Microsoft Case Holdouts Are in Cross Hairs

Attorneys general in the nine states that have refused to settle the landmark Microsoft Corp. antitrust case are finding themselves in the political hot seat, caught in the middle of a lobbying battle between the software company and its opponents.

In California, a Microsoft ally and key state legislator who helps oversee the state’s budget wrote Atty. Gen. Bill Lockyer last week, questioning the wisdom of continuing to fund the lawsuit amid the state’s budget shortfall.

Connecticut Atty. Gen. Richard Blumenthal was blasted Thursday in a Hartford Courant opinion piece for “sabotaging” the settlement. The article was written by a local professor who has worked as a consultant for Microsoft.

And Utah’s attorney general has received nearly three dozen letters from state Republicans urging him to settle. He suspects that many were prompted by Microsoft, which last year started giving generously to Republican causes.

Hardball lobbying tactics at the state level are nothing new in the long-running Microsoft case.

In its efforts to combat the antitrust lawsuit, the Redmond, Wash., software behemoth has dispatched lobbyists nationwide, funded letter-writing campaigns, planted op-ed pieces and contributed to state officials.

Microsoft rivals, including AOL Time Warner Inc., Sun Microsystems Inc. and Oracle Corp., have been equally active. They are paying close attention to the nine states–California, Connecticut, Florida, Iowa, Kansas, Massachusetts, Minnesota, Utah and West Virginia–that did not join in a settlement last week with the U.S. Justice Department and nine other states.

Attorneys general in the holdout states are bracing for a renewed lobbying campaign in the few weeks before they tell a federal judge how they want to restrict Microsoft’s future conduct. But they vow they won’t be intimidated by either side.

“I will make a decision based on the merits, not on the number of letters or phone calls I get,” Blumenthal said.

Microsoft officials said they are simply trying to educate the public and state leaders about the benefits of the proposed settlement and respond to criticism.

“Our efforts to educate on this agreement are simply a necessary response to a continued campaign waged by our competitors, who are dead set against any settlement, no matter how fair and reasonable it may be,” Microsoft spokesman Jim Desler said.

A source familiar with Microsoft’s plans said the company expects to target the nine states with a multi-prong campaign that will use a variety of individuals and organizations to raise questions about the use of taxpayer money to continue the lawsuit.

In California, the letter from Assemblyman George Runner Jr. (R-Lancaster) hits squarely on that theme, though he denies that Microsoft asked him to send it.

“The lawsuit could cost the state millions of dollars,” Runner wrote. “At a time when we should be stimulating the economy, it is unwise for the state of California to pursue a lawsuit that could stifle innovation and consumer choice. “

Runner’s comments suggest there may be a legislative battle next year over Lockyer’s antitrust budget.

The Democrat defended his decision against joining the settlement, singling out the agreement’s failure to include an admission of wrongdoing by Microsoft. That gap will make private litigation by Microsoft’s victims harder and could hamstring official enforcement proceedings.

“Maybe we need to create a 12-step program for their executives, where they start each morning saying, ‘I am a monopolist, I am a monopolist, I am a monopolist,”‘ Lockyer joked. “When they continue to deny any wrongdoing, it makes you worry that they aren’t going to change.”

Lockyer is getting plenty of support from Microsoft’s foes. This summer, Oracle gave Lockyer $25,000, state records show. The company also contributed $25,000 to Lockyer last year.

Lockyer said he wasn’t influenced by the contributions, a small part of the nearly $4 million his political committee has on hand.

Oracle spokesman Ken Glueck said the firm gave funds to Lockyer and others in California because it’s the state’s largest software firm, with big state contracts.

“If our interest was in perpetuating this lawsuit, you would see campaign contributions in 17 other states,” Glueck said. But Lockyer is the only state attorney general to have received Oracle money in the last election cycle, he said.

Microsoft and its opponents also are active in Florida, which remains a key battleground state because Atty. Gen. Robert A. Butterworth, a Democrat, has not made a final decision about the settlement.

Microsoft and its foes are optimistic that Florida will join their side, sources in both camps said.

One pro-Microsoft group, Citizens for a Sound Economy–which targeted Butterworth with a letter-writing campaign last year–said it is mobilizing in case Butterworth doesn’t sign the settlement.

