EU Court Holds the Antitrust Line Against Microsoft, but May not have Stemmed its Dominance Tide

In what the New York Times is calling a "stinging rebuke," the European Court of First Instance issued a much-awaited judgment at 9:30 AM today in Luxembourg affirming almost all of the March 23, 2004 holdings by the European Commission that Microsoft had abused its dominant position to further expand its market share. The Court also affirmed the remedies against Microsoft, including fines of approximately US $1 billion. Only those parts of the original decision that would appointed a trustee to monitor Microsoft's compliance with the EU's orders were rejected, as exceeding the powers of the Commission. But while the victory is a significant one for the European Commission, how great a defeat is this in fact for Microsoft? Perhaps less than first meets the eye, on which more below.

Today's decision is but the latest event in an almost 10 year history of investigations, trials, appeals, and new allegations that initially focused only on Microsoft's activities involving server software, but eventually grew to involve allegations of abuses in the office software marketplace as well. All of these accusations involved contentions that Microsoft was limiting the ability of its competitors to create products that would interoperate with its own, thus further entrenching itself. With time, open source advocates and trade associations filed lodged complaints as well, as Linux gained market share and greater vendor interest, and OpenDocument Format (ODF) compliant products, such as OpenOffice, gained greater credibility.

In the decision announced today, the Court found that Microsoft had abused its dominant market through two types of conduct, and ordered Microsoft to remedy the situation as follows:

The first type of conduct found to constitute an abuse consisted in Microsoft’s refusal to supply its competitors with ‘interoperability information’ and to authorise them to use that information to develop and distribute products competing with its own products on the work group server operating system market, between October 1998 and the date of adoption of the decision. By way of remedy, the Commission required Microsoft to disclose the ‘specifications’ of its client/server and server/server communication protocols to any undertaking wishing to develop and distribute work group server operating systems.

The second type of conduct to which the Commission took exception was the tying of Windows Media Player with the Windows PC operating system. The Commission considered that that practice affected competition on the media player market. By way of remedy, the Commission required Microsoft to offer for sale a version of Windows without Windows Media Player.

The European Commission welcomed the adoption of almost all of its earlier decision by issuing a press release (the press release, and the Court’s judgment are reproduced in full at the end of this blog entry for archival purposes). In that press release, Competition Commissioner Neelie Kroes states:

The Court has upheld a landmark Commission decision to give consumers more choice in software markets. That decision set an important precedent in terms of the obligations of dominant companies to allow competition, in particular in high tech industries. The Court ruling shows that the Commission was right to take its decision. Microsoft must now comply fully with its legal obligations to desist from engaging in anti-competitive conduct. The Commission will do its utmost to ensure that Microsoft complies swiftly.

This long (and still continuing) train events was set in motion in 1998, when Sun Microsystems complained to EU regulators that Microsoft had refused to provide it with the technical information it needed in order to permit it to enable its server operating system to communicate with Microsoft’s Windows desktop operating system. The European Commission’s decision in 2004 levied a fine of $497 million Euros against Microsoft at that time (about $613 million US dollars). Microsoft filed an appeal that was dismissed later the same year.

In late 2005, the EC formally accused Microsoft of failing to obey the EC’s 2004 order, calling Microsoft’s compliance "fundamentally flawed." It threatened Microsoft with further fines if it failed to comply, and subsequently followed through on its threats; on July 12 of 2006, the Court of First Instance found that Microsoft’s compliance was still inadequate, and levied further fines in the amount of $280.5 million Euros (about US $357 million).

In the meantime, various Microsoft competitors had complained (in February of 2006) that Microsoft was also abusing its market power in the office productivity software marketplace. In March of this year, the EU threatened Microsoft with further fines, because it believed that Microsoft was charging unfairly high royalties to vendors to receive the interoperability information that the EU had already held that Microsoft must provide.

In recent years, the European actions stood in marked contrast to the more relaxed posture of regulators in the United States at the federal level, although multiple states continued to take a more aggressive position. The open source community also became more engaged, and today’s decision in fact requires that Microsoft must pay 80% of the legal fees not only of the regulators, but of complainants such as the Software & Information Industry Association (SIIA) and the Free Software Foundation Europe (FSFE) as well.

