California government agencies will get a piece of the pie from Microsoft now that they've settled their price-gouging lawsuit with with the company. Beneficiaries will include local school districts, regional transportation agencies and a wide variety of other state and local agencies that bought products from Microsoft starting in 1995.
The $70 million dollar settlement, if approved by the court, will be divided among the eligible government entities as they buy new computer hardware and software. They don't have to buy the computer products from Microsoft. Competitor products can be bought with the money too.
This settlement is just a tiny portion of the money Microsoft spends each year as it settles its lawsuits. In fact, according to its 2005 annual report, as of June 20, 2005, Microsoft accrued liabilities totaling $2.661 billion for both current liabilities and long-term liabilities related to all its legal contingencies - and that's only the ones that have been settled. There are lots of cases out there still winding their way through the courts. Microsoft does not have to report expected legal costs from a lawsuit until there is a final court ruling after all appeals are exhausted or there is a settlement.
Even when there is a settlement, Microsoft can play with those numbers and you'll only find out the details of those games if you dig deeper into the annual report. For example, in 2004 Microsoft settled with 17 states and created a voucher program to settle cases regarding Microsoft's abuse of power in the computer industry and its inflating of prices - yes also price-gouging. The maximum settlement is approximately $1.9 billion according to Microsoft's 2005 annual report, but Microsoft doesn't expect to have to spend that much. Instead it estimates the settlement costs will range between $1.2 billion and $1.5 billion with actual costs depending on unknown factors, such as how many people or entities will actually file claims and what the value of those claims will be. Microsoft officially calculates the cost of this settlement at $1.1 billion in the report, net of payments made to date for administrative expenses and legal fees. That's a lot less than the cap of $1.9 billion.
The other big settlement reported in 2005 was the resolution of claims with IBM stemming from United States v Microsoft. This settlement involved claims relating to damage to IBM's OS/2 and SmartSuite businesses. IBM was paid $775 million plus got a $75 million credit for IBM's deployment of Microsoft software. Microsoft spent billions in previous years settling suits with other rivals including Time Warner and Sun Microsystems.
As I discuss in much greater detail in my book, "Reading Financial Reports for Dummies," you can't depend on the financial statements to find out the legal risks facing any company. You need to dig deeper into the Notes to the Financial Statements to find out a company's true long-term legal risk.
For Microsoft, read carefully its sections entitled Risk Factors where it discusses potential risks from intellectual property rights, liability claims and government regulatory action. Plus don't miss Note 17 on Contingencies. There you'll find more details about the EU suit and other antitrust suits pending, unfair competition suits, class actions suits related to overcharging and patent cases - just to name a few.
Obviously, for Microsoft, and most other corporations, the cost of fending off legal actions is just a part of the costs of doing business, but for Microsoft those costs may eventually outweigh the cash it brings into the business each year as it settles not only the cases already pending, but also new ones on the horizon. The EU already let Microsoft know it has concerns about Vista and may file yet another antitrust action. If Microsoft loses its EU appeal not only will it owe millions in fines, other countries may also decide to follow with their own legal actions.
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