Tit For Tat in ‘Vista Capable’ Suit

Microsoft’s (NASDAQ: MSFT) cheeks must still be burning from the
embarrassing disclosure two weeks ago that some senior executives feared the company’s “Windows Vista Capable” sticker program in late 2006 misled
some computer buyers.

In a new wave of filings last week, however, the Redmond, Wash.-based
software behemoth has gone on the offensive against the suit, challenging
a recent ruling that elevated the suit to class action status.

“Because of errors in its approach … the district court certified a
nationwide class with potentially millions of members to pursue claims
against Microsoft,” the company’s lawyers said in their appeal.

Microsoft also filed a request for a stay in the case, which is
currently set for trial in October. In that request, it claimed fighting
the ongoing suit while amid an appeal unfairly hurts its business and
reputation.

“The balance of hardships tips sharply in Microsoft’s favor,” the
company’s attorneys wrote.

“Continued proceedings here would cost Microsoft a substantial sum of money … and divert key personnel from full-time tasks; would intrude on sensitive pricing decisions and strategies by OEMs, wholesalers, and retailers; and would jeopardize Microsoft’s goodwill,” they added in the filing.

Attorneys for the plaintiffs plan to file their responses next week, they told
InternetNews.com. They also expect to re-file the lawsuit to include more parties.

Efforts by Microsoft aim to stem the mounting troubles it has suffered
thus far in fighting the year-old lawsuit, which alleges that prior to
Vista’s official consumer launch, Microsoft tricked customers into buying
PCs and laptops that were incapable of running certain editions of the OS — contrary to what it had been advertising with the sticker program.

The most recent setback erupted two weeks ago, when the judge unsealed previously sealed evidence — including 158 pages of internal company e-mails and other documents.

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In addition to revealing some senior executives’ misgivings about the sticker program, the e-mails showed that at least one employee felt the sticker program had been undertaken in part to boost sales for a key
Microsoft partner, Intel (NASDAQ: INTC).

John Kalkman, Microsoft’s general manager of OEM and embedded worldwide
engineering, wrote in one of the e-mails that Microsoft deliberately
lessened the sticker program’s certification requirements to help Intel
sell more of an aging graphics chipset.

Officials at the chipmaker vehemently denied the accusation.

In a later effort at damage-control, Microsoft characterized the e-mails as part of an active discussion about how best to implement the Windows Vista Capable program.

Even so, with claims like Kalkman’s now in the open, it’s no surprise that Microsoft’s image has taken a drubbing — and that the company is now moving to regain its footing.

While it’s waiting to see whether the appeals court will overturn the suit’s class-action status, Microsoft’s attorneys also are hoping that U.S. Federal Judge Marsha Pechman will grant a stay in the proceedings to keep the lawsuit from moving forward in the meantime.

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Microsoft returns fire

The suit alleges that fears of revenue losses from slow PC sales
during the 2006 holiday season prompted Microsoft to allow sub-par PCs — unable
to run Vista’s flashy and computationally intensive Aero Glass interface —
to still qualify for the “Vista Capable” sticker.

“If they didn’t lower the [hardware] requirements on the ‘Vista Capable’ program, there weren’t going to be very many machines [available at Christmas] that could qualify,” Jeffrey Thomas, an attorney representing the plaintiffs, told InternetNews.com.

But in the company’s appeal with the Ninth U.S. Circuit Court of
Appeals, Microsoft’s attorneys blasted the ruling that gave the lawsuit class-action status.

In their filing, Microsoft attorneys said the original plaintiff — Dianne Kelley — hadn’t even realized there was a “Vista Capable” sticker on the package. They also said she had never planned to even run Vista when she bought her PC.

“As it turned out … Ms. Kelley (a) did not know about Vista before she bought her PC; (b) did not care whether her PC was Windows Vista-capable when she bought it; and (c) did not see the sticker when purchasing it,” the appeal states.

But the plaintiff’s attorneys disputed the significance of those claims.

“Vista wasn’t even available yet so they [consumers] couldn’t possibly know what they weren’t getting,” said Thomas, an attorney with the Seattle law firm of Gordon, Tilden, Thomas & Cordell LLP.

Much of Microsoft’s appeal also challenges Federal Judge Marsha Pechman’s grounds for awarding class-action status to the suit.

One of the biggest issues, Microsoft’s lawyers claim, is that
Washington state’s Consumer Protection Act does not govern sales made in other
states — although Pechman ruled it will be the governing law in the case.

“In short, Washington does not have a meaningful relationship to the
transactions of most class members, who never left their home states and
never dealt with Microsoft in connection with purchases of PCs
manufactured,
labeled, marketed and sold outside Washington,” Microsoft’s attorneys
wrote
in their request for an appeal.

Past as prologue

More broadly, the case dredges up prickly issues around how Microsoft
and
PC vendors sought to avoid a potentially disastrous 2006 holiday buying
season.