Updated 3:45 EDT: Calling the US federal attitude "more relaxed" was, in this context, an understatement. EUBusiness.com has just posted an article that reports that a written statement has been released by Thomas O. Barnett, an assistant attorney general for antitrust. In that statement, Barnett states:

We are…concerned that the standard applied to unilateral conduct by the [European Court of First Instance], rather than helping consumers, may have the unfortunate consequence of harming consumers by chilling innovation and discouraging competition.

Thomas Vinje, a spokesman for the European Committee for Interoperable Systems (ECIS) and a partner at Clifford Chance, took a different view, stating that, "This case is unique to Microsoft. No other company has anything to fear from this decision. End update

While today’s judgment is significant, it is worth noting that the penalties that Microsoft has incurred to date – roughly $1 billion, plus an obligation to reimburse a far smaller amount of legal fees – are minute in comparison to the magnitude of the profits it has garnered over the ten-year investigative period. During that time, its market share in both of the subject markets has grown dramatically. As a result, while Microsoft has nominally lost in court, it continues to win at the bottom line, given that the only impact on its products to date has been more symbolic than effectual – the requirement to offer a version of Windows that does not bundle a free copy of its media player.

Stated another way, a billion dollars spread over ten years is $100 million a year. During the same period, Microsoft revenues have grown enormously, to over $50 billion a year, fueled primarily by the continuing growth of its operating system and Office products. It has been a tiny cost of business to pay, and a shrewd and cynical business decision to incur, a liability to pay one fifth of one percent of annual gross revenues to retain the freedom to dominate so lucrative a market in spite of the 2004 judgment.

Accordingly, the more important part of today’s judgment will be effectively Microsoft can be made to finally make its products more easily interoperable with those of other vendors, and at a fair price for any patent licenses that such vendors might need to acquire. Requiring that adequate, accessible, easily understandable and up to date technical information is indeed made available, for free or at a reasonable cost, is much harder to monitor than whether the fines are paid. The real danger to competition will be therefore be whether Microsoft can continue to plead to the court that it is complying, while leaving other vendors convinced that they remain at a competitive disadvantage, and customers feeling that they remain locked into Microsoft products.

It will be interesting to see how Microsoft’s competitors react to today’s news, and whether (for instance) the conduct alleged in a number of countries during the recent ISO/IEC JTC1 OOXML voting period is brought to the attention of the EC. In light of today’s judgment, it would appear that OOXML, if finally adopted, must thoroughly document all technical information needed to create a compliant implementation, as well as ensure that all underlying intellectual property rights are available on reasonable, non-discriminatory and (ideally) free terms. Otherwise, the same compoanies that lodged the complaints that led today’s verdict would be likely to come back to the court for more of the same.

For additional detailed coverage, see Pamela Jones’ article and links here.

For further blog entries on Intellectual Propery Rights issues, click here

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The full text of the judgment is reproduced below. The much longer, full decision can be viewed here. The full docket is here.

On 23 March 2004 the European Commission adopted a decision finding that Microsoft had infringed Article 82 of the EC Treaty by abusing its dominant position by engaging in two separate types of conduct. The Commission also imposed a fine of more than EUR 497 million on Microsoft.

The first type of conduct found to constitute an abuse consisted in Microsoft’s refusal to supply its competitors with ‘interoperability information’ and to authorise them to use that information to develop and distribute products competing with its own products on the work group server operating system market, between October 1998 and the date of adoption of the decision. By way of remedy, the Commission required Microsoft to disclose the ‘specifications’ of its client/server and server/server communication protocols to any undertaking wishing to develop and distribute work group server operating systems.

The second type of conduct to which the Commission took exception was the tying of Windows Media Player with the Windows PC operating system. The Commission considered that that practice affected competition on the media player market. By way of remedy, the Commission required Microsoft to offer for sale a version of Windows without Windows Media Player.

In order to assist the Commission in monitoring Microsoft’s compliance with the decision, the decision provided for a monitoring trustee to be appointed by the Commission from a list of persons drawn up by Microsoft. The monitoring trustee’s primary responsibility would be to issue opinions, upon application by a third party or by the Commission, or on his own motion, on whether Microsoft was complying with the decision and on any issue that might be of interest with respect to the enforcement of the decision. He was to have access to Microsoft’s assistance, information, documents, premises and employees and to the source code of the relevant Microsoft products. All the costs associated with the monitoring trustee, including his remuneration, were to be borne by Microsoft.

