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Eugene Crew couldn’t believe what he was hearing. He was on the phone with Robert Lieff, his co-counsel in an antitrust class action against Microsoft Corp. “Guess what?” Lieff said. “We have a settlement!” Crew didn’t even know that settlement talks were going on. Here he was in Seattle on Oct. 17, 2001, taking the deposition of a Microsoft executive. Crew was lead counsel for the class, which consisted of California consumers, and a court order designated him — and only him — as the plaintiffs’ “exclusive representative” for settlement talks. How could there be a settlement without him? Lieff was eager to tell Crew the details, but Crew refused to listen. Crew, a name partner in San Francisco’s Townsend and Townsend and Crew, needed to make it clear to Microsoft that they had to deal with him. A few days later, at Crew’s insistence, Microsoft faxed him an outline of the proposed deal. It described a global settlement of all antitrust suits filed by consumers in state and federal courts. It gave no relief to plaintiffs, but instead set up a foundation to provide Microsoft software and used computers to poor schools. Microsoft — which touted this “eLearning Foundation” as an answer to the digital divide — valued the deal at $1 billion. Crew was less charitable: “It was two and a half pages of garbage.” Crew was incensed that his California state claims, which were slated for trial in August 2002, had been folded in with separate federal multidistrict litigation consolidated in Baltimore. The California claims were more valuable — worth as much as $9 billion, he believed — because California law is much more favorable to the plaintiffs than federal law. And he was furious at Lieff, a partner at the San Francisco class action firm Lieff, Cabraser, Heimann & Bernstein, who played a dual role representing clients in the federal and California state cases. In Crew’s eyes, Lieff had hijacked the state claims behind his back to clinch a deal in the federal case. Crew feared that this proposal was speeding down a greased track for approval. Baltimore federal district judge J. Frederick Motz, who presided over the federal case, had scheduled a hearing in less than six weeks. As Crew saw it, Microsoft and its lawyers at Sullivan & Cromwell had cleverly angled to make a deal with the clubby class action bar, freezing him out. They had banked on the fact that Lieff and the lead federal lawyers, Michael Hausfeld and Stanley Chesley, valued the expediency of cutting deals, especially here, where their federal case was on thin ice. But the 70-year-old Crew, who had never before brought a class action, wasn’t part of this crowd. He had actually tried — and won — big antitrust cases. He wasn’t looking for an easy out. On Nov. 5, 1999, when Washington, D.C., federal district judge Thomas Penfield Jackson issued his findings of fact in United States v. Microsoft, a starting gun may as well have been fired. Class action lawyers raced to state and federal courthouses to stake claims based on Jackson’s findings. Among other things, Jackson found that Microsoft used its Windows operating system monopoly to harm consumers. More than 20 consumer suits were filed in California alone, including actions by Lieff, Cabraser and Milberg Weiss Bershad Hynes & Lerach. Crew had beaten them all by nine months. He had initiated Charles Lingo v. Microsoft in San Francisco superior court on Feb. 18, 1999, two days after the first phase of testimony had ended in the government’s case. At that point, Microsoft had taken a pounding — remember Bill Gates’ videotaped deposition? The case was far from over, but Crew and his partners had seen enough. They believed that their 150-lawyer firm, which specializes in intellectual property and antitrust, was perfectly positioned. To strengthen their forces (and spread financial risk), they teamed up with Kellogg, Huber, Hansen, Todd & Evans, a Washington, D.C., litigation boutique stocked with former Supreme Court clerks. Neither Lieff Cabraser nor Michael Hausfeld nor any other class action firm was involved at that point. Crew’s 13 million California plaintiffs are consumers, including many large companies, that indirectly purchased Microsoft software after May 17, 1994. Indirect purchasers are customers who bought computers from companies that bought software from Microsoft. The suit alleges that Microsoft’s illegal conduct denied consumers competitive prices and free choice among software products. This, the plaintiffs maintain, violated California’s Unfair Competition Act, as well as the state’s Cartwright Act, which prohibits monopolists from acting