Dissident States Make Microsoft an Unwelcome Offer

Their settlement demands would force the software giant to reveal more and be under closer watch.
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And the legal beat goes on?...

The attorneys general for nine states and the District of Columbia on Friday called for stricter penalties against

Microsoft

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than those proposed in a settlement with other states and the Justice Department. The dissident attorneys general said their proposals would more appropriately address the software giant's crimes.

In a 40-page filing submitted to U.S. District Court Judge Colleen Kollar-Kotelly, the lawyers called for Microsoft to offer an alternate version of its Windows operating system without "bundled" software programs such as Windows Media; ensure that its Office software is compatible with non-Windows systems and include the Java programming language in Windows XP.

Those provisions would most directly benefit firms such as

Apple Computer

(AAPL) - Get Report

,

Sun Microsystems

(SUNW) - Get Report

and

Redhat

(RDHT)

, all of which compete against the software titan.

They also called for assurances that Microsoft couldn't retaliate against competitors, as well as for the appointment of a single "special master" who would supervise the company's compliance with the law. The filing also proposes that Microsoft be subject to monitoring for 10 years, as opposed to the five-year period proposed in the original settlement.

"This proposed set of remedies goes beyond

the DOJ's settlement to reflect the accuracy of the law in this case," said Iowa Attorney General Tom Miller, during a conference call with his counterparts from the other states and the media. "Our hope is it will prevent the occurrence of monopolistic conduct and send an important and profound message to the community: that there will be fair, level rules of the road and fair competition that ultimately benefits consumers."

In June, the U.S. Court of Appeals found that Microsoft had illegally maintained a monopoly in computer operating systems, and remanded the case to the lower court to figure out how the company should be penalized. After months of haggling, Microsoft settled the case in November with the Justice Department and half of the 18 states that were pursuing it, though that settlement is now up for federally mandated public and judicial review.

Meanwhile, the other nine states and Washington, D.C., pledged to go forward with the case to get tougher penalties against the company, and today's filing is a result of those efforts.

In addition, the Senate Judiciary Committee has scheduled hearings next week to review the settlement reached with the Justice Department.

Microsoft issued a quick, terse response to Friday's widely expected filing by the remaining attorneys general.

"The proposed remedies submitted today by the nine holdout states are extreme and not commensurate with what is left of the case," said Microsoft spokesman Jim Desler, in a statement. "The Court of Appeals decision drastically narrowed the liability issues and provides the best road map as we move forward with these remedy proceedings."

Critics of the hold-out states have said Microsoft's competitors have goaded the remaining attorneys general to continue fighting the company. Iowa's Miller, however, strongly objected to that view on the conference call Friday, and he says the law is on his side.

"Microsoft has impugned our motives by saying that we're doing this because of requests from certain companies, and that's completely false," Miller said. "We have not impugned their motivations in any way, and we would ask that they behave in a similar way. We brought this case as law enforcement officers."

The firm said it will file its official response to the proposed remedies Dec. 12.

It's unclear how the two separate tracks in the case will proceed. While Kollar-Kotelly is currently fielding feedback on the proposed settlement, she also has told the holdout states to go ahead with their cases. On their conference call today, the attorneys general were uncertain on whether those two processes could eventually dovetail together, or whether one would have precedence over the other.

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, as well as the appointment of a three-member oversight panel to make sure the company complies.

Under the Tunney Act, though, the settlement must be approved by the judge to make sure it's in the public interest, and Microsoft's critics have said it is too lenient in light of the company's violations.

Kollar-Kotelly has scheduled hearings in the case for March.

Meanwhile, attorneys involved in another proposed settlement with the company for more than 100 private class-action lawsuits against the company filed additional documents today in that case.

The attorneys are trying to resist being included in a settlement that proposes Microsoft be punished for alleged gouging of consumers, by donating $1 billion in software and equipment to the nation's poorest schools.

Those attorneys say that settlement, proposed by other lawyers who had already been denied some claims in their cases, is little more than a veiled attempt to expand Microsoft's market share in the education software market. That's one of the only areas where Apple still offers significant competition to Microsoft.