Microsoft facing $1.1bn bill in California lawsuit settlement

Microsoft said late last Friday that it has settled a California class action lawsuit for up to $1.1bn, a move that would end the largest suit of the kind against the giant software company.

The settlement, which arose from claims that Microsoft unlawfully wielded its Windows monopoly to overcharge consumers for the operating system, allows individuals and businesses in California who bought Microsoft products during a five-year period to apply for vouchers with values of $5 to $29. The vouchers can be used to buy most hardware or software products from any manufacturer.

Although the maximum value of the settlement is $1.1bn, Microsoft could end up paying as little as $367m in cash to California public schools. If all vouchers are claimed, Microsoft pays the maximum.

The payout depends on how many customers make claims.

"Eighty per cent of the [Windows] licences were licensed to businesses in California," said Richard Grossman, a partner at San Francisco law firm Townsend and Townsend, which brought the suit. "Businesses are likely to have thousands, if not hundreds of thousands, of dollars in claims. Even the smallest business, with 10 or 20 computers, will have a substantial claim."

Grossman said a firm with 400 desktop computers might expect vouchers totalling $25,000.

The lawsuit, filed in February 1999, claimed Microsoft violated California anti-trust laws by overcharging by as much as $40 for every copy of Windows 95 and 98. Microsoft dominates the desktop marketplace, and a federal judge ruled in November 1999 that the company violated US anti-trust laws.

"This settlement represents a refund of nearly 30 per cent of all money that California businesses and consumers paid for Microsoft products over a seven-year period," Grossman said. "That is a gigantic refund."

In a conference call late on Friday, Microsoft said it would disclose the settlement's expected financial impact in an earnings telephone call on 16 January.

"We believe that this agreement makes a significant step forward to resolve our anti-trust legal issues," Microsoft General Counsel Brad Smith said.

The case, which covers more than 50 million product licences, was set to go to trial before California Superior Court Judge Paul Alvarado on 24 February. The agreement is subject to Alvarado's approval.

The settlement affects individuals and businesses in California that purchased Windows or certain Microsoft application software between 18 February 1995 and 15 December 2001.

They will have a four-month period, beginning when the judge approves the settlement, to claim the vouchers, which can be used for laptop, desktop or tablet computers and related software from Microsoft or other companies. The vouchers will be valid for four years.

Of the money that is not claimed by people seeking vouchers, one-third will be retained by Microsoft. Two-thirds of the unclaimed money will go to California public schools in a mix of donated Microsoft software and cash grants.

Townsend and Townsend's attorneys fees are not included in the settlement figure and will be set by the judge. Microsoft is also liable for those fees.

Similar class action lawsuits against Microsoft are pending in 16 state courts: Arizona, New Mexico, Kansas, South Dakota, North Dakota, Minnesota, Iowa, Wisconsin, Tennessee, Mississippi, Florida, West Virginia, Montana, North Carolina, Massachusetts and Vermont. Another is pending in the District of Columbia.

Legal observers had expected the California suit to be particularly difficult for Microsoft to defend, since the state has a law allowing indirect purchasers of Windows software - end users who are consumers and businesses - to file lawsuits alleging unfair competition. Most other states allow only direct purchasers of Windows licences, namely computer makers, to sue.

Other class-action lawsuits that were filed in federal court have been consolidated in Baltimore before US District Judge J Fredrick Motz, who in January 2002 rejected a proposed settlement under which Microsoft would have given $1bn in money, software, services and training to about 12,500 underprivileged public schools.

Microsoft isn't the first technology company to pay large sums after finding itself a class-action defendant. In 1999, Toshiba settled a billion-dollar class-action lawsuit that arose from claims that the company sold notebooks with defective floppy drives. Immediately after the settlement, the same lawyers that pursued Toshiba sued Compaq Computer, Emachines, Hewlett-Packard, NEC and Packard Bell NEC.

Declan McCullagh writes for CNET News.com.