with others to restrain trade. Crew, a genial Oregon native, has taken more than a dozen antitrust cases to trial, mostly for plaintiff companies, and in 1978 he argued an antitrust case before the U.S. Supreme Court (which he lost). His biggest victory, a $102 million recovery from Universal Manufacturing Co. in 1998, came after 14 years of litigation and two trials. In the mid-1990s the U.S. Department of Justice hired him as special counsel for antitrust actions against General Electric Co. and The Nasdaq Stock Market Inc., both of which settled. The license plate on his Mercedes convertible reads “15 USC 2″ — shorthand for the Sherman Act. The Kellogg Huber lawyers in Washington, D.C., are also experienced antitrust litigators. In March 2000 the firm won a $1.05 billion verdict, after trebling, against United States Tobacco Co. and affiliates in Kentucky federal court. (The case is on appeal.) Together, the two firms have sunk millions in fees and costs into the California case. Crew and his co-counsel got off to a good start against Microsoft. In August 1999 they defeated Microsoft’s motion to dismiss, thanks to favorable California law. Federal courts and many states don’t recognize antitrust damage claims by indirect purchasers, in the wake of a 1977 U.S. Supreme Court decision, Illinois Brick Co. v. Illinois. But California and 17 other states have passed laws allowing indirect purchasers to sue for damages. Microsoft is represented by Sullivan & Cromwell, its lead counsel for the federal government antitrust case, and San Francisco’s Heller Ehrman White & McAuliffe. In late 1999, Microsoft also added a surprising face to its team by hiring Steve Berman, Seattle’s most successful plaintiffs’ class action lawyer. (Berman is married to a Microsoft executive.) Microsoft wasted no time putting Berman’s Rolodex to work. On Dec. 15, 1999, Berman and Microsoft in-house lawyer Richard Wallis called Crew. Crew says they “insisted” that Crew give Lieff Cabraser and Milberg Weiss lead roles on the plaintiffs’ team when the California cases were consolidated. Berman knew both firms well, having worked with them on Holocaust litigation and tobacco cases. A few hours later, Crew’s phone rang again. This time it was Bob Lieff, boasting of a “special relationship” with Berman and anticipating a “quick settlement” if he got a prominent role, according to Crew. Crew smelled collusion. He detailed these conversations in an affidavit filed with San Francisco Superior Court Judge Stuart Pollak, accusing Microsoft of “clandestine efforts to manipulate the legal representation of the class to Microsoft’s advantage.” In an interview, Berman calls Crew “out to lunch” and denies he made this demand. Wallis is less dismissive. “I don’t think I urged [Crew] to do anything specifically,” says the in-house lawyer. “I urged him to talk to these firms. I said he should reach out to these firms.” But, he adds, “We didn’t say, ‘We think your [plaintiffs'] executive committee should be A, B, C.’ ” (Microsoft, however, never denied Crew’s claims in court filings.) Leonard Simon of Milberg Weiss says there was nothing sinister or unusual about the firms’ attempts to get lead counsel roles. Despite Microsoft’s efforts, Crew remained in charge. In March 2000, Judge Pollak appointed Crew lead counsel and designated him the exclusive representative of the class for all settlement communications. Milberg Weiss and Lieff Cabraser got secondary spots on the plaintiffs’ executive committee. The plaintiffs’ team mended fences as best it could and moved forward. In August 2000 they won class certification and headed for an August 2002 trial date. Back in Baltimore federal court the plaintiffs weren’t faring so well. More than 60 cases filed in federal courts or in various state courts had been consolidated before Judge Motz as multidistrict litigation. Crew’s case, as well as some cases in other states, stayed separate and were not pulled into this action. The consolidated federal complaint accused Microsoft of violating the Sherman Act by wielding its monopoly power to overcharge consumers of its operating systems and applications software, and of illegally restraining competition. In January 2001, Motz dismissed all federal claims for damages, citing the Illinois Brick decision prohibiting antitrust suits by indirect purchasers. That left the federal plaintiffs with only a request for injunctive relief, though they have appealed the dismissals to the 4th U.S. Circuit Court of Appeals. Not long after Motz dismissed the bulk of their damages claims, the federal plaintiffs’ lawyers began settlement talks with Microsoft. The plaintiffs’ principal negotiators were Michael Hausfeld and Stanley Chesley, who had both been chosen by Judge Motz to lead the plaintiffs’ lawyers. Hausfeld, a partner at the Washington, D.C., class action firm Cohen, Milstein, Hausfeld & Toll, has in the past sued companies for allegedly fixing travel agents’ commissions and the prices of baby food and compact disks. The 55-year-old Brooklyn native recently burnished his reputation by brokering a settlement in the Holocaust litigation, securing $5 billion for Nazi victims (and $5.4 million for his firm). The Polish government awarded him its Officer’s Cross of the Order of Merit. But some of Hausfeld’s efforts have raised questions about his veracity and tactics. In 1996, when he was pursuing a race discrimination class action against Texaco Inc., Hausfeld made an explosive allegation that landed on the front page of The New York Times: He had transcripts of secretly recorded conversations that revealed a Texaco executive referring to black workers as “fucking niggers.” Soon after, Texaco settled for $176 million, with $20 million going to the plaintiffs’ lawyers. As it turned out, the tapes (which suffered from poor quality) didn’t contain those words. Furthermore, the man who made the secret recording had warned members of Hausfeld’s firm that those words likely weren’t on the tape. Hausfeld’s team also included a familiar face from the California state case, Robert Lieff. At the time, Crew says, he worried about potential conflicts caused by Lieff’s firm working on the state and federal cases, but members of Lieff’s firm who were more active in the California case assured Crew there would be no problem. “Generally you would not worry about conflicts unless the defense has limited funds,” says Lieff Cabraser partner Michele Jackson. “That’s not a problem we have.” Also, Lieff points out that the California case was handled by others in his firm, while he focused on the federal case in Baltimore. In March 2001, Crew started hearing rumors about settlement talks between Microsoft and Hausfeld’s team, and heard that Lieff was part of the discussions. He wrote to Heller Ehrman partner Robert Rosenfeld to make sure that the California claims weren’t on the table and stressed that Lieff didn’t have authority to negotiate for California. Rosenfeld assured Crew in a letter the next day: “Microsoft has not had discussions regarding possible settlement of the California cases.” But during the following months, Microsoft made it clear to the federal plaintiffs that it wanted “complete peace” — that is, the resolution of all consumer cases around the country. It was hardly an unreasonable position for a defendant battling suits on numerous fronts. In addition to Crew’s California cases and those before Judge Motz, there were consumer suits in some 20 other states. If Microsoft had to negotiate separately with every lawyer with a state case, the litigation could drag on interminably. The California cases, however, were arguably different. For one thing, they represented more than 15 percent of the nation’s purchasers of Microsoft products. More important, they were much further along, having received class certification and a trial date. But Crew wasn’t invited to those meetings, where Microsoft and the federal plaintiffs’ lawyers were negotiating the fate of his case. In fact, he wasn’t even told about them. In three years of litigation, Microsoft has shown little interest in negotiating with Crew. During interviews, Microsoft lawyers have tried to paint Crew as irrational, practically bordering on crazy. Their evidence, however, is not compelling. Microsoft points to a meeting between its lawyers and Crew in Redmond, Wash., on an evening in June 2001, after a deposition. To give Microsoft an idea of its exposure, Crew and his partner Richard Grossman handed company lawyers a sheet of paper that showed consumer overcharges attributable to Microsoft’s illegal conduct, as calculated by outside studies. Sullivan & Cromwell partner David Tulchin looked it over, did a quick mental calculation, and shot back, “This could run into the billions!” Crew insists that this wasn’t a settlement demand, but a starting point for a discussion. “No dollars were mentioned, and no demand was made,” Crew says. Tulchin, in contrast, describes an irrational Crew demanding single damages — in the tens of billions — instead of the treble damages they might get at trial. Tulchin left shaking his head. “What he wanted was everything,” says the Sullivan & Cromwell partner. “If you make a deal, it has to be realistic. It can’t be pie-in-the-sky stuff.” Tulchin says he was also put off by Crew’s “pounding-on-the-table