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The charge comes in a filing with the U.S. District Court for the District of Columbia by the nine states and the District of Columbia, which are seeking a separate antitrust settlement from the U.S. Department of Justice and nine other U.S. states. The nine holdouts cite testimony from a Microsoft executive to prove their claim that the settlement "has fostered new monopolistic practices and fettered the market with new anticompetitive practices."

Based on the February 8 deposition of Richard Fade, a Microsoft senior vice president, the states charge that the proposed settlement "has provided a sword for Microsoft to gather additional fruits and to reap a net gain."

According to the filing, Microsoft--by referring to the proposed settlement--was able to impose "uniform" licensing terms on PC vendors that, for among other things, gives Microsoft free access to their patents. These customers were precluded from enforcing their patents against Microsoft because of a "nonassertion of patents" provision in the licensing terms, the states claimed.

"Microsoft took advantage of the opportunities presented by the language (of the proposed settlement) to adopt significantly more onerous licensing terms and to impose those on the (PC makers)," the states said in the filing. Microsoft told PC makers that the patent provision was required by the settlement, the states said.

Vendors Complain

Sony detailed a similar concern in a public comment it submitted to the DOJ as part of the 60-day public comment period required under the Tunney Act. In the comment, posted last week on the DOJ's Web site, Sony asked the court to modify the section of the proposed settlement that would force uniform terms on the top 20 PC makers that license the Windows operating system. The company argued that the new terms would threaten its intellectual property rights.

Under terms long enforced by Microsoft, PC vendors "agree not to assert patent claims against Microsoft and Microsoft licensees," Sony wrote. However, the Japanese hardware maker had negotiated in its contracts with Microsoft that it would be exempt from those patent provisions.

"Sony believes these limitations are necessary to protect its investments in intellectual property," the company wrote in its public comment.

Microsoft argued on Wednesday that the states had misinterpreted Microsoft's patent provisions, adding that they have passed regulatory scrutiny by the DOJ and the European Commission. The EC concluded in its latest antitrust review that the provisions "complied with the requirements of competition law," Microsoft spokesperson Jim Desler said in a statement.

"Inevitably some [vendors] who had gained unique concessions would be unhappy with particular terms under the new ... 'one-size-fits-all' approach. But many ... were pleased with the new license terms," Desler said in the statement.

Manipulation Charged

PC makers might reasonably have expected a net benefit in their relationship with Microsoft following a consent decree with the government, but every one of the world's top 20 PC makers believes that Microsoft has benefited from the proposed settlement at their expense, the states said. The court filing cites specific examples from Hewlett-Packard and Gateway. Both PC makers complained to Microsoft about the licensing terms, the states said.

Furthermore, the states say there is "significant evidence" that Microsoft did not simply take advantage of language that was fortuitously included in the proposed settlement, but that the software company negotiated the language of the proposed settlement with the intention of profiting from its terms.

Having free access to these patents would allow Microsoft to expand its hardware business and compete directly with the PC makers. Previously, Microsoft was limited in its ability to produce its own hardware based on the patents owned by the PC makers, the states said.

According to Fade's testimony, Microsoft has long sought a waiver from the PC vendors of their patent rights, the states said. Until now, the major PC vendors have always managed to keep the patent provision out of their contracts with Microsoft, the states said.

The nine holdout states are California, Connecticut, Florida, Iowa, Kansas, Massachusetts, Minnesota, Utah, and West Virginia, alongwith the District of Columbia. They have asked U.S. District Judge Colleen Kollar-Kotelly to let them present the evidence gathered in Fade's deposition at a March 6 hearing on the proposed settlement.

More Voices

They aren't the only interested parties that want to participate in the upcoming settlement hearing. A number of technology organizations, including SBC Communications and the Computer & Communications Industry Association have moved for court intervention. They want a chance to testify at the March 6 hearing, when Kollar-Kotelly will review the proposed settlement.

Microsoft and the DOJ oppose third-party testimony at the hearing. They filed a joint status report suggesting that the judge hold a one-day hearing to clarify any remaining issues related to the proposed settlement. In that document, both Microsoft and the DOJ stressed that other groups should not be allowed to testify in the hearing, since a 60-day public comment period on the settlement has already been held.

"A large number of highly interested and motivated third parties have taken full advantage of the opportunity to submit extensive comments which set forth in painstaking detail their views of the (settlement) and whether or not the court should enter it," the joint status reads.

Judge Kollar-Kotelly has not yet ruled on the request. More briefs on the topic are due from Microsoft and the DOJ this Friday, Desler said.

(Matt Berger in San Francisco and Cara Garretson in Washington, D.C., contributed to this report.)

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