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November 21, 2001


Microsoft Aims to Settle Suits by Equipping 12,500 Schools

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Microsoft (news/quote) filed a proposal in federal court yesterday that could remove another of its legal headaches: more than 100 class- action antitrust suits contending that it overcharged consumers. The proposed deal is an innovative approach because the proceeds would not go to the customers who say they were overcharged but to more than 12,500 schools in low-income neighborhoods around the country.

Under the terms of the deal, Microsoft would be required to provide cash, training and support to help put computing services into disadvantaged schools with nearly seven million students. The five-year program would cost Microsoft at least $550 million and possibly far more. The deal is championed by a pair of leading class- action lawyers, Stanley M. Chesley of Cincinnati and Michael D. Hausfeld of Washington.

The plaintiffs' lawyers behind the settlement and executives of Microsoft hailed the proposed deal as an inventive way to end costly litigation while helping to narrow the "digital divide."

But the settlement plan faces resistance from some lawyers in California who say they represent 13 million overcharged personal computer users in their state.

The California lawyers will oppose the settlement in court next Tuesday. They say that the deal is cleverly altruistic, but that its main beneficiary would be Microsoft. The cost would be tiny compared with Microsoft's potential liability, they contend. And the nearly unlimited donations of Microsoft software to eligible schools, they add, would serve to create an even larger market in the future for the company's products because students would be introduced to computing by using Microsoft products, like Windows, Word and Excel.

"With this settlement, Microsoft gets off dirt-cheap," said Eugene Crew, a partner of Townsend & Townsend & Crew, a law firm in San Francisco, "and it helps Microsoft perpetuate its monopoly."

In the federal court in Baltimore where the Microsoft class-action cases are being considered, Mr. Crew will present next week the analysis of Jeffrey K. MacKie-Mason, an economist at the University of Michigan who estimates that class members in California alone suffered damages of $3 billion to $9 billion from 1994 to 1999. Nationally, the overcharges by Microsoft were $15 billion to more than $40 billion, according to the economic estimate.

Mr. Crew said he hoped to persuade Judge J. Frederick Motz of Federal District Court in Baltimore to reject the proposed settlement. If not, he added, "our case is still alive" in a California Superior Court.

Yet the proposed settlement, some details of which were first reported yesterday in The Wall Street Journal, promises a stream of money and technology to schools and would probably have great appeal. The plaintiffs' lawyers backing the settlement will present a economist who is a Nobel laureate to defend the wisdom of their approach: Joseph E. Stiglitz, a professor at Columbia University.

Microsoft lawyers said they expected some opposition to the settlement. But if Judge Motz approves the pact, they said, they expect the remaining suits in state courts to fade.

Steven A. Ballmer, the chief executive of Microsoft, said that the settlement would "avoid long and costly litigation for the company and really make a difference in the lives of children in some of America's most disadvantaged school districts."

The proposed class-action settlement comes a few weeks after the Justice Department and half of the 18 states suing Microsoft agreed to a settlement in the federal antitrust case. Mr. Ballmer said he was optimistic that the remaining state attorneys general would join in this season of settlement.

The plaintiffs' lawyers who engineered the settlement said they had taken the approach of a donation to schools after determining that each individual member of the class might get $10 or so after all administrative and legal fees had been paid. "It was really a matter of practicalities," said Mr. Hausfeld, a partner in Cohen, Milstein, Hausfeld & Toll.

So what had been a "public benefit" provision in early rounds of negotiations eight months ago became the foundation of the settlement.

"We have provided a major solution to the digital divide in our country," said Mr. Chesley, a partner at Waite, Schneider, Bayless & Chesley.

Under the settlement plan, Microsoft would help set up a national foundation that would give grants to schools to purchase computers and software. Microsoft would begin the foundation with $150 million in cash and would provide up to an additional $100 million if those funds were matched by other donors. Two of the foundation's five board members would be selected by the plaintiffs' lawyers, two by Microsoft and one by the court.

Microsoft would also supply $160 million for a technical support fund overseen by the foundation to help schools use the computer hardware and software, and it would provide $90 million to train teachers and administrators.

The company would also establish a computer refurbishment plan that would make 200,000 computers both Windows and Macintosh computers available to schools each year for five years. Each refurbished machine would cost a school no more than $50.

Microsoft would also donate software upon request to eligible schools, from kindergarten through high school. Based on Microsoft's standard prices for schools, the value of the software could exceed $500 million, according to the company.

Because the grants could be used for Macintoshes and competing software, Microsoft said, the settlement would not be intended to give the company an even greater advantage in the marketplace. Microsoft does make a lot of software that runs on Macintosh machines, including the Office programs and much of its Magic School Bus software.

The liberal software donation program would certainly tend to favor Microsoft. An Apple spokeswoman had no comment on the proposal.

Adding in its estimated value of donated software, Microsoft put the value of the settlement at more than $1 billion. But if the court approved the agreement, the company would take a $550 million pretax charge against earnings this quarter. After taxes, the charge would be $375 million, or less than 7 cents a share.

The schools eligible for aid from the settlement would be those in which 70 percent of the students qualify for federal free-lunch programs; that would cover about 14 percent of the students in public schools. The beneficiaries would be in all 50 states.

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