“We have not turned up the pressure at this stage of the game,” said Slade O ‘Brien, an organizer at the group’s Florida office. “We’re waiting to see where his head is at. But if it is not where we think it should be, we’ll let him know.”

Butterworth declined to comment.

The battle for Utah also was fierce. Atty. Gen. Mark Shurtleff ultimately decided to join other states in proceeding with the lawsuit.

Pressure from all sides intensified over the last two weeks before a decision was made, he said, with a flurry of phone calls, letters and visits from Microsoft, its supporters and its foes, including Orem-based Novell Inc., one of Utah’s leading technology companies.

Shurtleff, a Republican, said he has never before received so many letters and calls from local elected officials, mostly Republican state legislators, lobbying him about the antitrust matter.

“It was pretty obvious that there was an effort made by someone to have people who know me send letters about this,” Shurtleff said. He suspects Microsoft was behind the effort because it previously funded similar letter-writing campaigns.

Shurtleff’s decision to keep fighting was a disappointment to Microsoft, which had been counting on Utah to fall its way.

Last year, Microsoft gave $5,000 to Shurtleff’s campaign, making him Utah’s only statewide official to receive campaign contributions from the firm, according to state records. Microsoft gave an additional $23,000 to the Utah Republican Party and related causes.

“It was a very tough decision,” Shurtleff said. “But it boiled down to the rule of law. A remedy must stop the illegal conduct and restore competition. The settlement does neither.”

In Connecticut, Microsoft supporters already are moving to rally public opinion.

Blumenthal was attacked last week in an opinion article penned by Leonard Orland, a University of Connecticut law professor who has worked for Microsoft as a consultant.

The Hartford Courant piece, entitled “Earth to Blumenthal,” accused the attorney general of “bad judgment,” “grandstanding” and “histrionics.”

Blumenthal, a Democrat, declined to comment on the article. He said he has made no final decision about whether he will sign the settlement but is leaning toward proceeding with the lawsuit.

In other states, Microsoft may be offering a carrot rather than a stick.

Microsoft officials informed Kansas three weeks ago that it was raising the state’s Windows licensing fee by $15 million a year. The price hike was part of Microsoft’s controversial new licensing program for large customers.

The state’s attorney general, Republican Carla J. Stovall, said the price hike was not a factor in her decision to refuse to sign the settlement, though she said it angered many of the state’s leaders, who had to scramble to find money to cover the unexpected new cost.

Last week, a couple of days after Stovall refused to sign the settlement, Microsoft informed Kansas officials that the fee hike would be cut to $5 million.

Stovall, who is running for governor next year, said the price cut would not reduce her support for the lawsuit.

“They are totally separate issues,” Stovall said.

A Microsoft spokesman said the reduced fee was not related to the litigation. He noted that Microsoft recently pushed back the deadline for when its large customers must shift to the new licensing program.

Massachusetts Atty. Gen. Tom Reilly, a Democrat, became the first state official to publicly attack the proposed settlement.

Then an official at a technology trade group called the Massachusetts High Technology Council suggested in a newspaper article that a settlement was more business friendly and would be better for the state’s economy.

The comments set off a firestorm of complaints from some members of the tech council, including Sun Microsystems, which opposes the settlement, and IBM Corp. Microsoft is not a member.

The council quickly pulled back from the statements, saying the official was new and had misspoken. The council has no formal position on the Microsoft settlement, its president said.

In West Virginia, Atty. Gen. Darrell McGraw Jr., a Democrat, expects more pressure to come in the next few weeks as Microsoft redeploys its troops to focus on the holdouts.

“We have received a lot of material accusing us of wasting taxpayer money and being against free enterprise and on and on,” McGraw said. “Lobbyists have inordinate powers with legislators, and some are just bald captives.”

Minnesota Atty. Gen. Mike Hatch attributes at least two recent events to the hidden hand of Microsoft: a call from a state legislator asking how much he was spending in pursuit of the case and a Boondoggle Award from a taxpayer group citing the suit.

“It doesn’t really have any effect on me,” Hatch said. The Democrat noted, with relief, that his budget doesn’t come up for review by lawmakers for 18 months.