kind of behavior.” Crew denies there was fist-pounding, literal or figurative: “It never got to the point where there could be any fist-pounding.” Tulchin, who has taken the lead for Microsoft in the consumer cases, has never worked on the Department of Justice antitrust case. In fact, while Tulchin’s partners John Warden and Richard Urowsky were getting skewered for their performance in Jackson’s court three years ago, Tulchin was scoring an all-but-unnoticed victory for Microsoft in Connecticut federal court. In July 1999 he convinced a jury to reject antitrust claims made by software maker Bristol Technology Inc. that Microsoft had attempted to gain a monopoly on operating systems for workstations and servers. Bristol had sought roughly $1 billion in damages. In true Sullivan & Cromwell form, the 54-year-old Tulchin projects a supremely confident air. His briefs to the court are models of clarity and persuasion. In contrast to his partners in the government antitrust case, who have shunned the press, Tulchin was eager to discuss the litigation. Tulchin argues that the California case suffers from significant weaknesses, including the fact that the plaintiffs won’t be able to show damages because Microsoft products have been a bargain for consumers. After months of negotiations that took place with Judge Motz’s knowledge, Tulchin, Microsoft deputy general counsel Thomas Burt, Hausfeld and Chesley went to the judge on Oct. 17 and proposed the education settlement that would extinguish all consumer claims, including the California suit. (Plaintiff attorney fees would be negotiated by Hausfeld, Chesley and Microsoft and submitted for court approval.) Judge Motz suggested that Lieff, who was participating by phone, inform Crew of this development. That’s when a startled Crew refused to hear the details from Lieff. Milberg Weiss’ Leonard Simon, a member of the multidistrict plaintiffs’ 28-lawyer team who cast the only vote against the deal, says that bypassing Crew was wrong. By going to Judge Motz first, and piquing his interest, he says, Microsoft and the lead plaintiffs’ lawyers hoped to “cram down” the settlement. Says Simon: “They did this to box Crew in and put massive pressure on him to accept a settlement that he had not been involved in negotiating.” A federal settlement can arguably extinguish state claims if the judge certifies a nationwide class and the plaintiffs’ lawyers release all claims against the defendant, whether in state or federal court. At the least, a court must ensure that all claimants have been adequately and fairly represented in the settlement talks. Occasionally such settlements have been forced against the objections of state plaintiffs (the so-called cram down). But only once before has this been done to a certified state class such as Crew’s — in the Washington Public Power Supply System securities litigation settlement back in 1989. Microsoft’s Burt says that it would have been fruitless to include Crew in the settlement talks, given his unreasonable stance at the June 2001 meeting in Redmond, which the in-house lawyer attended. But didn’t Judge Pollak’s order require Microsoft to negotiate with Crew? No, says Sullivan & Cromwell’s Tulchin. That order was entered ex parte, he notes, without Microsoft’s input. “This [order] was supposed to be not vis-�-vis us, but internal management [of the plaintiffs' matters],” he maintains. The Sullivan & Cromwell partner also offers a highly technical argument to explain why Microsoft didn’t violate the order. “It may be a fine distinction, but we were not settling the California case, but settling the California claims.” Lead federal plaintiffs’ lawyer Hausfeld explains that they didn’t include Crew because he’d been uncooperative before, and Hausfeld saw no reason to reach out again. “California was offered a number of opportunities to be involved [in joint negotiations] and declined,” he claims, adding that he had a letter showing their efforts to include Crew’s team in the talks. After several requests for that document, however, Hausfeld supplied a letter that did not support his claim; written by Lieff to Crew, it was dated Oct. 29, 2001 — after Hausfeld and Microsoft had gone to Judge Motz with the deal. Despite the protests of Crew and his team, Judge Motz acted eager to put his stamp on a deal that could gain fame for bridging the digital divide. In October he traveled to San Francisco, and he and Judge Pollak met for two hours with the parties. They tried to get the three sides — Microsoft, the federal lawyers and the California lawyers, including Crew — to engage in productive discussions, with no success. Crew