On 7 June 2004 Microsoft brought an action before the Court of First Instance for annulment of the decision or for annulment or a substantial reduction of the fine imposed on it.

The refusal to supply the interoperability information

First, the Court confirms that the necessary degree of interoperability required by the Commission is well founded and that there is no inconsistency between that degree of interoperability and the remedy imposed by the Commission.

The Court then observes that the Commission defined interoperability information as a detailed technical description of certain rules of interconnection and interaction that can be used within Windows work group networks to deliver work group services. The Court notes that the Commission emphasised that Microsoft’s abusive refusal to supply concerned only the specifications of certain protocols and not the source code and that it was not its intention to order Microsoft to disclose its source code to its competitors.

The Court also considers that the aim pursued by the Commission is to remove the obstacle for Microsoft’s competitors represented by the insufficient degree of interoperability with the Windows domain architecture, in order to enable those competitors to offer work group server operating systems differing from Microsoft’s on important parameters. In that connection, the Court rejects Microsoft’s claims that the degree of interoperability required by the Commission is intended in reality to enable competing work group server operating systems to function in every respect like a Windows system and, accordingly, to enable Microsoft’s competitors to clone or reproduce its products.

As to the question of the intellectual property rights covering the communication protocols or the specifications, the Court considers that there is no need to adjudicate on that question in order to determine the case. It observes that in adopting the decision the Commission proceeded on the presumption that Microsoft could rely on such rights or, in other words, it considered that it was possible that the refusal at issue was a refusal to grant a licence to a third parties, thus opting for the solution which, according to the case-law, was the most favourable to Microsoft.

As regards the refusal to supply the interoperability information, the Court recalls that, according to the case-law, although undertakings are, as a rule, free to choose their business partners, in certain circumstances a refusal to supply on the part of a dominant undertaking may constitute an abuse of a dominant position. Before a refusal by the holder of an intellectual property right to license a third party to use a product can be characterised as an abuse of a dominant position, three conditions must be satisfied: the refusal must relate to a product or service indispensable to the exercise of an activity on a neighbouring market; the refusal must be of such a kind as to exclude any effective competition on that market; and the refusal must prevent the appearance of a new product for which there is potential consumer demand. Provided that such circumstances are satisfied, the refusal to grant a licence may constitute an abuse of a dominant position unless it is objectively justified.

In the present case, the Court finds that the Commission did not err in considering that those conditions were indeed satisfied.

The Court considers that the Commission was correct to conclude that the work group server operating systems of Microsoft’s competitors must be able to interoperate with Windows domain architecture on an equal footing with Windows operating systems if they are to be capable of being marketed viably.

The absence of such interoperability has the effect of reinforcing Microsoft’s competitive position on the market and creates a risk that competition will be eliminated.

The Court observes that the circumstance relating to the appearance of a new product must be assessed under Article 82(b) of the Treaty. It considers that the Commission’s finding that Microsoft’s refusal limits technical development to the prejudice of consumers within the meaning of that provision is not manifestly incorrect.

Last, the Court rejects Microsoft’s arguments to the effect that the refusal is objectively justified because the technology concerned is covered by intellectual property rights. The Court notes that such justification would render ineffective the principles established in the case-law which are referred to above. The Court further considers that Microsoft has failed to show that if it were required to disclose the interoperability information that would have a significant negative effect on its incentives to innovate.

The Court therefore upholds the part of the decision concerning interoperability.

The bundling of the Windows client PC operating system and Windows Media Player

By way of preliminary observation, the Court considers that the factors on which the Commission based its conclusion that there was abusive tying are correct and consistent with Community law. It observes that those factors are as follows: first, the undertaking concerned must have a dominant position on the market for the tying product; second, the tying product and the tied product must be two separate products; third, consumers must not have a choice to obtain the tying product without the tied product; and, fourth, the practice must foreclose competition.

In respect of each of those factors, the Court considers that the Commission’s decision is well founded.

First, the Court observes that it is not disputed that Microsoft had a dominant position on the client PC operating systems market.

Second, the Court, noting that that the question as to whether products are distinct must be assessed by reference to consumer demand, finds that a number of factors based on the nature and the technical features of the products concerned, the facts observed on the market, the history of the development of the products concerned and also Microsoft’s commercial business practice, demonstrate the existence of separate consumer demand for media players. In that regard, the Court notes, inter alia, that the Windows operating system is system software, whereas Windows Media Player is application software; that there are independent companies, like RealNetworks, who design and supply competing products independently of operating systems; that Microsoft develops and markets Windows Media Player for other operating systems; that Windows Media Player can be downloaded independently of the Windows operating system; and that, in spite of the bundling, a not insignificant number of consumers continue to acquire competing media players separately.

