Microsoft Corp's proposal to give US$1 billion worth of computers to schools in poor neighborhoods to settle claims that it overcharged customers is opposed by industry groups and consumers' lawyers in five states.
Among those opposing the settlement, which will be considered at a hearing on Tuesday by a federal judge in Baltimore, are Red Hat Inc, which makes software in competition with Microsoft's Windows operating system, Minnesota Attorney General Mike Hatch and the Software and Information Industry Association.
Lawyers representing California consumers say they will ask US District Judge Frederick Motz to reject the settlement announced Nov. 20 because it would deny their clients the opportunity to seek as much as US$9 billion in damages.
"We have 13 million consumers who are relying on us to represent them," said San Francisco antitrust lawyer Eugene Crew, representing plaintiffs who sued in California state court. "The settlement is grossly inadequate."
The proposed settlement of 150 class-action suits consolidated before Motz would also apply to any pending claims that accuse Microsoft of using its Windows monopoly to charge extra money for the Windows operating system and popular software programs like Microsoft Office.
Lawyers for plaintiffs in New York, New Mexico and North Dakota also oppose the settlement. Hatch said it "further entrenches Microsoft's monopoly" and would "usurp Minnesota state court authority over state law claims."
Minnesota is one of nine states that have rejected the proposed settlement of the government's separate antitrust suit against Microsoft. Under that settlement, Microsoft would give computer makers freedom to promote rivals' software and guarantee access to the code needed for those programs to run on Windows.
Plaintiffs' lawyers who negotiated the US$1 billion settlement say it is fair because the cost of notifying each consumer would far exceed the financial damages that would be paid to anyone who bought Windows or a Microsoft application.
The lawyers submitted affidavits from economists who estimated that damages nationwide would not exceed US$8.5 billion if the plaintiffs prevailed at trial. Under this scenario, damages would range from US$1.43 for each copy of Windows 95 sold to eligible plaintiffs to US$47.83 for each copy of the Excel spreadsheet program sold in 1999, said economist Keith Leffler.
Under the settlement, the benefit to individual consumers would range from US$3.71 to US$8.25 depending on the size of the group, said economist Harvey Rosen.
"It is far better to use the settlement proceeds and benefits to provide poor schoolchildren with increased educational opportunities, rather than to distribute a check for a relatively small amount to the millions of class members," lawyers Michael Hausfeld and Stanley Chesley said in court papers.
Microsoft's competitors argue that the settlement would give the software giant an advantage in a market where it competes with Apple Computer Inc. and other makers of educational software for students in kindergarten through high school.
"If you look at the market, it is one of the few markets they don't have a monopoly in," said Matthew Szulik, chief executive officer of Red Hat, based in Durham, North Carolina.
The settlement "rewards them for their monopolistic practices" and with tax deductions "the taxpayers are paying for them to extend their monopoly into schools."
After the settlement was announced, Microsoft said it would take a US$375 million after-taxes charge on earnings for the quarter that ends Dec. 31.
Under the settlement, Microsoft would endow a private foundation with US$150 million, plus US$100 million for matching grants, to provide educational software for schools in poor neighborhoods. Microsoft would guarantee the delivery of 200,000 refurbished computers a year for five years and waive the cost of the license for Windows and other products it makes. It also would provide US$250 million in training and technical support.
In court papers, Red Hat said the settlement "establishes a new generation of Microsoft consumers, because the overwhelming exposure that students will have" will be to Microsoft products.
Distribution of Microsoft software to schools will hurt Apple and "could contribute to the monopolization of the educational market by Microsoft," Hatch said.
Apple has less than 5 percent of the market for personal computer operating systems and competes head-to-head with Microsoft in schools. Companies like Vivendi SA, The Learning Company, and Classroom Connect Inc. also sell education software.
The settlement "will have an enormously destabilizing effect on what has been until now a very vibrant and competitive educational technology market," said Ken Wasch, president of the Software and Information Industry Association, which represents Apple.
Microsoft CEO Steve Ballmer told reporters last week that Microsoft wasn't trying to increase its share of the educational software market. The company said it would provide Apple Macintosh computers if the machines are available in the market for reconditioned computers.
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