation is winding down. We're closer to the end than we are to the beginning. What investors worry about is sudden, unanticipated change. Once they know what the general state of affairs is, they can pretty well make their risk decisions and proceed accordingly. So even if you do have a fair amount of outstanding litigation, the markets can discount its ultimate impact fairly efficiently. It's sudden changes that alarm the market.

TSC: So it's good news for Microsoft then?


It is good news, on the whole. It is good news that we are arguing about how to finish this stuff instead of how to start it all over again. It's good news that we are arguing about not whether the federal antitrust case should be over, but on what terms it should be over.