Federal judge rejects Microsoft settlement: Deal would have channeled $1 billion to poor students

1/22/02 – A federal judge has rejected the proposal by Microsoft Corp. to donate $1 billion worth of computers and software to the nation's poorest public schools.

U.S. District Judge J. Frederick Motz ruled Jan. 11 in Baltimore that the proposal was unacceptable because it would give Microsoft an unfair advantage over Apple Computer, which has a large stake in the education market.

The settlement, reached in November, was to have resolved more than 100 private class-action suits that accused Microsoft of overcharging customers for Windows, Office, and other software.

Because the company estimated that customers would receive compensation of only $10 or $15 each, it proposed creating an educational foundation to channel as much as $1 billion to K-12 schools. The company offered to donate $500 million in cash and provide software, refurbished computers, training, and technical support to schools that serve poor children.

Although the settlement said schools could use money from the foundation to purchase Apple products, Apple's attorney argued at a hearing in November that the agreement encouraged schools to acquire more Microsoft products.

While the agreement seems to be "platform neutral," Motz says, "it appears to provide a means for flooding a part of the kindergarten through high school market, in which Microsoft has not been the strongest player (particularly in relation to Apple), with Microsoft software and refurbished PCs."

He says 95 percent of computers donated by government, business, or other agencies are PCs that use Microsoft's Windows operating system.

The judge also said he couldn't approve the agreement because there was such a wide disparity in the estimated value of the claims being settled. Microsoft had argued its liability could have been as little as $200 million, while some economists testifying for the plaintiffs estimated the company's liability to be more than $18 billion.

Opponents of the settlement also said the value of the software Microsoft was planning to donate also was inflated because the actual cost to the company was very little.

An economist retained by a group of dissident California plaintiffs who opposed the settlement said the software was worth $705 million, while an economist retained by Microsoft said it could be worth as much as $1.6 billion.

The ruling by Motz calls the proposed foundation "critically underfunded."

Noting that "school boards and administrators typically budget $3 of support and training for every $1 of technology acquisition," Motz says, under the agreement, Microsoft proposed contributing between $650 million and $750 million for technology acquisition and only $250 million for technical support and professional development.

While Motz rejected the terms of the settlement, he made it clear that he doesn't object to this kind of innovative approach to resolving the lawsuits.

He suggested a similar deal might pass muster if the foundation were sufficiently funded and there were no adverse effects on competition.

Both sides said they will resume litigation but left the door open for further negotiations.