objected to their exclusion from the settlement talks and argued that the settlement was woefully inadequate for California plaintiffs. According to Tulchin, when Crew resisted the judges’ suggestion that he cooperate with Hausfeld and Chesley, Motz looked at Crew and said: “I’m a federal judge, and the last time I looked, California was still a part of the union.” Crew complained to Pollak last November that Microsoft had “flagrantly violated” the judge’s order by not negotiating with him, but Pollak sidestepped the issue. In a hearing, he said he understood Crew’s concerns, but didn’t want to take any action that would interfere with matters before Motz. Crew has not taken the drastic step of seeking sanctions against Microsoft or Lieff or asking the court to remove Lieff’s firm from the California case. “We’ve been busy with other things,” he offers as an explanation. In late November, a day after flying back from a hearing in Baltimore, Crew sits in his office with his partner Richard Grossman. Deep bags hang under Crew’s eyes, but the loquacious lawyer seems energized by this fight. At an age when many lawyers spend afternoons napping, Crew still pulls all-nighters and works through weekends. On his desk is a crystal plaque inscribed with a quote by General George Patton: “You’re not beaten until you admit it. Hence, don’t.” Crew begins: “This case has been an eye-opener for us, for the level of — what’s the word?” “Corruption,” Crew and Grossman say in unison. They accuse Microsoft of conducting a “reverse auction,” by pursuing the plaintiffs’ lawyers with the weakest claims — who, they say, were willing to settle cheap. They lambaste the company for violating Judge Pollak’s order by not dealing with Crew in settlement talks. But the two aim their harshest words at their co-counsel at Lieff Cabraser. “They have a very severe, irreconcilable conflict,” says Crew. “They secretly negotiated away California’s rights and lied to us and said they weren’t. I’m astounded at the duplicity and secrecy and deception of someone who was an agent in both camps … . They’ve crossed over the ethics line.” Just four blocks from Townsend’s offices in San Francisco’s financial district are the offices of Lieff Cabraser. On an overcast afternoon in early December, the 65-year-old Lieff acts unfazed as he addresses the accusations leveled against him and his integrity. Sitting in a 30th-floor conference room, Lieff leans back in his chair with his hands behind his head, staring out a window as he talks, conveying an ever-so-weary air. Lieff denies that he had any conflict in simultaneously representing clients in the federal and state cases. “You can’t have a conflict if these are the same people,” he says, noting that the California clients would be part of the nationwide group. He also maintains that he didn’t violate Pollak’s order designating Crew the exclusive representative for California in settlement talks. “The discussions [with Microsoft] until the very end had nothing to do with California,” Lieff says. And when they did turn to California, why wasn’t Crew brought in? Lieff stumbles with that question. “The pretrial order was to basically protect Gene in some matter,” he replies. “I don’t remember what the purpose of the order was.” Lieff argues he didn’t compromise the interests of the California plaintiffs because the California class action may not be very strong. “I think [the California case] is a very difficult case, and it will be difficult to prevail. [Crew] thinks he’ll win a huge amount, trebled — billions and billions of dollars … . [But] showing damages won’t be so easy.” Lieff adds: “If the California case goes to trial and loses, I would not want to be responsible for this.” On Nov. 27 dozens of lawyers who had worked through the Thanksgiving holiday filled Motz’s courtroom for a hearing to decide whether the judge should give preliminary approval to the settlement and send out notices to class members. By then the proposal had been modified so that Microsoft had less control over the eLearning Foundation, but it still favored Microsoft products. Over five years, Microsoft would provide a minimum of $400 million in cash, at least 200,000 “refurbished” (used) computers that poor schools could buy at a discount, and free Microsoft software. (The used computers could be PCs or Macintoshes, but most refurbished computers are PCs that run only Microsoft software.) Over three days of hearings that extended into early December, Judge Motz had to confront several knotty issues. [See "Of Federalism and Fairness."] Does federal law even permit a so-called cy pres settlement such as this, where class members