Microsoft agreed on Friday to pay IBM US$775 million to settle claims growing out of the antitrust lawsuit brought by the US Justice Department against Microsoft in 1995. IBM will also receive a US$75 million credit toward the use of Microsoft software.
The settlement is one of the largest in a series of settlements Microsoft has struck in its effort to resolve its legal troubles after Judge Thomas Penfield Jackson of US District Court in Washington ruled in 2000 that it had engaged in anticompetitive practices.
IBM, in negotiating a settlement with Microsoft, held back from filing a lawsuit of its own. Indeed, the rival companies have recently become partners in some areas. For example, Microsoft will use IBM microprocessor chips in its new game console, the Xbox 360, which is scheduled to be introduced this fall.
Microsoft executives said the settlement with IBM addressed all discriminatory pricing and overcharge claims growing from the federal antitrust case, including claims related to the IBM OS/2 operating system and SmartSuite products. Under the deal, IBM agreed to defer consideration of filing claims related to IBM's server hardware and server software business for two years.
"It's an important milestone for us that marks the end of a significant effort," said Brad Smith, Microsoft's chief counsel.
Scott Brooks, an IBM spokesman, said the company was pleased to "resolve this amicably without having to go to greater extremes, and we're looking ahead."
Executives at the companies said settlement negotiations began in November 2003 and were stepped up in the last two months because "tolling agreements" that extended the statue of limitations on claims related to the federal antitrust case were set to expire this month.
The claims first emerged in the late 1980s when Microsoft and IBM agreed to develop the OS/2 operating system, which was intended as a replacement for MS-DOS, the original operating system for the IBM PC. In November 1989, the two companies publicly agreed to develop OS/2 first for high-end computing systems with more than four megabytes of memory. Microsoft, however, proceeded to develop its Windows operating system as an alternative for business customers, undercutting the agreement.
Microsoft's strategy affected not only IBM, but software makers like Lotus Development, which initially developed its software for OS/2 and not Windows.
Jackson's ruling found that "from 1994 to 1997 Microsoft consistently pressured IBM to reduce its support for software products that competed with Microsoft's offerings, and it used its monopoly power in the market for Intel-compatible PC operating systems to punish IBM for its refusal to cooperate."
Andrew Gavil, a law professor at Howard University, said that Microsoft had managed to resolve many of its legal troubles without radically altering its conduct.
"It's paying for peace," Gavil said, "but it's not changing its behavior in any significant way."
In recent years, Microsoft has spent more than US$3 billion settling lawsuits by its rivals, including a US$1.6 billion deal with Sun Microsystems last year and a US$750 million deal with America Online, part of Time Warner, in 2003.
In April Microsoft agreed to settle claims with Gateway Computer arising out of the government's antitrust suit for US$150 million. Microsoft said earlier that it would place US$550 million in reserve for further antitrust-related claims.
The company said on Friday that it would describe how it would account for the IBM settlement when it reports its quarterly financial results in July.
"This is just cleaning up the remaining mess on the floor," said Robert Litan, a senior fellow at the Brookings Institution and a former Justice Department prosecutor.
Litan also noted that while Microsoft's software monopoly in the home PC market has remained durable despite the federal antitrust ruling, the rise of the Linux operating system, which is freely distributed, has proven a powerful counterweight to Microsoft's power in the corporate server market.
"You cannot underestimate the impact of Linux" on the computing industry in recent years, Litan said.
Microsoft also settled with Novell in November last year for US$536 million for claims related to the antitrust case; however, Novell has since filed a second antitrust suit against Microsoft related to its WordPerfect word-processing software application.
Microsoft is also facing a lawsuit by RealNetworks over its Windows Media Player software and is appealing a US$600 million antitrust ruling brought by European regulators.
As part of the ruling in 2000, Jackson ordered that Microsoft be broken into two companies to curb its monopolistic practices. But the next year, the new Bush administration decided not to seek a breakup, and the Justice Department settled the case in 2002.
Shares of IBM shares rose US$0.47 on Friday, to close at US$74.67. Microsoft shares declined US$0.13, to close at US$24.71.
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