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When is a deal with the Department of Justice’s antitrust division really a deal? That is the question confronting U.S. District Judge Claude Hilton, who must decide if the Justice Department may sue to block a transaction involving The MathWorks Inc. and Wind River Systems Inc. despite having signed an agreement resolving the matter. Antitrust experts called the case “very intriguing” and said they could not recall a similar dispute. “I’m not aware of any situations analogous to this,” one former top antitrust regulator said. They said the Justice Department, if it loses the case, could be less willing to attempt innovative solutions to antitrust cases for fear of losing its right to later challenge the deals in court. Hilton will hold a hearing Aug. 9 and could rule from the bench on whether the Justice Department had a right to file suit. A MathWorks lawyer, Mark Gidley of White & Case in Washington, did not return calls for comment. A Justice Department spokeswoman declined to comment. The dispute centers on Wind River’s efforts to exit the market for engineering software used in the aerospace and defense industries for tasks including the design of the joint-strike fighter. Wind River agreed in February 2001 to license its Matrixx product line to MathWorks for $11.5 million. This included exclusive distribution rights for 30 months, after which MathWorks had the right to buy the software outright. Wind River also licensed three patents to MathWorks for $500,000. More controversially, the agreement provided for a 50 percent discount for Matrixx customers that switch to MathWorks’ rival product within the first year of the deal and a 25 percent discount to those who switch in the second year. It also gave MathWorks complete discretion to set prices for Matrixx and to market, support and develop future enhancement to the product. The Justice Department issued demands for more details on the deal in July 2001 amid concerns that the agreement constituted per se illegal price-fixing and market allocation. MathWorks argued the deal was benign because Wind River had failed to keep pace with the technological advances of rival software producers and because the Matrixx suite of products had suffered a significant drop in revenue. MathWorks also argued that it was the only company willing to acquire Matrixx. Such a deal was preferable to the immediate loss of Matrixx from the market, it said. In January, the Justice Department approached MathWorks with an innovative solution: Appoint an investment bank to shop Matrixx. If it found a buyer, MathWorks would have to sell. If no other company stepped up, the antitrust division would drop its objections. For the deal to work, speed was essential. That is because Matrixx becomes less and less viable the longer it was controlled by MathWorks. Despite the government’s demand for alacrity, it took until April to iron out details. It called for both sides to contact investment bankers. The antitrust division would then select a firm to shop Matrixx. MathWorks had seven days to execute an agreement with the investment bank, which then had 45 days — subject to one 15-day extension — to find an alternative buyer. The deal had no restrictions on potential buyers, though it had a reserve price of $2 million. It permitted MathWorks to retain several key patents, which it would license to the purchaser, assuming one was found, on favorable terms. The agreement at first appeared to work. MathWorks and the Justice Department contacted investment banks, including Robertson Stephens Inc. On June 5 Robertson Stephens informed MathWorks that the Justice Department had selected it as the investment bank, and it presented a draft engagement agreement. MathWorks countered 12 days later with a modified agreement, despite its obligation to cement a deal within seven days. The Justice Department charged that MathWorks’ failure to execute a contract with Robertson Stephens within the seven-day window constituted a breach of the agreement, freeing the regulator to file suit. MathWorks counters that the Justice Department never triggered the seven-day clock because it never formally notified the company of its selection of a bank. “The division never provided the required notice,” it said. “Thus the seven-day time period could not have elapsed because it did not start.” The company also blamed the antitrust division for some of the delays, saying the agency did not return several messages by MathWorks officials questioning whether Robertson Stephens’ internal troubles and its ties to a law firm retained by MathWorks should preclude it from acting as the investment bank (Robertson Stephens parent FleetBoston Financial Corp. announced July 12 that it will shutter the San Francisco bank.) “The division made no response to those inquiries,” MathWorks said. “Instead the division chose to remain silent, ignoring MathWorks’ requests for information and refraining from providing any substantive comment.” MathWorks also said the Justice Department may not allege a breach of the agreement because it did not raise this in the complaint. The Justice Department responded that MathWorks attempted repeatedly to delay a sale of the Matrixx product line. It said MathWorks was well aware June 5 that Robertson Stephens was the chosen investment bank. It also said there is no requirement for the antitrust division to directly notify MathWorks of the selection. Given that MathWorks materially breached the accord, the Justice Department was no longer bound by terms of the settlement, the division said. It added that MathWorks cannot contend that it made a good-faith effort to comply because the company should have been able to suggest modifications to the engagement letter within a few days rather than taking two weeks. Copyright �2002 TDD, LLC. All rights reserved.

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