Guns Drawn in Microsoft’s Battle with State

Minnesota’s lawyers are expected to press forward with the state’s five-year-old antitrust class-action lawsuit against Microsoft when testimony continues next week.

The state is attempting to prove that Microsoft engaged in predatory business practices that drove competitors out of business, then overcharged end-users for its products. Lawyers from Zelle, Hofmann, Voelbel, Mason & Gette are representing the state in the case of Gordon, et al. v. Microsoft. The same firm helped negotiate a $1.1 billion settlement with Microsoft on behalf of California residents in January 2003.

E-mail correspondence unveiled in court this week provides juicy details of the fight for market share between Microsoft’s MS-DOS and Novell’s DR-DOS; both were based on CP/M , the original PC OS developed by Digital Research. Analysts say the e-mails also give insight into what the state’s strategy might be.

Pages of e-mails and memos filed by the state and published by the Fourth Judicial District Court are filled with tidbits that could show Microsoft chose to break Windows unless it ran on MS-DOS. For example, one September 1988 e-mail from “billg” asks, “You never sent me a response on the question of what things an app would do that would make it run with MSDOS and not run with DR-DOS. Is there any version check or API that they fail to have? Is their feature (sic) they have that might get in our way? I am not looking for something they can’t get around. I am looking for something that their current binary fails on.”

The e-mails filed as evidence also show there was much back-and-forth about whether an application could identify the flavor of DOS on the PC. According to another e-mail, “Bill Gates ordered … if it is non MS-DOS (such as DR-DOS), application will display messages saying ‘Since you use different environment, this application may not work correctly.'” In a July 1991 e-mail, davidcol (David Cole, now vice president of the MSN and personal services group) writes, “We should not consider things that stop Windows from working on Netware. (Netware here = netware + DR-DOS.) If it was just DR-DOS alone, then we should prevent Windows from working there.”

In a September 1991 e-mail, philb (former Microsoft engineer Phil Barrett) responds to a developer’s question sbout how to make Windows 3.1 run on DR-DOS 6 by writing, “The approach we will take is to detect dr6 and refuse to load.”

The same e-mail shows Microsoft’s early decision process of moving functions out of applications and into the Windows operating system.

“When the user starts Windows, they get the Microsoft OS (including networking) and all the other cool features that go with that. When they quit, they get Netware and Dr DOS and no Windows apps. The key is getting a piece of MS system software on that client so we can deliver our strategy and vision,” the e-mail read.

Caldera (now the SCO Group), which purchased DR-DOS from Novell in 1996, sued Microsoft for anti-competitive practices it claimed cut DR-DOS out of the market. Microsoft settled the case in January 2000, before it went to trial, for a reported $155 million.

For their part, the Microsoft defense team entered into evidence a book and a memo. The 1992 e-mail memo from “stephanir” details negotiations with Vobis, an OEM that was getting pitched to pre-install applications by Microsoft, Borland, Novell and Lotus. According to the memo, Vobis offered to stop offering DR-DOS and Lotus to customers in return for a strategic alliance with the Redmond, Wash.-based company’s team. The book — “How the Web Was Won,” by Paul Andrews — was highlighted by Microsoft as a publication that the New York Times called “an exemplary tale of corporate resilience.”

Continued on Page 2… Microsoft’s Argument Inspected

Microsoft’s Argument Inspected

Microsoft may argue that the e-mails are taken out of context — a very specific historical context that may be difficult for many of us to understand.

“Going back to 1988, the industry was in its infancy,” said Yankee Group analyst Laura Didio. “A lot of engineers simply did not have enough experience or know-how to fix these problems.” In that era, according to Didio, “Integration between disparate software platforms ranged from barely adequate to extremely poor and unworkable. What you’re reading in these memos was widely practiced by vendors at the time, including Microsoft competitors.”

Rob Helm, an analyst with Directions on Microsoft, said that the recently leaked Windows source code gives some insight into Microsoft’s constant scramble to support third-party applications.

