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Microsoft Conduct Is Challenged Again

As it pushes to settle other antitrust suits, Microsoft Corp. faces new, potentially damaging allegations about its business conduct in a patent-theft and monopolization case pending in a federal court in Baltimore.

In a court filing unsealed late Monday, a small Silicon Valley software company called Burst.com Inc. alleges that Microsoft routinely destroyed much of its internal e-mail despite the many federal investigations and private suits it has faced in recent years, when it was often under court orders to preserve such communications.

Burst.com, whose early investors included the Irish rock band U2, filed its suit two years ago. It charges that Microsoft used Burst’s digital-media technology in Windows, solving a technical problem that was slowing the acceptance of Internet video. Burst also claims that Microsoft tried to patent the technology after a technical briefing from Burst, and altered Windows so that Burst’s product wouldn’t work. Microsoft denies the charges.

Wsj_msoft11162004211302These claims and documents unsealed in pretrial proceedings suggest that Microsoft continued to use some of the same bareknuckle tactics described in the U.S. government’s 1998 antitrust case, which was settled by the Bush administration in 2001.

Microsoft has moved aggressively since then to settle remaining cases, paying a total of more than $3 billion in consumer lawsuits and to rivals Sun Microsystems Inc., Time Warner Inc., as well as $536 million to Novell Inc. last week. It also has paid a $600 million fine to European regulators.

"As we’ve said from the start of the case, Burst’s claims are without merit, and the technology at issue is based on Microsoft’s own work and innovation," a Microsoft spokeswoman, Stacy Drake, said yesterday. She said that Burst "is using the issue of e-mail to obscure the real points of this case."

The document-destruction allegations emerged following Burst’s claim earlier this year that internal e-mails needed for the case were missing from Microsoft files. Microsoft later admitted that some e-mails were missing, blamed an outside contractor and subsequently provided more documents. U.S. District Judge Frederick Motz has ordered Bill Gates, Microsoft’s chairman, and Jim Allchin, its top Windows executive, to be questioned under oath in the case.

In the newly unsealed filing, Burst outlines what it says is a previously undisclosed Microsoft policy of deleting most e-mails. While such a policy isn’t illegal, companies are required to save relevant e-mails and documents if they face federal investigation or private lawsuits. In the filing, Burst alleges that Microsoft misled Justice Department lawyers in 2002 to conceal the e-mail-destruction practice, and in several instances didn’t save e-mails from executives who were crucial to U.S. inquiries and private suits.

A senior Microsoft executive exhorted Windows developers in a January 2000 e-mail, "I mean this — purge every 30 days," just weeks after a federal judge found in the Justice Department’s earlier case that Microsoft was a monopoly and had violated antitrust law. Amplifying the point, Mr. Allchin — who had faced tough cross-examination at the earlier trial, based on some of his own e-mails — followed up with an e-mail to the entire Windows group: "This is not something you get to decide. This is company policy," he wrote. "Do not archive your mail. Do not be foolish. 30 days."

Microsoft says that Mr. Allchin, after checking with company lawyers, sent a second e-mail shortly after the one cited by Burst that repeated the 30-day e-mail deletion policy, but added that any employee covered by court orders shouldn’t destroy his or her documents.

"Mr. Allchin’s guidance on e-mail retention was entirely consistent with our policy to meet all legal requirements as well as sound business practice providing for the efficient management of e-mail not covered by any legal obligations," Ms. Drake said.

Microsoft officials say they have retained and produced millions of e-mails and documents in scores of antitrust cases in recent years, and forcefully reject any claim of systematic destruction of material sought under court order. They defend the firm’s e-mail deletion policy, saying it is legal and that any big company without such policies would drown in paper and run out of data-storage space.

In its case, Burst has said it has documents – including handwritten notes of a July 2000 meeting inside Microsoft – that will show that the senior managers in Microsoft’s multimedia group secretly decided to adopt Burst’s approach as its own, and write their own patents, one of which is pending before the patent office. The technology aimed to solve the problem of jerky, poor-quality video and audio then plaguing Internet-based media transmissions.

In 2000, Burst, with its own patents, was flying high. It had $19 million in new financing, companies such as Yahoo Inc. and America Online were testing the technology, and the band U2 was touting its product as the best way to broadcast live music on the Web.

The company met with Microsoft several times that year, and while Microsoft initially dismissed the technology — it conflicted with an alternative technical approach Microsoft was using — it later saw Burst’s technology as a way to fix the poor quality of "streamed" media on the Web, according to Burst’s legal filings in the case. Burst says its patented approach involves sending video streams at variable "faster-than-real-time" speeds, responding to changes in network capacity and storing it briefly on users’ computers, allowing smooth playback.

Microsoft’s objection, according to Burst, was that the software ran on Linux, a rival operating-system software, as well as Windows, and at the time, Microsoft was battling to gain control of media software. Burst charges that Microsoft altered its new Windows media player to make it incompatible with Burst, killing the product and pushing the company near collapse. It also claims Microsoft’s patent applications were nothing more than updates of Burst’s approach. As Burst neared the brink, documents unsealed in the case show, Microsoft managers debated whether to buy the company at a "fire-sale price … as an insurance policy" against a future patent suit, or just let it die, according to an unsealed Microsoft document.

Source:
Microsoft Conduct Is Challenged Again
JOHN R. WILKE
THE WALL STREET JOURNAL, November 17, 2004; Page A3
http://online.wsj.com/article/0,,SB110065100041976160,00.html

Category: Finance, Web/Tech

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