States Split Over Microsoft Settlement

The 18 states pursuing an antitrust suit against Microsoft Corp. split Tuesday over whether to sign on to a
settlement agreement brokered by the U.S. Department of Justice (DOJ).

Half the states, and the District of Columbia, will continue to litigate the case. The other nine, including New York, Illinois,
North Carolina, Kentucky, Michigan, Louisiana, Wisconsin, Ohio and Maryland, agreed to sign on to the DOJ-brokered settlement.

“Today’s agreement is a win for consumers, a win for innovation in the technology marketplace, and a win for our nation’s economy,”
said Michigan Attorney General Jennifer M. Granholm after agreeing to the settlement. “The refinements to the original U.S.
Department of Justice settlement which were negotiated over the past weekend further cement my belief that this settlement will
allow and encourage Microsoft’s competitors to offer consumers the broadest array of computer products possible.”

Microsoft echoed that sentiment.

“We are pleased that nine states have joined the Department of Justice in supporting this settlement,” Microsoft Chairman and Chief Software Architect Bill Gates said Tuesday afternoon. “The fact that so many states have joined the federal government in supporting this agreement is a very significant positive step toward resolving these issues once and for all.”

Gates added, “while this decree will place significant restrictions on our business, we believe this is a fair and reasonable settlement that will be good for consumers, good for the high tech industry, and good for the economy. Microsoft is committed to making this settlement a success. We are committed to becoming a better industry leader, and we will continue to deliver new innovations to revitalize the economy and improve people’s lives.”

Last week, Bush administration appointees to the DOJ, including new antitrust division head Assistant Attorney General Charles A.
James, reached an agreement with the software titan to settle the three and one-half year-old case. But career officials at the
Justice Department, who have pursued the case since the beginning, displayed their apparent displeasure with the agreement by not
signing it.

The DOJ has since taken a hard stance, saying that it is not willing to alter the agreement it drafted together with Microsoft,
though the company met with state officials late into the evening Monday in an attempt to negotiate an agreement. The DOJ did not
attend the meeting.

The dissenting states, led by Massachusetts Attorney General Thomas F. Reilly, the first attorney general to state conclusively that
he would seek to block the deal, told U.S. District Judge Colleen Kollar-Kotelly Tuesday afternoon that the agreement was bad for
Microsoft competitors and consumers because provisions intended to rein in Microsoft’s monopolistic business practices were riddled
with exceptions that gave the company too much latitude. They also noted that it was Microsoft’s previous violation of a consent
order that set the stage for the current suit.

The settlement agreed upon by Microsoft and the DOJ gives Microsoft the right to define what is and is not part of the Windows
operating system. Also, under the agreement, Microsoft is obligated to allow computer manufacturers to install icons or shortcuts
for non-Microsoft software on the desktop or in the start menu, but is allowed to restrict or limit those additions if they “impair
the functionality of the user interface.”

Microsoft also retains the right override a competing product with its own if the product “fails to implement a reasonable technical
requirement (e.g. a requirement to be able to host a particular ActiveX control) that is necessary for valid technical reasons to
supply the end user with functionality.” The document does not define “reasonable technical requirement,” though it does require
that Microsoft notify the software developer and give it the opportunity to fix the problem.

Microsoft can also refuse to give competitors APIs that would allow those competitors to integrate their products with Windows if
the competitor does not meet standards established by Microsoft. For instance, if Microsoft determines that the competitor’s product
would compromise security or privacy safeguards, the company can refuse to disclose the APIs. Also, for a vendor’s middleware
software to qualify as a middleware product under the terms of the settlement the competitor must have distributed at least 1
million copies of its software in the previous year, effectively giving Microsoft free rein to deal with start-ups as it sees fit.

In all, the dissenting states say there are a dozen specific points that need to be changed in the agreement before they could sign

Microsoft competitors, watchdog groups and some analysts have been vocal in their disapproval of the terms of the settlement
agreement. Some have called the agreement a reward, not a remedy, giving the company the go-ahead to use the strength of its
monopoly to continue its dominance of the software sector.

“We’re very disappointed that some states are likely to sign on to what was a bad deal negotiated in secrecy between Charles James
and Charles Rule,” said Ken Wasch, president of the Software & Information Industry Association (SIIA) on Tuesday, prior to a 2 p.m.
hearing before Judge Kollar-Kotelly in which the states notified the court of their intentions. Charles Rule, of Fried, Frank,
Harris, Shriver & Jacobson, and a former head of the DOJ’s antitrust division during the Reagan administration, is Microsoft’s chief

Wasch added, “Anybody who believes that the computer manufacturers are going to be truly free to add non-Microsoft software to the
computer desktop is living in a fantasy world.”

Wasch outlined several of the exceptions in the settlement, noting, “Under this agreement, Microsoft is still allowed to
unilaterally decide what is part of the operating system. The words were “under its sole discretion.” Could Microsoft make a ham
sandwich part of the operating system? The answer is yes.”

However, some industry groups said it is time to accept the settlement and move on.

“The announced settlement between Microsoft and the federal government should end a long chapter of antitrust jurisprudence,” said
Lars Liebeler, antitrust counsel for the Computing Technology Industry Association (CompTIA). “CompTIA believes the settlement is a
reasonable resolution of the case, allowing the IT industry — here and abroad — to end the litigation and focus on delivering
innovative and low-cost IT products to consumers.”

Liebeler added, “The settlement must be seen for what it is — a negotiated settlement that requires each side to compromise. To
that end, CompTIA harbors its own concerns surrounding the proposed settlement’s forced sharing of Microsoft’s intellectual
property. While ostensibly designed to promote industry competition, CompTIA feels that these provisions may in fact harm the very
lifeblood of IT industry competition — innovation. Government by consent decree must be strenuously avoided, especially in dynamic,
technologically advanced markets that can literally change on a dime.”

Judge Kollar-Kotelly said the case will now proceed under two tracks. The settlement will be reviewed under the Tunney Act of 1974,
which governs antitrust settlements involving the government and requires that the judge find the settlement in the public interest
before approving it. Judge Kollar-Kotelly will also begin hearings to allow those states which have chosen to continue litigating to
pursue their case. The judge refused a request by Microsoft to halt litigation during the review period.

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