“There were a lot of comments on the order of, ‘We had to do this because otherwise someone else’s app won’t work right,'” he said pointing out that the e-mails aren’t necessarily a smoking gun. They may, however, indicate that the developers couldn’t or didn’t have time to fix all incompatibility problems.

To give some objective perspective, Dan Galorath, a computer consultant in El Segundo, Calif., was responsible for deciding between MS DOS 2.0 and CP/M as the operating system for an IBM PC clone that Commodore planned but never built. Galorath told he jchose MS DOS for two reasons.

“I thought it was better to stick with what IBM was using, and MS-Dos version 2 had sub-directories, which just blew the doors off CP/M 86 in my opinion,” he said. Galorath met with both companies before making the decision, and found them to be similar in their sales methods — or lack thereof. “There were a bunch of techies at both companies,” he said, adding that there was no pressure, no wining and dining. “I was a technical guy out there with technical people making an operating system decision.”

The state will have to prove that if Microsoft hadn’t taken exclusionary actions, there would be more competition today in the operating system market, said Allan Van Fleet, co-head of the antitrust practice group at the Houston law firm Vinson & Elkins.

“If you get a monopoly because you honestly have the best product or service, it’s not a crime to charge whatever you can for it,” he said.

The measure of damages if Microsoft loses will be what end-users actually paid for Windows licenses versus what that price would have been in a competitive market, Van Fleet said. “You have to guess and hypothesize about what that market would be like.”

Legal Woes Winding Down

Minnesota is one of a few holdovers — along with Wisconsin, Arizona, Iowa,
and New Mexico — that haven’t brokered a settlement deal with the Redmond,
Wash.-based software giant for monopolistic practices. In November 2002,
the U.S. Department of Justice settled its
against the company, but Microsoft still had to negotiate at
the state level
for individual settlements, many of whom have taken up
the offer.

Despite the many state-level settlements — including his own firm’s role in
the California decision — Rick Hagstrom, the lead attorney representing the
plaintiff in Minnesota, thinks he has enough evidence on hand to win the
case. He told the firm wouldn’t have taken the case
if they weren’t confident of the results.

“Microsoft’s position is, ‘Well, we apologize for violating the law, but we didn’t hurt anybody,'” he said. “And, of course, our position is why would Microsoft risk the consequences of violating the antitrust law if they didn’t do it to hold prices higher so they could reap monopoly profits?”

“That’s the question jurors will answer,” he added.

Testifying next week in Minneapolis will be Jerry Kaplan, former co-founder and chairman of GO Corp., developers of a pen-based operating system that plaintiff lawyers maintain is “virtually” identical to Microsoft’s existing pen-based OS. His live testimony will lead off a week of video depositions jurors will use to determine whether Microsoft is guilty of inflating software prices and stifling software innovation, to the detriment of Minnesota residents who paid for Window OS or Microsoft Office.

Microsoft is expected to present its side of the case in mid-April. Lawyers for the company have unsuccessfully attempted to throw the case out of court for the past couple of years, going all the way to the state Supreme Court, which ultimately decided to uphold the lower court’s decision to certify the case as an antitrust issue. Microsoft executives did not respond to requests for comment.

These actions are going on in state courts, according to Van Fleet, because federal jurisprudence doesn’t allow indirect purchasers to sue manufacturers. Since computer users buy Windows in a bundle with the PC, they’re indirect purchasers under federal rules, but a number of states allow indirect purchasers to sue for damages. According to news reports, Microsoft defense lawyers were able to throw out 38 other state class action suits in 2001 because of the Illinois Brick precedent, which bars lawsuits from people who indirectly buy the product; in this case, individuals who purchase PCs with pre-installed Windows or Word applications.

Minnesota’s Appeals and Supreme Courts obviously didn’t agree with the precedent, although the Gordon et al. v. Microsoft case represents just such indirect software purchasers.

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