Microsoft 2007 Annual Report Download - page 59

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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
($675,000) per day from December 2005 to June 2006, up to €2 million ($3 million) per day from June to July
2006, and up to €3 million ($4 million) per day beginning August 2006. The maximum amount of the potential fine
as of June 30, 2007 is $1.58 billion. We have submitted a written response to the statement of objections and are
seeking to determine a reasonable royalty rate with the Commission.
In December 2005, the Korean Fair Trade Commission (“KFTC”) ruled that we abused a market dominant
position and engaged in unfair trade practices under the Korean Fair Trade Act. The KFTC stated we violated the
Act by building instant messaging and media player features into the Windows PC operating system and
streaming media technologies into the Windows server operating system. The KFTC imposed a fine of
approximately $34 million which we have expensed and paid. The KFTC’s order issued in February 2006 held
that our integration of these media and messaging features into the Windows PC and server operating systems
was an abuse of monopoly power and unlawful tying in violation of the Korean Fair Trade Act. The order required
us to develop and distribute in Korea versions of Windows XP and its successors that do not include Windows
Media Player or Windows Messenger functionality. We also may distribute a second modified version of Windows
that contains the media and messenger features, as long as it includes promotional links to certain competing
media players and instant messengers. We have appealed the KFTC’s decision to the Seoul High Court. In
May 2006, the KFTC denied our motion for reconsideration of its ruling, but also dropped the element of its ruling
that prohibited us from including media player or instant messaging functionality in any product other than the
Windows client operating system for which we have a 50% or greater market share. In other ongoing
investigations, various foreign governments and several state attorneys general have requested information from
us concerning competition, privacy, and security issues.
Antitrust, unfair competition, and overcharge class actions. A large number of antitrust and unfair
competition class action lawsuits have been filed against us in various state and federal courts on behalf of
various classes of direct and indirect purchasers of our PC operating system and certain other software products.
We obtained dismissals of damages claims of indirect purchasers under federal law and in 15 states. Courts
refused to certify classes in two additional states. We have reached agreements to settle all claims in 20 states.
Under the settlements, generally class members can obtain vouchers that entitle them to be reimbursed for
purchases of a wide variety of platform-neutral computer hardware and software. The total value of vouchers that
we may issue varies by state. We will make available to certain schools a percentage of those vouchers that are
not issued or claimed (one-half to two-thirds depending on the state). The total value of vouchers we ultimately
issue will depend on the number of class members who make claims and are issued vouchers. The maximum
value of vouchers to be issued is approximately $2.7 billion. The actual costs of these settlements will be less
than that maximum amount, depending on the number of class members and schools that are issued and redeem
vouchers.
The settlements in all states but Iowa have received final court approval. Settlements in Arkansas and
Wisconsin received final court approval in March 2007. The Iowa case settled in February 2007 and the court
gave its preliminary approval of the settlement in April 2007. The cases in Mississippi have not been settled. We
estimate the total cost to resolve all of these cases will range between $1.7 billion and $1.9 billion. The actual cost
depends on factors such as the quantity and mix of products for which claims will be made, the number of eligible
class members who ultimately use the vouchers, the nature of hardware and software that is acquired using the
vouchers, and the cost of administering the claims. At June 30, 2007, we have recorded a liability related to these
claims of approximately $1.2 billion, which reflects our estimated exposure of $1.7 billion less payments made to
date of approximately $500 million, mostly for administrative expenses and legal fees.
Other antitrust litigation and claims. In November 2004, Novell, Inc. filed a complaint in U.S. District Court in
Utah, now consolidated with other cases in Maryland, asserting antitrust and unfair competition claims against us
related to Novell’s ownership of WordPerfect and other productivity applications during the period between June
1994 and March 1996. In June 2005, the trial court granted our motion to dismiss four of six claims of the
complaint. An appeal of that ruling is now pending and the case is effectively stayed during the appeal.
Patent and intellectual property claims. We are vigorously defending more than 45 patent infringement
cases. In the case of Eolas Technologies, Inc. and University of California v. Microsoft, filed in U.S. District Court
in Illinois in 1999, the plaintiffs alleged infringement by the browser functionality of Windows. In January 2004, the
trial court entered final judgment of $565 million, and entered an injunction against distribution of any new
infringing products, but stayed execution of the judgment and the injunction pending our appeal. We appealed
and in March 2005 the U.S. Court of Appeals for the Federal Circuit reversed the decision and vacated the