THE MICROSOFT CASE

Gateway Executive Says Microsoft Has Used Settlement to Its Advantage By NICHOLAS KULISH Staff Reporter of THE WALL STREET JOURNAL WASHINGTON -- A top Gateway Inc. executive told a federal judge that Microsoft Corp. has tightened its grip on the computer industry in the months since the Bush administration settled its antitrust case against the software maker. "Microsoft has used the [settlement] to compel financial and other benefits it did not have under previous agreements with Gateway," Anthony Fama, an attorney for Gateway, testified in U.S. District Court here Monday. The Justice Department settled its antitrust case last November, pending approval of the deal by Judge Colleen Kollar-Kotelly. At the same time, she is presiding over the related case through which nine states that refused to settle with the Justice Department are seeking tougher remedies. The states argue that the settlement is ineffective against the monopoly abuses found by a federal appeals court last June. Mr. Fama said Microsoft had used the agreement to force computer makers to accept new contracts that contained more onerous terms than before the settlement, even though the company had been found in violation of the Sherman Antitrust Act. According to Mr. Fama, the new contracts allow Microsoft to terminate agreements with little or no notice and permit the company to infringe on PC makers' patents without compensation. New agreements also could force Gateway and others to pay Windows operating-system royalties on returned computers and potentially even on hardware shipped without an operating system, he said. Microsoft challenged portions of his testimony, asking that they be stricken as outside the scope of the proceeding, but Judge Kollar-Kotelly allowed Mr. Fama's written direct testimony to be entered into the record. In his challenge, Microsoft's lead trial attorney, John Warden, said one of the criticized provisions "had been a standard term in Microsoft's Windows license agreements since at least 1995." Microsoft's relationship with computer makers has been central to the antitrust case from the start. Without Microsoft's operating system on which to run programs, PC makers can't sell their computers. And with the tight profit margins in the industry, even slight price differences can make or break a company. That leverage gave Microsoft the power to demand that PC makers leave rival software like the Netscape Navigator Web browser off their computers, evidence in the earlier trial showed. Even with a new volume-based uniform pricing system agreed to in the Justice Department settlement, Mr. Fama said Microsoft still appeared to favor the most cooperative computer makers. In cross-examination, Microsoft attorney Richard Pepperman asked Mr. Fama about those uniform pricing terms. Mr. Pepperman said the company already had conformed to guidelines for listing prices on a closed Web site for the top 20 PC makers. A former Gateway executive, Peter Ashkin, testified before the court last week, but attorneys for Microsoft linked his testimony to his current employer, competitor AOL Time Warner Inc. Earlier in the day, Microsoft attorneys cross-examined Michael Tiemann, the chief technology officer at Red Hat Inc. The upstart software company distributes the Linux operating systems, which powers a small fraction of the PC market Microsoft dominates. Mr. Tiemann testified that Microsoft had made it more difficult for computers with different operating systems to work together, discouraging equipment manufacturers from selling rival technologies. Lawyers for Microsoft questioned Mr. Tiemann about Red Hat's business practices, suggesting that it was the company's own failure to meet demands and provide products and standards requested by PC makers that kept their market share relatively small.