Antitrust Lawyer Blog Commentary on Current Developments

THE COURT OF FIRST INSTANCE ESSENTIALLY UPHOLDS THE EUROPEAN COMMISSION’S DECISION AND FINDS THAT MICROSOFT ABUSED ITS DOMINANT POSITION

In a ruling released on September 17, 2007, the Court of First Instance (the “Court”), the second highest court in Europe, reaffirmed the European Commission’s (“EC”) 2004 decision that Microsoft abused its market power by tying its digital media player to the Windows operating system. By bundling these products together, Microsoft undercut existing competition in the digital media player market and created an anticompetitive market structure. The Court upheld nearly all the key points the 2004 EC decision and, in doing so, delivered a stinging rebuke to Microsoft. The Court’s ruling stated that the EC’s standard of interoperability between the Windows operating system and alternative digital media players was well conceived and that there is no inconsistency between that degree of interoperability and the remedy imposed by the EC.

The Court also upheld the EC directive to share confidential computer code with Microsoft’s competitors, a ruling that contains possible ramifications on other companies that possess market dominance in various software markets. The Court went on to declare that the EUR 497 million ($690 million) fine levied against Microsoft shall stand as is.

European Commission

On March 23, 2004, the EC released a decision asserting that Microsoft infringed Article 82 of the EC Treaty by abusing its dominant position and engaging in two separate types of misconduct. The EC also levied a fine of approximately $690 million on Microsoft.
The first class of conduct that constituted an abuse related to Microsoft’s refusal to supply its competitors with “interoperability information” and a failure to authorize them to use that information to develop and distribute competing products in the “work group server operating system market”. To remedy this abuse, the EC required Microsoft to reveal the “specifications” of its client/server and server/server communication protocols to any venture who desired to develop and distribute work group server operating systems.

The EC challenged a second class of conduct – the tying of Windows Media Player with the Windows PC operating system. It decided that the practice affected competition on the “media player market”. To remedy this practice, the EC required Microsoft to sell a version of Windows without Windows Media Player.

The 2004 ruling called for a monitoring trustee to be appointed by the EC to observe Microsoft’s compliance with the decision. The monitoring trustee’s primary duty would be to issue opinions on whether Microsoft was actually in compliance with the decision.

On June 7, 2004, Microsoft appealed to the Court of First Instance for annulment of the decision or for cancellation or a substantial reduction of the fine imposed on it.

Court of First Instance

A. The refusal to supply the interoperability information

The Court claimed that according to the case-law, the refusal to supply the interoperability information can, in certain circumstances, constitute an abuse of a dominant position provided three conditions are met. First, the refusal relates to a product or service indispensable to the exercise of an activity on a neighboring market; second, the referral excludes any effective competition on that market; and, third, the referral prevents the appearance of a new product for which there is potential consumer demand. If such circumstances are fulfilled, the refusal to grant a license may be an abuse of a dominant position unless it is objectively justified. The Court found that the EC made the correct decision regarding the fulfillment of those three circumstances.

Also, the Court deemed that the EC 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. The Court rejected Microsoft’s arguments that the refusal is objectively justified because the technology is covered by intellectual property rights.

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

The Court found that the factors that constitute an abuse, on which the EC based its conclusion, were “correct and consistent with Community law”. It claimed that those factors were as follows: (1), “the undertaking concerned must have a dominant position on the market for the tying product”; (2), “the tying product and the tied product must be two separate products”; (3), “consumers must not have a choice to obtain the tying product without the tied product”; and, (4), “the practice must foreclose competition”. With respect to each of those factors, the Court concluded that the EC’s decision is well founded.

Further, the Court concluded that the EC was right to find that there was a substantial risk that the tying would lead to a weakening of competition in such a way that an effective competitive structure could not be ensured. Last, the Court found that Microsoft had not shown objective justification for the bundling and that the remedy imposed by the EC was balanced. On that point, the Court made clear that Microsoft retained the right to continue to offer the version of Windows bundled with Windows Media Player; only that it is required to make it possible for consumers to obtain the operating system without that media player.

The Court upheld in full the part of the EC decision concerning the bundling of Windows Media Player.

C. The monitoring trustee

However, the Court concluded that the EC went too far in that it not only appointed its own expert to advise it during an investigation but also established the mechanism of a monitoring trustee who could be called upon to act by third parties. The Court disapproved of, in particular, the requirement forcing Microsoft to allow the monitoring trustee, “independent of the EC, access to its information, documents, premises and employees and also to the source code of its relevant products”. The Court found that the EC had no authority to compel Microsoft to “grant to a monitoring trustee powers which the EC itself is not authorized to confer on a third party”. Also, the Court decided that the EC went beyond its power by making Microsoft responsible for all the costs associated with the monitoring trustee.

D. The fine

The Court found that the EC was correct in its judgment of the “gravity and duration of the infringement” and “did not err in setting the amount of the fine”. The amount of the fine remains unchanged at EUR 497 million ($690 million).

It should be noted that Microsoft can appeal, limited to points of law, to the Court of Justice of the European Communities within two months of its notification.

Camelia C. Mazard
202-589-1837
cmazard@dbmlawgroup.com