Third, the Court observes that it is beyond dispute that, in consequence of the tying, consumers are unable to acquire the Windows operating system without simultaneously acquiring Windows Media Player. In that regard, the Court considers that neither the fact that Microsoft does not charge a separate price for Windows Media Player, nor the fact that consumers are not obliged to use that media player, is relevant for the purposes of the examination of that factor.

Fourth, the Court finds that the Commission clearly demonstrated in the contested decision that the fact that Microsoft offered OEMs only the version of Windows bundled with Windows Media Player had the inevitable consequence of affecting relations on the market between Microsoft, OEMs and suppliers of third-party media players by appreciably altering the balance of competition in favour of Microsoft and to the detriment of the other operators. The Court considers that that practice enabled Microsoft to obtain an unparalleled advantage with respect to distribution of its product and to ensure the ubiquity of Windows Media Player on client PCs throughout the world, thus providing a disincentive for users to use third-party media players and for OEMs to pre- install such media players on client PCs. The Court concludes that the Commission was correct to find that there was a significant risk that the tying would lead to a weakening of competition in such a way that the maintenance of an effective competitive structure would not be ensured in the near future.

Last, the Court finds that Microsoft has not demonstrated the existence of objective justification for the bundling and that the remedy imposed by the Commission is proportionate. On that point, the Court makes clear that Microsoft retains the right to continue to offer the version of Windows bundled with Windows Media Player and that it is required only to make it possible for consumers to obtain the operating system without that media player, a measure which does not mean any change in Microsoft’s current technical practice other than the development of that version of Windows.

The Court therefore upholds the part of the decision concerning the bundling of Windows Media Player.

The monitoring trustee

The Court observes that if the Commission decides to seek the assistance of an external expert, it may communicate to him all the information and documents which it has obtained in the exercise of its powers. However, it considers that by establishing the mechanism of a monitoring trustee, with his own powers of investigation and capable of being called upon to act by third parties, the Commission went far beyond the situation in which it appoints its own expert to advise it during an investigation.

The Court criticises, in particular, the obligation imposed on Microsoft to allow the monitoring trustee, independently of the Commission, access to its information, documents, premises and employees and also to the source code of its relevant products. It observes that no limit in time is envisaged for the continuing intervention of the trustee.

The Court finds that the Commission has no authority to compel Microsoft to grant to a monitoring trustee powers which the Commission itself is not authorised to confer on a third party.

Last, the Court considers that the Commission exceeds its powers in so far as it makes Microsoft responsible for all the costs associated with the monitoring trustee. There is no provision of Community law that authorises the Commission to require an undertaking to bear the costs which the Commission itself incurs as a result of monitoring the implementation of remedies.

The Court therefore annuls the decision in so far as it orders Microsoft to submit a proposal for the appointment of a monitoring trustee with the power to have access, independently of the Commission, to Microsoft’s assistance, information, documents, premises and employees and to the source code of the relevant Microsoft products and in so far as it provides that all the costs associated with that monitoring trustee be borne by Microsoft.

The fine

The Court finds that the Commission did not err in assessing the gravity and duration of the infringement and did not err in setting the amount of the fine. Since the abuse of a dominant position is confirmed by the Court, the amount of the fine remains unchanged at EUR 497 million.

REMINDER: An appeal, limited to points of law only, may be brought before the Court of Justice of the European Communities against a decision of the Court of First Instance, within two months of its notification.

Unofficial document for media use, not binding on the Court of First Instance.

Languages available: EN, FR

The full text of the judgment may be found on the Court’s internet site http:/ /curia.europa.eu/jurisp/cgi-bin/form.pl?lang=EN&Submit=rechercher&numaff=T-201/ 04 The Judgment will be on the internet site at 10.00hrs.

