Microsoft's been very good for Zelle Hofmann

  • Article by: STEVE ALEXANDER , Star Tribune
  • Updated: December 17, 2007 - 4:58 PM

The Minneapolis firm won a trio of antitrust suits against the software maker for almost $600 million. Now they're fighting over lawyers' fees.

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“We cost Microsoft $600 million” in settlements, said Rick Hagstrom, the lead attorney for Zelle Hofmann in the three cases. “How do you think they feel about us? Microsoft would love to see us stop. But we’re not going to.”

Photo: Glen Stubbe, Star Tribune

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(Correction: An earlier version of this story incorrectly reported a federal judge’s ruling in a 1998 anti-trust lawsuit against Microsoft that was settled in 2001. The court ruled that Microsoft used its monopoly power to harm competitors. Final approval of the settlement came in 2004.)

It’s been a good four years for the Minneapolis law firm of Zelle Hofmann, Voelbel, Mason & Gette, but not so good for its perennial courtroom opponent, software giant Microsoft.

Zelle Hofmann has hit a mother lode, with a series of antitrust lawsuits against Microsoft Corp. that resulted in nearly $600 million in out-of-court settlements for consumers and businesses who bought Windows, Office and other Microsoft products at what were alleged to be artificially high prices.

In courtroom dramas that drew upon  the same basic evidence, Zelle Hofmann won settlements in Minnesota in 2004 and in Iowa and Wisconsin this year, while collecting more than $65 million in legal fees for itself (fees for lawyers are awarded separately from settlements for plaintiffs).

These bitter fights are no ordinary David-vs.-Goliath story, as Zelle Hofmann has proved itself to be the equal of Microsoft’s New York-based defense team in the three cases. Microsoft settled for $174.5 million in Minnesota, $180 million in Iowa and $223.9 million in Wisconsin. Even the lawyer pricetags are similar, Wisconsin court records show: Zelle’s top attorney gets $750 an hour, while Microsoft’s head attorney got more than $1,000 an hour.

Those contests are a legacy of the 1998 federal antitrust suit against Microsoft, which was settled in 2004. The evidence in the federal case — in which a court  ruled that Microsoft used its monopoly power to harm competitors — later became the basis for dozens of antitrust suits, many of which were consolidated into statewide cases.

Since 2003, Microsoft has settled 20 of these suits out of court. Sixteen other cases were dismissed and two others were denied class-action certification. Except for the Iowa case, all the settlements were for vouchers that consumers or businesspeople could use to buy additional software, not for cash.

But now it is Zelle Hofmann’s turn to be on the defensive. In the Wisconsin case, a judge last month slashed the firm’s requested fees from $22.6 million to $4 million, on the grounds that Zelle hadn’t done that much key work in the case.

At the same time, Microsoft has attacked Zelle for allegedly padding its attorney hours in Wisconsin so that it could claim bigger fees than it was entitled to. Microsoft urged the judge to give Zelle nothing.

Zelle is fighting back. The firm claims that it was instrumental in adding $100 million to the Wisconsin settlement and deserved a larger fee, while accusing Microsoft of distorting the facts to get revenge on Zelle for the huge sums the software company has agreed to pay.

“We cost Microsoft $600 million” in out-of-court settlements, said Rick Hagstrom, the lead attorney for Zelle Hofmann in the Minnesota, Iowa and Wisconsin cases. “How do you think they feel about us?”

Steven Aeschbacher, Microsoft’s associate general counsel for law and corporate affairs in Redmond, Wash., denied that Microsoft is out for revenge.

Instead, he said, its allegations against Zelle Hofmann were based on reading the fine print. Zelle Hofmann had used common evidence in the Minnesota, Iowa and Wisconsin cases that it rolled over from one state lawsuit to the next. In at least one instance, Microsoft found that work that Zelle Hofmann did exclusively for the Iowa­ case had been billed to the Wisconsin case as well.
Zelle Hofmann says it corrected two mistakes out of thousands of time entries before submitting its fee request in Wisconsin, but Microsoft merely points to the judge’s ruling on Zelle’s fees.

“The bottom line is the court had Zelle Hofmann’s fee award reduced dramatically, and referred to their lack of candor with the court,” Aeschbacher said. “That’s something I wouldn’t want a court to say about me.”

From the bench

The “lack of candor” quote by the judge does appear in the ruling, but it was not related to the decision to cut Zelle’s fees.
In his order, Wisconsin Circuit Judge Richard Sankovitz said that irregularities in Zelle Hofmann’s timekeeping rec­ords reflected a “lack of candor with the court,” but were a minor issue as far as he was concerned.

“I reject Microsoft’s contention that the [Zelle Hofmann] lawyers padded their bills and attempted to conceal unrecoverable time from the court,“ Sankovitz said. “Microsoft was not deceived and neither was the court.” He added that, “Micro­soft’s stingy approach … is inconsistent with its willingness to pay arguably exorbitant fees to other lawyers.”

Said Zelle’s Hagstrom: “To put it very simply, Microsoft likes to spin things.”

But Sankovitz had some harsh words for Zelle Hofmann, too.

“I conclude that the [Zelle Hofmann] lawyers deserve about one-quarter of the credit for the successful settlement of this case,” he wrote, adding that the firm didn’t do much of the preliminary work in the lawsuit and only helped consumers recover their losses through redeemable vouchers, not cash. As a result, the judge approved $4 million in fees instead of the $22.6 million that Zelle Hofmann had requested. He approved fees of more than $5 million each for the other two plaintiffs’ law firms in the case.

(In the Minnesota case, Zelle Hofmann got the lion’s share of $46 million in attorneys fees, and in Iowa it got more than half of the $67 million in fees.)

Hagstrom argues that Sankovitz understates Zelle Hofmann’s role in obtaining the $223.9 million Wisconsin settlement, which replaced an earlier, smaller figure that had been under discussion.

“We defeated the settlement Microsoft wanted and added $100 million to it, and we had hoped to be paid for that effort,” Hagstrom said. “When you look at the value we brought to the Wisconsin settlement, this fee is low.”

No decision has been made about whether to appeal the judge’s ruling, he said.

Aeschbacher says Hagstrom shouldn’t take credit for increasing the Wisconsin settlement by $100 million, because that was the judge’s decision.

More to come?

While it might look as though the two sides are battling over spilled milk — the Wisconsin settlement is now history —the battle between Zelle Hofmann and Microsoft appears to be far from over.

Although Microsoft has settled 20 state antitrust suits, there remains one obvious legal frontier: Canada.

Accordingly, Zelle Hofmann is considering whether it might file another antitrust suit against Microsoft by consolidating consumer and business claims in the Canadian provinces into a single case.

“Microsoft would love to see us stop,” Hagstrom said. “But we’re not going to.”

Steve Alexander • 612-673-4553]]>
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