US Report: States ready to move against Microsoft

According to sources close to the investigation, the states are likely to seek a preliminary injunction that prohibits Microsoft from releasing Windows 98 until the states can hold formal hearings about the company's alleged anti-competitive practices. Microsoft is currently slated to ship the operating system upgrade June 25.

In hopes of pre-empting the move, Microsoft has called upon some of its closest operating-system licensees to publicly come out in support of the operating system. Microsoft officials confirmed that they have been in touch with licensees regarding the importance of Windows 98 and how being prevented from shipping the operating system will harm the OEMs. Microsoft spokesman Jim Cullinan said some OEMs have also called Microsoft to offer their help.

While the state attorneys general have not made a formal decision about filing suit against Microsoft, a source involved with the investigation said all signs are pointing toward action soon. "It is coming to the end," said the source. When asked if action was likely within the next two weeks, the source said, "You would not be too far off the beaten path."

Officials at several of the states' attorneys general offices declined to comment on any potential action.

Microsoft is "very nervous about the states," said an official with a major OEM, who requested anonymity. "[Microsoft is] trying to get us to give them a nice, strong public endorsement of Windows 98." Within the last two weeks, Microsoft finished delivering documents that the states' attorneys general had requested, Cullinan said. "We are sure that once they have had a chance to look at the documents, they will realise that Microsoft is in a competitive marketplace and has done nothing wrong," he said.

The states have been investigating Microsoft for more than a year and last fall joined forces to investigate the software company jointly. Texas took the first stab at Microsoft when it filed suit against the company in an attempt to free OEMs and ISVs from nondisclosure agreements so they could provide information to the states. The courts ruled against Texas.

A suit by the states would precede any additional action by the U.S. Department of Justice, which sources said is trying to build a bigger case against Microsoft surrounding Windows 98 and other anti-competitive practices. That case could be filed within the next month, sources said. A Justice Department spokesman declined to comment on the investigation, other than to say the department is still looking into Microsoft's business practices.

With the next shoe apparently ready to drop, the current legal battle between the DOJ and Microsoft may get pushed to the background. The two met in the U.S. Court of Appeals to argue before a panel of three justices whether a preliminary injunction made last December by U.S. District Judge Thomas Penfield Jackson should stand. Jackson issued a preliminary injunction prohibiting Microsoft from forcing OEMs to bundle Internet Explorer with Windows 95. Jackson also appointed a special master, Lawrence Lessig, to further investigate allegations that Microsoft violated its 1995 consent decree. Microsoft appealed the injunction and the use of a special master in the case, arguing that since Jackson did not rule that Microsoft was in contempt of the consent decree, the case should have ended there.

During the 90-minute hearing on Tuesday, the judges picked apart a number of legal procedural steps taken by the lower court and put the DOJ on the defensive, asking why the preliminary injunction should stand considering the DOJ never asked for one to be issued.

Observers expect the judges to rule on the appeal within two months.