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Into the Briar Patch: Microsoft’s Self-Serving Settlement

Often lost in the news surrounding the state and federal antitrust lawsuit against Microsoft is the fact that numerous other private class-action lawsuits have been filed against Microsoft. These private lawsuits allege that Microsoft overcharged for its software, and they were bolstered by (or indeed engendered by) the Appeals Court ruling that Microsoft did indeed maintain a market monopoly in desktop operating systems through anti-competitive actions (see "Playing Monopoly," our collection of articles on the Microsoft antitrust case).


On 20-Nov-01, attorneys for some of the class-action plaintiffs and Microsoft proposed a bold settlement for all of the private class-action lawsuits; in short, the company would over five years spend an estimated $1 billion to equip some 12,500 of the nation’s poorest schools with software and computers and to train teachers. It sounds like a great deal, especially if you agree with the lawyers who say that due to the huge number of class-action plaintiffs (about 65 million), the damages would probably work out to be less than $10 per person.

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Unfortunately, as much as the proposal would no doubt help schools, it creates a situation where Microsoft isn’t so much paying a penalty for monopolistic abuses, but is instead being allowed to spend $1 billion to extend their reach into the hotly contested education market, where Apple claims a nearly 50 percent market share. Apple filed a brief arguing that the settlement would merely further Microsoft’s monopoly power, and Apple CEO Steve Jobs has been widely quoted saying, "We’re baffled that a settlement imposed against Microsoft for breaking the law should allow, even encourage, them to unfairly make inroads into education – one of the few markets left where they don’t have monopoly power."


It’s difficult to tease out exactly what the proposal entails, but reports include Microsoft donating $150 million for schools to use to purchase hardware or software, up to $100 million matching other donations, $160 million for technical support, and $90 million to train teachers. Microsoft would also make 200,000 refurbished computers available to schools for no more than $50 each, and would donate a free Windows license for each new or refurbished computer provided.

Although schools would be allowed to spend the money on non-Microsoft products, Microsoft has conceded that those who utilize Microsoft products will receive more resources, such as free software and training. (Some wags have suggested that Microsoft should be required to provide all Apple equipment and software.) Plus, it seems likely that Microsoft’s overt presence in the education market would become increasingly pervasive, creating a situation where schools felt even more pressure to purchase PCs with Windows over other alternatives, such as Macs or even PCs running Linux.

Criticism has come from educators too, with some expressing concern the proposal could derail years of technology planning already in place rather than providing funding for existing plans. Other concerns revolve around the refurbished computers, which could be too underpowered to be worthwhile with current software, and the amount earmarked for support, which can be particularly expensive with PCs and older computers in general.

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More generally, there’s a question of how this settlement punishes Microsoft for overcharging consumers, lacking as it does any conduct restrictions, pricing changes, or direct payments to the aggrieved parties.

U.S. District Judge J. Frederick Motz listened to arguments from plaintiff’s lawyers and Apple on 27-Nov-01, but after time ran out, scheduled additional time on 10-Dec-01 for Microsoft’s presentation. The case has become extremely complex, and along with the settlement, there are also issues surrounding how the roughly 100 lawsuits were combined, how some of them were dismissed under Illinois Brick (a 1977 Supreme Court decision that determined that indirect purchasers of a product cannot sue manufacturers directly), and how all this affects those lawsuits from California, where state law explicitly allows indirect purchasers to sue manufacturers directly.

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In general, I approve of the effort to settle the class-action lawsuits, if for no other reason than to end all this litigation, the primary beneficiaries of which are always the lawyers. And as much as the current proposal is fatally flawed, the basic concept of funneling vast sums of money to education rather than giving a pittance (which could very well end up in the form of a discount off a Microsoft product) to each of the individual plaintiffs isn’t a bad one – if the lawyers on both sides can come up with a revised settlement proposal that meets the real-world needs of educators and doesn’t further Microsoft’s monopoly at the expense of competitors like Apple.

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