Vista had been scheduled for consumer availability after the end of the
holiday season — which, according to the suit, raised concerns at
Microsoft
and its partners that consumers may hold off on buying new PCs.

Specifically to avoid hurting sales of lower-cost PCs that lacked the
heavy-duty graphics support required for Vista’s Aero Glass interface,
Microsoft created a two-tier logo sticker program — ostensibly to alert
consumers as to which editions of Vista would run on which machines.

According to Microsoft, one of the stickers — “Vista Premium Ready” —
signified higher-end systems able to run Aero Glass, since they could
support the Windows Display Driver Model (WDDM) technology at the heart of
the graphics-intensive interface.

At the time, however, many systems on the market, particularly laptops, still contained the older Intel 915 chipset — instead of the more expensive 945 chipset,
which supports WDDM.

Consequently, Microsoft created the “Vista Capable” logo for those
lower-end PCs, signifying they would run Vista Home Basic — an edition
that
does not include Aero Glass, since those systems were generally incapable
of
running WDDM.

Despite Microsoft’s official stance that the stickers fairly advised
consumers on which systems could run Aero Glass, Seattle-area
resident
Kelley filed her suit claiming she had been mislead by the “Vista Capable”
sticker on the laptop she had purchased in advance of Vista’s availability.

A second consumer in Illinois joined the case a few months later.

Partners’ support needed

One of the reasons that Microsoft may be finding itself embroiled in
its
current predicament is that it’s primarily a software company, one analyst
said.

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To sell its products, Microsoft has to work closely with a
constellation
of partners ranging from other software companies writing Vista-compatible
software as well as PC vendors and system component manufacturers like
Intel.

Often, this means cooperating and compromising with a wide variety of
industry players, and even cajoling or intimidating partners when
necessary,
Dwight Davis, vice president at researcher Ovum Summit, told
InternetNews.com.

“It’s one more in a long list of instances where, unlike Apple,
Microsoft
doesn’t control the hardware and the software,” Davis said.

One key mistake for Microsoft might have been using too many editions
of
Vista to mollify partners and segment the consumer market, Davis added.

“You could have seen the writing on the wall that there would be
customer
unhappiness based on the size of Microsoft’s Vista portfolio,” he said. “I
don’t know whether any of this rises to the level of legal malfeasance,
though … [that’s] a question for the legal system.

Those decisions ultimately led to unhappiness even within Microsoft.
According to the company’s internal e-mails, several high-ranking employees expressed
concern with the resulting sticker program during the run-up to Christmas
2006.

Until Pechman unsealed the e-mails last month, only small portions of
them had been read aloud in court. Once the e-mails had been released,
however, the full volume of discussion — both internally and with
partners
such as Dell (NASDAQ: DELL) — surprised many industry observers.

Vista “Incapable”?

For instance, one of the recently unsealed documents, a Dell slide
presentation dated March 25, 2007 — two months after consumer editions of
Vista shipped — provided a disheartening debriefing about the logo
program.

“Customers did not understand what ‘Capable’ meant and expected more
than
could/would be delivered,” Dell employees wrote in the presentation.

According to the e-mails, even before the Vista Capable program kicked
into gear, Dell and others felt a two-tiered sticker program was bound to
confuse consumers.

Confusion struck even at the highest levels of Microsoft, with the
“Vista
Capable” program drawing the ire of Steven Sinofsky, who is now the senior
vice president for the Windows and Windows Live engineering group.

“I was in Best Buy listening to people and can tell you this one did
not
come clear to customers,” wrote Sinofsky, who was then overseeing
Microsoft
Office. “We set ourselves up.”

As it turns out, the plaintiffs’ attorneys feel similarly.

“We feel like the [unsealed] documents that have been produced pretty
much speak for themselves,” Thomas said.

Next steps: “Express Upgrade” under the microscope?

While Microsoft is attempting to reverse the lawsuit’s class-action
status, the plaintiffs’ attorneys are planning to file their responses
next
week — challenging both Microsoft’s appeal and the company’s request for
a
stay.

In addition, the plaintiffs will file an amended lawsuit next week that
seeks to add consumers who had bought into Microsoft’s “Express Upgrade”
program to the mix.

Under that low- or no-cost option, when customers bought a “Windows
Capable” PC before the Vista launch, they could get Vista Home Basic as an
upgrade once it shipped.

[cob:Special_Report]The plaintiffs sought previously to have those customers included in
the
class action as well, but Pechman ruled that the lawyers first needed to
find a representative user to join the suit who had bought into Express
Upgrade.

Fortunately for their case, Thomas told InternetNews.com that
the
plaintiffs have received “hundreds” of e-mails from Express Upgrade
customers interested in joining in the suit.

However, there is still a lot to do before the case goes to court in
earnest in October — if it gets that far.

Barring Pechman granting a stay to Microsoft, more discovery and
depositions are planned for coming weeks.

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