Judge Tells Justice and Microsoft to Work it Out

Citing the recent national tragedy, she orders 24-7 settlement talks in the antitrust case.
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Updated from 12:48 p.m. EDT

Sometimes, the best thing to do with squabbling adversaries is to lock them in a room until they work out their differences. And that's just what the judge in the

Microsoft

(MSFT) - Get Report

case intends to do.

Judge Colleen Kollar-Kotelly today ordered Microsoft and the government to shift into high gear on settlement talks, telling them to "engage in an all-out effort to settle these cases, meeting seven days a week and around the clock." The move gives a clear framework to how the penalty phase of the landmark antitrust trial will proceed.

In her order, she cited the Sept. 11 terrorist attacks on the U.S. as an additional motive to get the 4-year-old case over and done with.

"In light of the recent tragic events affecting our nation, this court regards the benefit which will be derived from a quick resolution of these cases as increasingly significant," Kollar-Kotelly wrote in the first line of her order.

She also denied a request from Microsoft to limit the potential penalties that could be wielded against the company.

We're pleased with the judge's schedule, and look forward to moving expeditiously," said Gina Talamona, a spokeswoman for the Justice Department. "As we've said all along, we want the case to move quickly, and it's always been our desire to get a remedy in place that will help consumers."

After initially trading off on the news, Microsoft shares were up 67 cents, or 1.4%, to $50.63 in Friday trading.

Looking for a Quick Settlement

Because both sides have said they think they can do better without a mediator, the judge said they could bargain unassisted until Oct. 12. If they don't reach an agreement by then, she said she would ask the parties to submit the name of a mutually accepted mediator. If they can't reach an agreement on that, she said, she would appoint one.

If that happens, the sides would then have until Nov. 2 to reach agreement. If they haven't settled by then, the case will go back to court to determine what penalties Microsoft should face for illegally maintaining its monopoly in computer operating systems. An appeals court upheld Microsoft had done so in late June.

Under that scenario, the government would submit penalty proposals by Dec. 7, and Microsoft would respond by Dec. 12. Hearings in the case would then start around March 11. That timetable would put the case back in court five weeks later than the Feb. 4 date previously proposed by the government.

Kollar-Kotelly's order left little doubt that the uncertainty of the post-Sept. 11 world and the length of the proceedings against Microsoft motivated her.

"The court cannot emphasize too strongly the importance of making these efforts to settle the cases and resolve the parties' differences in this time of rapid national change," Kollar-Kotelly wrote in her order. "The claims by Plaintiffs of anticompetitive conduct by Microsoft arose over six years ago, and those cases have been litigated in the trial and appellate court for over four years. As the Court of Appeals has noted, the relevant time frame for this disputer spans 'an eternity in the computer industry.' "

The sides have held settlement talks, and a Microsoft spokesman said they would continue in compliance with the judge's order. But the two sides have failed before in trying to resolve their differences outside of the courtroom, most notably in March of 2000, when federal judge and mediator Richard Posner said months of talks hadn't resulted in any agreement.

Since then, both sides added new blood to their teams. Microsoft added tobacco defense lawyer and former government prosecutor Dan K. Webb to its team this week, while the government earlier this summer tapped Philip Beck, who advocated for George W. Bush during the Florida election recount. Both are based in Chicago, and their additions lead some to believe that the possibility of settlement, especially in light of this order, has been given new life.

"It should be settled," says Ernest Gellhorn, a law professor at George Mason University who has been following the case closely. "I think the advantage of bringing in two new people makes it more so. Both Beck and Webb are very able lawyers, and they have the advantage of coming from the same community. While that might not be a major deciding factor, it's certainly not a harm."

A Microsoft spokesman, while declining to comment on whether the Sept. 11 attacks add more urgency to finish the case, said it's important, economically, to move on.

"We've expressed throughout the process our interest in resolving the remaining issues through settlement," said Jim Desler, the Microsoft spokesman. "Whether through settlement discussion or through the legal process, it's important to get the PC industry moving as well as the economy. We want to do our part to keep the economy moving."

Motivation for Microsoft

Before Sept. 11, many analysts predicted that the release of Windows XP on Oct. 25 would spur computer sales. That is now unclear, in light of faltering consumer confidence. On the other hand, some observers say if Americans travel less in the wake of the attacks, they'll want to stay connected at home, and could buy PCs to do so.

The judge also denied Microsoft's request that she scale back which penalties could be used against the software giant, according to wire reports. Microsoft had argued that since the appeals court in June only upheld some parts of the original judgment against it -- notably, that it had illegally maintained a monopoly -- the possible penalties the company could face should also be scaled back.

But with Kollar-Kotelly seeing things differently, that means Microsoft could still be forced to open up the source code of its new Windows XP operating system, so that competitors can write programs that run more efficiently on top of it. Some observers see that penalty as potentially more devastating to the company than breaking it up, something the government pledged it wouldn't do earlier this month.

Kollar-Kotelly's decision also means Microsoft could be prevented from wielding its monopoly against its partners and competitors in determining who does or doesn't receive favorable license agreements to use it.

"By rejecting the narrowing of the scope of the remedy hearings, she's sent a definite message to Microsoft: you've got to worry about Windows XP," says Gellhorn. "You've also got to worry about interim relief of exposing more of the code, and limiting the pricing pressure on your competitors to support your product."

Desler declined to comment on the judge's decision not to narrow the available remedies, though he reiterated the firm's previous argument on that point. "I would just refer you back to the joint status report where we indicated that we felt only a relatively narrow remedial order is necessary, based on the actions that were found to be anticompetitive by the court of appeals."

Erik Olbeter, an analyst at Schwab Capital Markets Washington Research Group, said today's development shows Judge Kollar-Kotelly understands time is of the essence in this case. In fact, he says, the longer it takes to craft remedies, the more severe they would have to be to truly encourage competition in the computer and software industry.

"It seems to indicate her feeling that the efficacy of any remedy is related to the timing, that it's crucial to get a remedy in place now that can address the specific issues to avoid a very onerous remedy later," Olbeter said. "If Windows XP is out there for two years, or three years, and they have to go through this entire court process, the mandate to open the operating system to competitors at that point would do very little. Hence, the only remedy that would actually have any affect at that point is a much more onerous remedy, such as a break-up."

That, likely, would be bad for investors.

While Microsoft has had partial victories throughout the case, it appears now that the four walls of the room it will be locked in for the near future are coming closer in.