For further information, please contact Christopher Fretwell Tel: (00352) 4303 3355 Fax: (00352) 4303 2731

Pictures of the delivery of the judgment are available on EbS "Europe by Satellite", a service provided by the European Commission, Directorate-General Press and Communications, L-2920 Luxembourg, Tel: (00352) 4301 35177 Fax: ( 00352) 4301 35249 or B-1049 Brussels, Tel: (0032) 2 2964106 Fax: (0032) 2 2965956 IP/04/382 and MEMO/04/70). This conduct hindered innovation in the markets concerned to the detriment of consumers. To put an end to this abusive behaviour, the Commission ordered Microsoft to disclose interoperability information which would allow non-Microsoft work group servers to achieve full interoperability with Windows PCs and servers and to offer a version of its Windows operating system without Windows Media Player. The Court’s ruling confirms that the Commission was right to prohibit Microsoft’s anti-competitive conduct which harmed competition to the detriment of consumers.

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European Commission press release:

Antitrust: Commission welcomes CFI ruling upholding Commission’s decision on Microsoft’s abuse of dominant market position

The European Commission welcomes today’s ruling by the Court of First Instance upholding the European Commission’s 2004 decision on Microsoft’s abuse of its dominant market position and confirming the totality of the fine imposed. In this decision, Microsoft was fined €497 million for infringing the EC Treaty rules on abuse of a dominant market position (Article 82) by leveraging its near monopoly in the market for PC operating systems onto the markets for work group server operating systems and for media players (see IP/04/382 and MEMO/04/70). This conduct hindered innovation in the markets concerned to the detriment of consumers. To put an end to this abusive behaviour, the Commission ordered Microsoft to disclose interoperability information which would allow non-Microsoft work group servers to achieve full interoperability with Windows PCs and servers and to offer a version of its Windows operating system without Windows Media Player. The Court’s ruling confirms that the Commission was right to prohibit Microsoft’s anti-competitive conduct which harmed competition to the detriment of consumers.

Competition Commissioner Neelie Kroes stated: “The Court has upheld a landmark Commission decision to give consumers more choice in software markets. That decision set an important precedent in terms of the obligations of dominant companies to allow competition, in particular in high tech industries. The Court ruling shows that the Commission was right to take its decision. Microsoft must now comply fully with its legal obligations to desist from engaging in anti-competitive conduct. The Commission will do its utmost to ensure that Microsoft complies swiftly."

In upholding the Commission’s decision the Court of First Instance (CFI) confirmed the Commission’s finding that Microsoft had abused its dominant position in the PC operating system market by refusing to disclose interoperability information that would enable its competitors to fully interoperate with Windows PCs and servers and by tying Windows Media Player with its dominant Windows PC operating system. The CFI confirms that both types of conduct reduced competition in the relevant markets, thereby preventing innovation and choice to the substantial detriment of consumers. The Commission’s decision established that Microsoft prevented innovative server products from being brought to the market, and that competition in the streaming media player market was distorted.

The CFI confirmed the Commission’s assessment as to the appropriate legal tests to be applied, and the evidence needed to satisfy those tests.

However, the CFI annulled the decision in so far as it orders Microsoft to submit a proposal for the appointment of a monitoring trustee with the power to have access, independently of the Commission, to Microsoft’s assistance, information, documents, premises and employees and to the source code of the relevant Microsoft products and in so far as it provides that all the costs associated with that monitoring trustee be borne by Microsoft.

The Commission will carefully analyse the judgment and will consider its implications for future antitrust enforcement in these sectors and in others. It is clear, however, that this is an exceptional case with extremely harmful abuses by a company in a quasi-monopolistic position on a market.

The Commission decision upheld by the CFI focuses on the promotion of interoperability, which contributes strongly to innovation and competition in the software industry whilst also fully recognising the importance of intellectual property rights as incentives for innovation. The decision also made clear that bundling into the Windows operating system of software products otherwise available on a stand-alone basis had the effect of excluding competitors, thereby leading to reduced consumer choice liable to reduce access to innovative products.

Background

Work group server operating systems are operating systems running on central network computers that provide services to office workers around the world in their day-to-day work such as file and printer sharing, security and user identity management. The Commission decision ordered Microsoft to disclose to competitors interoperability information which would allow non-Microsoft work group servers to achieve full interoperability with Windows PCs and servers – that is to say for their servers to be able to seamlessly ‘communicate’ with the ubiquitous Windows OS. Microsoft was also required to offer a version of its Windows OS without Windows Media Player. On 7 June 2004, Microsoft filed an application for annulment of this decision with the CFI.

See Also: http://ec.europa.eu/comm/competition/antitrust/cases/microsoft/