Some States Not Chillin' With Mister Softee

Half of 18 states aren't signed on to the Microsoft settlement, and some of those want to go to court.
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Updated from 1:08 p.m. EST

You didn't really think it was over, did you?

Four days after the Justice Department unveiled a proposed settlement in its antitrust case against

Microsoft

(MSFT) - Get Report

, only half of the 18 states involved in the case said they could live with the deal. That leaves the other half, or some portion of them, in a position to continue to pursue the software monopolist in court.

By late Tuesday, nine states had agreed to accept the settlement terms. New York Attorney General Eliot Spitzer said his state and Illinois, North Carolina, Kentucky, Michigan, Ohio, Wisconsin, Louisiana and Maryland were on board with the settlement, which has been revised since it was first announced Friday.

Nine other states (California, Massachusetts, Iowa, Minnesota, Connecticut, Florida, Utah, Kansas and West Virginia) and the District of Columbia were either undecided or resolved to continue with litigation. The day's events seemed to lay out two separate paths for the case: one for those parties that want to settle the case and a separate one for those states who still want to fight.

Under the original proposed settlement, Microsoft would be prohibited from much of the behavior that made it so wealthy and powerful in the first place, such as 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. Microsoft would also be subjected to monitoring by an independent panel, which would have full access to its books and underlying code for at least five years.

The settlement was immediately criticized on Friday as being too lenient on the software giant.

As the parties continued to negotiate through Tuesday, though, it became clear that the states wanted more. By Tuesday, they agreed to extend some of the conditions, including language to monitor Microsoft's business push into the Internet.

New York's Spitzer said Tuesday that Microsoft would also be required to disclose more of its communication protocols so that server companies could more easily make their products compatible with Microsoft's ubiquitous Windows operating system. The expanded agreement would also extend the kinds of software companies protected by the decree, including those which do not write software for Windows.

After days of nonstop negotiations that continued through Tuesday morning, Iowa Attorney General Tom Miller said he simply needed to sleep on the matter before deciding what his state would do.

"We have worked around the clock for many days," Miller said in a statement. "Now I literally will go home to Iowa to sleep on it, and give it the deliberation it still deserves." He said his reservations were over whether the agreement document "accurately executes" the settlement principles to which he had agreed. He added: "We will live with any settlement for years, so Iwill spend several more days reviewing it."

Meanwhile, hard-line Massachusetts Attorney General Tom Reilly was busy blasting Microsoft, predicting that the company would violate the agreement as soon as it was signed.

"There is no question in my mind that five minutes after this agreement issigned, Microsoft will violate it," Reilly said in a statement emailed by his office. "This is a company that has repeatedly violated the law. That is their nature and that's why we're in court trying to undo the damage. We may be a small state, but we've got some fight left."

Reilly's California counterpart, Bill Lockyer, was more measured but said he couldn't join the agreement until he got tougher restrictions on the company. The two states are viewed as likely to lead any continuing litigation.

"While the settlement proposals are a step forward, they fail to provide adequate remedies for Microsoft's illegal use of its monopoly power to crush innovative technology," Lockyer said in a statement. "We need strong remedies to curb future abuses by the software giant and to ensure a fair marketplace in which businesses can compete and grow to offer consumers more choices."

Microsoft, meanwhile, reportedly told the judge presiding over the case that it considered the settlement process over and done with.

In a statement, Microsoft Chairman Bill Gates praised the nine states that were on board with the agreement, but said his company had done its part to resolve the case.

"We made every effort to reach a compromise to address the states' concerns and allow everyone to move forward. Yesterday, at the request of the states, we made some additional revisions to clarify the proposed decree and better capture the intent of the parties," Gates said. "We hope that the remaining states will join in this agreement, so that everyone can focus on the future and avoid the unnecessary costs and delays of further litigation."

Microsoft's shares yo-yoed during the course of regular trading as details trickled out about the settlement proceeds. The finally finished up $1.51, or 2.4%, at $64.78 on a day when the Federal Open Market Committee lowered interest rates by a half-point, marking the 10th time it has lowered the pivotal fed funds rate this year.

U.S. District Court Judge Colleen Kollar-Kotelly had told the states on Friday to decide by today whether they would accept the agreement. After hearing from them this afternoon, she put the rest of the case on a two-track course -- one for settlement and one for litigation -- which seemed to point it into uncertain legal territory.

Kollar-Kotelly had ordered the parties involved on Sept. 28 to try to reach a settlement in round-the-clock negotiations. At that time, she laid out a road map for how the case would proceed if settlement wasn't reached, with additional penalty hearings coming in March.

In an order today, she reiterated that any parties not on board with the agreement should be prepared to follow the trial schedule that was previously laid out. She also said that those parties who agreed to the settlement should be ready to discuss the Tunney Act proceedings which would result from that settlement.

Under the 1974 Tunney Act, designed to make sure settlements with the government are in the public interest, a proposed settlement must be published in the Federal Register and undergo a 60-day public comment period before gaining approval. At the end of that period, the government has 30 days to respond to those comments. The court then determines whether the settlement is indeed in the public interest.

Microsoft filed a preemptive brief before the court this morning, asking the judge to put off the predetermined schedule in the case that was laid out on Sept. 28.

Instead, Microsoft argued, any states not happy with the settlement should air their grievances during the public comment period that is mandatory if the court approves the settlement between it and the federal government.

"What

Microsoft's trying to do is force everything under the Tunney Act because that limits the court's discretion," said Ernest Gellhorn, an antitrust law professor at George Mason University. "It's a nice try, but they've got no more law in this than anyone else. We're all making this up as we go."

Wait for more creative lawyering in the days to come.