-- Eleventh hour negotiations between U.S. state and federal prosecutors and Microsoft Corp. collapsed late yesterday, setting the stage for a new antitrust lawsuit expected to be filed tomorrow.
Microsoft said in a press release that talks "with federal and state officials are at an impasse over government demands that Microsoft abandon its principle of product innovation."
The talks reportedly broke down after Bill Gates, Microsoft chairman and chief executive officer, apparently ordered the company's lawyers to withdraw earlier concessions, according to the New York Times.
A spokesman for the U.S. Department of Justice today would only say the talks are "not expected to resume" and that the department would have more to say tomorrow morning.
The spokesman declined to elaborate on the negotiations or on what the focus of the new lawsuit will be.
Microsoft postponed the previously scheduled Friday shipment of its Windows 98 operating system to PC manufacturers but now plans to ship the code to PC makers tomorrow.
The DOJ and state attorneys general demanded that Microsoft stop requiring PC manufacturers to display the Windows user interface "when consumers turn on a new PC for the first time," according to Microsoft. The DOJ also demanded that Microsoft abandon its plan to make Web-browsing functionality a core part of Windows, Microsoft said.
In addition the DOJ demanded that Microsoft include Netscape Communications Corp.'s browser with every copy of Windows, Microsoft said in its release.
"This impasse is disappointing. We worked hard to try and resolve this, but the government demands went too far with no basis in law and, most important, were not in the best interest of consumers," said Gates. "We unfortunately had no other choice but to resolve this matter in court."
Microsoft also said that the company will continue to vigorously defend its right to innovate and improve its products. "We cannot compromise on this principle," Gates said.
The company also said that the lawsuit, expected to be filed by federal and state agencies on Monday, "is without merit and would hurt consumers and the American software industry."
"We negotiated in good faith from the beginning, always with an eye toward what our customers would want today and in the future," said William Neukom, senior vice president for law and corporate affairs at Microsoft. "The government's theories for the personal computer industry were not in the interest of PC users and would have set a bad precedent for other technology companies in the PC industry."
Officials at several state attorneys general offices were not immediately available for comment. Twenty state attorneys general last week had plans to file antitrust lawsuits against Microsoft.
The lawsuits, now expected to be filed tomorrow, expand on an October, 1997 complaint filed by the DOJ in federal court. That complaint asked that the software giant be held in contempt of a 1995 consent decree that resulted from an earlier antitrust investigation.
The DOJ argued that Microsoft was violating the decree by forcing PC makers to include the Internet Explorer browser as a condition of licensing Windows 95.
As that case wound its way through the court system, the DOJ continued its investigation, issuing subpoenas to Microsoft rivals and allies alike. At the same time, various state attorneys general initiated their own investigations, as did the U.S. Senate. The European Union is also continuing an ongoing probe of Microsoft's business practices.