Complaints began more than three years ago when it was revealed that beta versions of WGA phoned home on a daily basis. Microsoft clarified that this was only going to be part of the beta, with future versions contacting the company once every 14 days and later extending that to approximately once every three months. However, when Redmond began pushing WGA to Windows XP users via Windows Update as a "high priority" security update, the suit was filed seeking compensatory damages and class action status.
Last month, a federal judge refused to certify the lawsuit as a class action, which would have meant anyone who could prove they were affected could join the case without having to hire an attorney, and just recently the same judge dismissed the case completely after the plaintiffs and Microsoft agreed to drop the lawsuit. It's unclear if the involved parties came to any settlement agreement outside of court.
Microsoft uses WGA to detect PCs that are not using a properly licensed version of Windows and inform users that they have been victims of counterfeiting with numerous nagging messages. Eventually, the copy of Windows is locked down. Among the many things WGA was criticized for is the ridiculously high false positive rate of the software which affected millions of legitimate buyers.
Microsoft has since rebranded WGA to Windows Activation Technologies (WAT) in Windows 7, and reportedly tweaked the software to be less intrusive and more "informative", letting users know in greater detail if and why their software is counterfeit.