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Judge rejects Microsoft bid to settle suit by donating

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BALTIMORE — A federal judge Friday rejected Microsoft's offer to donate computers and software to schools to settle a class-action lawsuit accusing it of overcharging for its products.

U.S. District Judge J. Frederick Motz said the settlement is "critically underfunded" and would have anticompetitive effects on the market, especially on Microsoft rival Apple Computer Inc.

The lawsuits allege that Microsoft used its monopoly power to overcharge consumers. The lawsuits, which began in 1999, are separate from antitrust lawsuits brought by states and the federal government.

Microsoft and some of the plaintiffs' attorneys agreed last month to settle the lawsuit by donating Microsoft software, refurbished computers and other resources the company valued at $1 billion to the nation's neediest schools.

The proposal would have provided schools with money they could spend on other companies' technology, although a foundation set up by Microsoft and plaintiffs' attorneys would have had to approve their decisions.

Apple argued in December that the agreement would give Microsoft an unfair advantage by encouraging schools to acquire Microsoft products.

While Microsoft software runs on more than 90 percent of business computers, rival Apple says it still maintains nearly half the pre-college education market.

"The agreement raises legitimate questions since it appears to provide a means for flooding a part of the kindergarten through high school market in which Microsoft has not traditionally been the strongest player (particularly in relation to Apple) with Microsoft software and refurbished PCs," Motz wrote in a 21-page opinion.

Critics in the education community also complained to Motz that the plan — which would affect some 14,000 schools — was too rigid.

The proposal seeks to provide the schools with refurbished computers and Microsoft software they don't necessarily need or have the resources to properly use, the critics said. They argued for giving schools more choice in how to spend the settlement — which Microsoft values at more than $1 billion — on other technology or resources.

Motz also said the "widely divergent views" between estimates of the value of the claims being settled prevented him from granting approval.

Microsoft had argued that it could be responsible for as little as $200 million, while some economists for the plaintiffs estimated the company's liability to be upwards of $18.9 billion.

Microsoft and plaintiffs' attorneys met with a mediator last month to discuss possible changes to the settlement, but the talks were unsuccessful.

Microsoft lawyer David Tulchin said Friday it was too early to know if the parties could negotiate another settlement that would meet Motz's standards. Tulchin said Microsoft was prepared to head back to court.

"We are willing to litigate, and we have done well so far," Tulchin said.

Dan Small, one of the plaintiffs' attorneys who helped craft the rejected settlement, said he was "disappointed" in Motz's decision and echoed Tulchin's prediction of a return to court.

"We worked hard to put together a settlement that we believed would have done a lot of good for poor students in this country," Small said. "We are prepared now to litigate aggressively against Microsoft."