Microsoft 2002 Annual Report Download - page 49

MSFT 51 / 2002 FORM 10-K
Part II
Item 8
The Judgment was stayed pending an appeal. On June 28, 2001, the U.S. Court of Appeals for the District of Columbia Circuit affirmed in part, reversed in
part, and vacated the Judgment in its entirety and remanded the case to the District Court for a new trial on one Section 1 claim and for entry of a new
judgment consistent with its ruling. In its ruling, the Court of Appeals substantially narrowed the bases of liability found by the District Court, but affirmed
some of the District Court’s conclusions that Microsoft had violated Section 2. On October 12, 2001, the trial court held a status conference and entered
orders requiring the parties to engage in settlement discussions until November 2, 2001. Microsoft entered into a settlement with the United States on
November 2, 2001. Nine states (New York, Ohio, Illinois, Kentucky, Louisiana, Maryland, Michigan, North Carolina and Wisconsin) agreed to settle on
substantially the same terms on November 6, 2001. A hearing on the settlement was held by the Court on March 6, 2002. The Court will now decide whether
to approve the settlement as being in the public interest. Nine states and the District of Columbia continue to litigate the remedies phase of U.S. v. Microsoft.
The non-settling states are seeking imposition of a remedy that would impose much broader restrictions on Microsoft’s business than the proposed
settlement with the DOJ and nine other states. The Court conducted an evidentiary hearing related to the non-settling states’ proposed remedies from March
18 to June 19, 2002. A decision is anticipated later in calendar 2002.
In other ongoing investigations, the DOJ and several state Attorneys General have requested information from Microsoft concerning various issues. In
addition, the European Commission has instituted proceedings in which it alleges that Microsoft has failed to disclose information that Microsoft competitors
claim they need to interoperate fully with Windows 2000 clients and servers and has engaged in discriminatory licensing of such technology, as well as
improper bundling of multimedia playback technology in the Windows operating system. The remedies sought, though not fully defined, include mandatory
disclosure of Microsoft Windows operating system technology and imposition of fines. Microsoft denies the European Commission’s allegations and intends
to contest the proceedings vigorously.
A large number of overcharge class action lawsuits have been initiated against Microsoft in various state and Federal courts. These cases allege that
Microsoft has competed unfairly and unlawfully monopolized alleged markets for operating systems and certain software applications and seek to recover
alleged overcharges that the complaints contend Microsoft charged for these products. Microsoft believes the claims are without merit and is vigorously
defending the cases. To date, Microsoft has won dismissals of all claims for damages by indirect purchasers under Federal law and in 17 separate state court
proceedings, of which seven have been affirmed and one has been reversed. Claims on behalf of foreign purchasers have also been dismissed. Appeals of
several of these rulings are still pending. No trials or other proceedings have been held concerning any liability issues. Courts in several states have ruled
that these cases may proceed as class actions, while two courts have denied class certification status to the claims in that state proceeding and another has
ruled that no class action is available for claims in that state. In fiscal 2002, the Company recorded a contingent liability of approximately $660 million
representing management’s estimate of the costs of resolving the contingency. Management’s contingent liability estimate is based upon a proposed
settlement between Microsoft and lead counsel for the Federal plaintiffs. While the proposed settlement was not approved by the District Court, management
believes that the proposal represents the best estimate of the costs of resolving the contingency based on currently available information. The Company
intends to continue vigorously defending these lawsuits.
Netscape Communications Inc., a subsidiary of AOL-Time Warner Inc., filed suit against Microsoft on January 22, 2002 in Federal court in the District of
Columbia, alleging violations of antitrust and unfair competition laws and other tort claims relating to Netscape and its Navigator browser. The complaint
includes claims of unlawful monopolization or attempted monopolization of alleged markets for operating systems and Web browsers, illegal tying of
operating systems and browsers, and tortuous interference with Netscape’s business relations. Netscape seeks injunctive relief, unquantified treble damages
and its fees and costs. Microsoft denies these allegations and will vigorously defend this action. The case has been transferred for pretrial purposes to the
District Court in Baltimore, Maryland and is being coordinated with the overcharge class actions described above.
Be Incorporated, a former software development company whose assets were acquired by Palm Incorporated in August 2001, filed suit against Microsoft
on February 18, 2002 in Federal court in San Francisco, alleging violations of Federal and state antitrust and unfair competition laws and other tort claims. Be
alleges that Microsoft’s license agreements with computer manufacturers, pricing policies, and business practices interfered with Be’s relationships with
computer manufacturers and discouraged them from adopting Be’s own operating system for their products. Be is seeking unquantified treble and punitive
damages for its alleged injuries along with its fees and costs. Microsoft denies these allegations and will vigorously defend this action. The case has been
transferred for pretrial purposes to the District Court in Baltimore, Maryland and is being coordinated with the overcharge class actions described above.
On March 8, 2002, Sun Microsystems, Inc. filed suit against Microsoft alleging violations of Federal and state antitrust and unfair competition laws as well
as claims under the Federal Copyright Act. Sun seeks injunctive relief and unspecified treble damages along with its fees and costs. Microsoft denies these
allegations and will vigorously defend this action. The case has been transferred for pretrial purposes to the District Court in Baltimore, Maryland and is being
coordinated with the overcharge class actions described above.
On June 3, 2002, Microsoft and the Securities and Exchange Commission entered into an administrative settlement resolving a non-public investigation
of certain of Microsoft’s accounting and record keeping practices during fiscal years 1995 through 1998 (SEC File No. 3-10789). The settlement provides that
Microsoft will not violate securities regulations that require companies to make accurate filings and maintain sufficient records and controls. The settlement
has no impact on the Company’s financial results.
The Company is also subject to a variety of other claims and suits that arise from time to time in the ordinary course of its business.
Management currently believes that resolving all of these matters will not have a material adverse impact on the Company’s financial position or its
results of operations.