One Last Hearing Before ‘Vista Capable’ Trial

With all the hubbub last week regarding Microsoft’s first layoffs and dramatically lower sales, the company’s legal warriors were all but forgotten. So while facing the barbarians of Wall Street last Thursday, Microsoft was also struggling to cast out one of its biggest legal demons.

In fact, as Microsoft CEO Steve Ballmer was revealing how far the industry’s golden child had slipped over the past quarter, his attorneys were across Lake Washington in downtown Seattle arguing to a judge that one of its stickiest legal cases should be dismissed. Goodbye. Gone. Please?

Nothing is ever that easy.

That case would be Microsoft’s (NASDAQ: MSFT) so-called “Vista Capable” lawsuit, which is nearing a critical point – the case is scheduled to go to trial on April 13.

The stakes are high. The plaintiffs argue that the company should owe members of the class action as much as $8.5 billion – the cost to upgrade their PCs to run a premium version of Vista.

Not surprisingly, Microsoft strongly disagrees.

Vista Culpable?

On Thursday, January 22, Judge Marsha Pechman held a hearing for both sides to present oral arguments on the reasoning both for and against continuing the lawsuit. Pechman has had few hearings in the two-year-old case but this was a pivotal one. It will decide whether the case goes to trial or not, barring an out-of-court settlement.

Microsoft’s legal team argued that the case does not rise to the level of a class action and that the suit itself should not go forward – with or without class action status.

The company tried the same maneuver last year, unsuccessfully, even going as far as the Ninth District Court of Appeals only to be turned back. That said, it is typical for civil defendants to try to get such cases tossed prior to actually going to trial.

Originally filed in early 2007, the suit over whether Microsoft tricked consumers into buying PCs incapable of running all but the least capable version of Vista under the banner of Microsoft’s “Vista Capable” logo program later escalated into a class action.

Prior to shipment of Windows Vista, Microsoft had two levels of PC hardware requirements. The highest one – dubbed “Vista Premium Ready” – meant that the PC was able to run any version of Vista. Meanwhile, though, the lower-cost Vista Capable machines would only be able to run Vista Home Basic, which lacks the Aero Glass user interface.

Windows Vista was behind schedule and, ultimately, would not be available to consumers until January 30, 2007. Therefore, new PCs sold during the 2006 holiday season came with Windows XP pre-installed, and many of them had the “Vista Capable” sticker on the PC. The sticker was meant to indicate that the machine could run Vista when it was available – but only Vista Home Basic.

To argue otherwise would be to demand more than what the Vista Capable program promised, Microsoft’s attorneys said.

Next page: Money and motions.

Page 2 of 2.

Money and Motions

In recent weeks, including last Thursday’s court hearing, which included oral presentations on Microsoft’s dual November motions to decertify the suit’s class action status as well as to dismiss the case altogether, both sides have been posturing.

For instance, in one document unsealed last fall, University of Washington economist Keith Leffler, an expert witness for the plaintiffs, asserted that Microsoft made as much as $1.5 billion from the Vista Capable marketing campaign.

“I have … estimated that the licensing revenue to Microsoft from the sales of PCs to the plaintiff class members was $1.505 billion,” Leffler’s affidavit said.

Another calculation by Leffler, though, could extend Microsoft’s liability much higher if the plaintiffs ultimately win out.

The cost to upgrade all of the machines sold with a Vista Capable sticker in order to run a higher-end edition of Vista, Leffler pegged at as high as $8.5 billion.

“I have estimated that the minimum costs to the plaintiff class members of rectifying their Vista Capable but not Premium Ready PCs to make them in fact capable of running a premium version of Windows Vista would be in the range of $3.084 to $8.522 billion,” Leffler said in his statement.

That is the amount it would take to upgrade all the Vista Capable machines sold between April 2006 and January 30, 2007 – the period that the program ran — to run a higher level of Vista. Microsoft argues that is not a valid approach since many users would not choose to upgrade later.

Microsoft’s attorneys argued that there are significant holes in the plaintiffs’ theory, including the expert testimony.

“He [Leffler] could not determine the extent to which consumers, such as Dianne Kelley [the lead plaintiff], purchased Windows Vista Capable PCs for reasons that had nothing to do with Windows Vista, the Windows Vista Capable sticker, or the WVC program,” Microsoft’s attorneys said in their motion for summary judgment, filed in November.

“Indeed, Dr. Leffler performed no study or consumer survey to analyze the affect of the WVC program on the demand for WVC PCs. In fact, he simply assumed that the WVC program impacted consumers’ choices,” Microsoft’s motion argues.

While he made no analysis based on the plaintiffs’ assertions, one leading analyst said he has some misgivings regarding Leffler’s assumptions.

“Historically, [operating system] upgrades are really unpopular and the uptake is in the single digit percentile,” Richard Shim, research manager for the PC team at IDC, told InternetNews.com. That would indicate that the numbers in the class who would be likely to upgrade – that is, forking out cash for upgrading memory and or the graphics adapter, if possible — may be much lower than Leffler’s estimates.

Additionally, sales of PCs with Vista Premium have been high when compared to systems with Home Basic.

“There was a pretty high uptake rate of Premium, so his numbers seem inflated,” Shim added.

The case itself has been Byzantine, with accusations in embarrassing unsealed e-mails that Microsoft buckled to pressure from Intel to lower the stated hardware requirements for designating a new PC as “Vista Capable” in order to sell more PCs during the 2006 holiday sales season.

That outraged partners like HP, which had spent millions of dollars making sure its PCs could fulfill a more stringent requirement that was relaxed at the last minute. HP senior management was ticked to say the least.

Judge Pechman told the court she would rule in about “two and a half weeks,” Dave Simmonds, an attorney at the plaintiff’s firm, Gordon Tilden Thomas & Cordell, told InternetNews.com.

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