don’t get proceeds from the settlement? Could he extinguish state claims that weren’t before him? Were all the plaintiffs fairly represented in the negotiations? What was the value of these claims, and was the settlement generous enough? Furthermore, was the settlement itself anticompetitive? Apple Computer Inc., represented by O’Melveny & Myers’ George Riley, made an appearance, to argue that the settlement would provide a massive subsidy for Microsoft to boost its presence in the education market, where Apple has historically been strong. Riley suggested instead a competitively neutral program, funded by cash or certificates, that would allow schools to buy the technology of their choice. During the three days of hearings, economics experts debated the value of the plaintiffs’ claims, and educational experts offered varying opinions on the benefits of the scheme. Tulchin implored the judge to resolve the morass. “We can’t do a settlement like this on a state-by-state basis. It would be impractical in the extreme,” he said, projecting slides of maps to demonstrate how claims differed among states. Tulchin also appealed to notions of beneficence, by stating, “We have the opportunity to do something truly good for America.” Microsoft’s experience in Motz’s courtroom has been quite a change from the harsh treatment it received at the hands of Judge Jackson in the government trial. Where Jackson couldn’t contain his contempt for the company and its lawyers, Motz appeared to take a shine to Sullivan & Cromwell’s Tulchin. At one point, he praised a Tulchin argument by likening it to a ninth-inning Kirk Gibson home run. In contrast, Motz at times seemed annoyed at the California lawyers, treating them like whiners who didn’t care about giving computers to poor kids. When the hearings ended Dec. 11, Motz put off his ruling until the parties — including Crew, Tulchin, Hausfeld and Lieff — made a stab at mediation, using Kenneth Feinberg (the lawyer who crafted the government’s Sept. 11 victim relief package). That effort failed, and on Jan. 11, Motz issued a ruling rejecting the proposed settlement. He concluded that it was underfunded and anticompetitive, noting that it would flood the school market with Microsoft products. Nonetheless, Motz made it clear that he still favored the educational foundation concept, all but drawing a road map to show the parties how to get his approval. He suggested that Microsoft contribute more cash and make the program less dependent on Microsoft products. This was less than a victory for Crew. The judge brushed aside the California lawyers’ objections that their clients weren’t fairly represented and that they shouldn’t be forced into the deal against their will. The judge conceded that conflicts among class members did “abound,” with some (like the Californians) having stronger claims. But dissatisfied consumers could opt out, although he acknowledged that this hardly offered an acceptable answer to every controversial settlement. To ground his ruling, Motz stretched for a novel principle. Despite these conflicts, he wrote, a settlement such as this could be fair, because the funds wouldn’t go to individual claimants, but to a foundation benefiting others. Without citing case law, he concluded that such a settlement could be approved, because all class members would “benefit equally from a bridging of the ‘digital divide.’ ” Whether this radical theory could survive appellate scrutiny is unclear. By grabbing control of California claims that weren’t before his court, Motz acknowledged he would be treading on sensitive areas of comity and federalism. But, he boldly concluded: “Comity does not require tolerance of economic balkanization and litigation chaos.” At press time, Crew said he was focusing on preparing the case for trial in August. “We’re taking depositions and are back on track,” he said. Crew’s case got even stronger when Pollak ruled in December that collateral estoppel should be applied to accept certain findings about Microsoft’s illegal conduct from the government’s case. But if Microsoft and the federal plaintiffs’ lawyers go back to the bargaining table with Motz’s ruling in hand, Crew could still see his case swept into a national settlement. It’s enough to make a lawyer think twice about going up against the class action bar. For all his efforts to fight for his clients’ interests and blow the whistle on the routine slippery practices of class actions, Crew has been labeled an obstructionist. Assisted by a cooperative company and a federal judge, the machinery of the class action bar, once again, rolls on.

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