On 17 September, the European Court of First Instance (CFI) delivered its long awaited judgment in the Microsoft case. Although the industry had evolved enormously since Sun Microsystems first brought its complaint before the European Commission alleging that Microsoft was abusing its dominant market position, the judgment has important implications for the future of the industry that go beyond the specific circumstances of the case. The impact of the judgment will be felt far beyond Europe’s borders, and comes at a time when the Commission is taking enforcement action against other IT monoliths such as Qualcomm and Intel. Gone are the days when the IT industry was too ‘technologically dynamic and nascent’ to give rise to significant and protracted EU enforcement action.
Background to the Case
In its judgment the CFI reviewed the controversial 2004 findings of the European antitrust regulator, the European Commission, that Microsoft had abused its dominant position on two counts.
First, the European Commission found that Microsoft’s refusal to supply 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 was an abuse of its dominant position. The Commission required Microsoft to disclose the specifications of its client/server communication protocols to any undertaking wishing to develop and distribute work server operating systems.
Secondly, the European Commission found that the tying of Microsoft’s media player to its PC operating system (Windows) prevented other media players from competing with Microsoft. The Commission found that Microsoft was not competing on the quality of its media player product but rather using its dominance in the operating systems market to envelope the media player market as well. To remedy this problem, the Commission required Microsoft to offer for sale a version of Windows without Windows Media Player.
The European Court’s Findings
As has been well reported, the European Court upheld the Commission’s findings.
The Court confirmed that the Commission was right to require Microsoft to release its interoperability information in order that Microsoft’s competitors on the group work server market could provide products which interact effectively with Microsoft Windows.
Although it was far from clear whether Microsoft’s interoperability was protected by intellectual property rights, the European Court’s analysis proceeded on the basis that it was (thereby affording it as much protection as is possible). However, intellectual property rights do not enjoy absolute protection under European law. A refusal by a dominant company to license an intellectual property right can however constitute an abuse of that dominant market position only in exceptional circumstances, ie where: (i) the refusal relates to a product or service indispensable to the exercise of an activity on a neighbouring market to that of the protected product; (ii) the refusal must be of such a kind as to exclude any effective competition on that market; and (iii) the refusal must prevent the appearance of a ‘new product’ for which there is potential consumer demand.
The CFI agreed that Microsoft’s refusal to supply competitors with interoperability information amounted to an abuse of its dominant position. The information was indispensable to enabling competing group servers to compete on an equal footing with Microsoft. The CFI found that without this information there was a danger that Microsoft would eliminate competition on this market. Finally, the CFI concluded that the refusal to provide this information limited ‘technical development’ to the prejudice of consumers. This last finding is perhaps the most controversial aspect of the judgment.
As a result of these findings, the CFI agreed with the Commission’s remedy that Microsoft should make its interoperability information available for an acceptable licence fee.
The CFI also agreed that the tying by Microsoft of Windows Media Player to Windows breached EU competition law. The practice of putting Windows Media Player on the Windows operating system resulted in the ubiquity of Media Player and the sharp decrease in market share for competing products such as RealPlayer. The CFI considered it irrelevant that other Media Players could be downloaded. The fact was that Microsoft had given itself an advantage in tying the two and not offering manufacturers the possibility of getting Windows without Windows Media Player constituted an abuse of its dominant market position. The CFI upheld the Commission’s remedy that Microsoft must offer a version of Windows without Windows Media Player to manufacturers.
US v EU
The European Court’s judgment brings into sharp relief the contrasting results of the EU’s remedies with the settlement by the US Department of Justice of its dispute with Microsoft (when President Bush got into power).
The US Department of Justice’s Assistant Attorney General for Antitrust, Thomas Barnett, recently claimed in a remarkable statement that the Microsoft judgment could have ‘the unfortunate consequence of harming consumers by chilling innovation and discouraging competition’. The EU slammed this response with no less a personage than the EU Commissioner for Competition, Neelie Kroes telling the DOJ to mind its own affairs.
In contrast to the US settlement, the EU decision is remarkable in its robust approach. The same Thomas Barnett was recently left defending the DOJ’s settlement from accusations that it had made no difference to the market on the basis that there were now ‘signs of competition’. The EU decision is expected to have a much more dramatic impact on the IT industry. The Microsoft judgment shows that the days of the EU looking to the US for inspiration on thorny antitrust questions are over.
Impact of the Judgment for IT industry
The immediate impact of the Microsoft judgment will be for companies working in group server products. As a result of the remedies imposed upon Microsoft, these companies will now be able to request and receive from Microsoft the huge amount of interoperability data that will enable their programmes to operate seamlessly with Windows. On 22 October, the Commission announced that after years of wrangling Microsoft finally agreed, inter alia, to give full access to its interoperability information to open source software developers at a nominal one-off royalty rate. Thus, open source competitors to Microsoft will now be able to provide businesses with competitive, innovative alternatives to Microsoft work group server products, knowing that they are fully interoperable with Microsoft’s Windows desktop operating system.
Microsoft has also agreed to a significantly reduced licence fee for a worldwide licence including patents.
The other immediate impact is that Microsoft will have to provide manufacturers with a version of Windows without Windows Media Player. The judgment means that other media players should be able to negotiate with manufacturers for their media player rather than Microsoft’s media player being placed automatically on Windows.
There has been much discussion as to whether Microsoft can provide Windows Media Player free of charge to manufacturers. The Commission did not address this issue and therefore the CFI had no opportunity to rule on the matter. However, the judgment does seem to hint that without a realistic price difference for Windows with and without Windows Media Player, Microsoft would merely be engaging in another form of tying. The rationale for this is that the cost of Windows Media Player would just be absorbed by the cost of Windows and so the contention that it is free of charge is just illusionary. This issue, however, remains very live at the moment.
Long-term Impact on Innovation
Perhaps the most lasting legacy of the Microsoft judgement is its impact on innovation. The judgment makes it clear that a company in a dominant market position may be required to release information, some of which may be protected by intellectual property rights, to enable competing products to interoperate with the dominant supplier’s systems.
The European Court’s judgment has been criticised by some as going too far. Previous EU cases had recognised that, in exceptional circumstances, a dominant company may have to license its intellectual property rights if its refusal to do so prevented the creation of a new ‘product’. In the Microsoft judgment, the CFI accepted that this principle should not be limited to new products but should also relate to ‘technical development’.
This means that it would not be necessary for a competitor to show that it needs the information to create a new product. Rather, it would suffice for it to show that the information is needed to develop new technology. What fits into this category could well be the battlefield for future legal disputes.
However, claims that the Microsoft judgment means that all intellectual property rights are up for grabs and have to be licensed are mistaken. The formula reiterated in Microsoft applies only in exceptional circumstances. The undertaking that owns the intellectual property requested for licensing has to be dominant in the market (ie the market for all the products or services that compete with the product protected by the intellectual property rights). In addition, the party requesting the licence has to show that there are no other realistic possibilities and that failure to obtain the licence could result in competition being eliminated. It is only then that the purpose for the licence is of relevance.
So the judgment does not herald the end of intellectual property rights in the EU. However, other monoliths in the IT sector, such as Apple, Qualcomm, Intel and Google, are considering the implications of the judgment for their own licensing structures, especially in neighbouring markets to those where they could be considered as being dominant. This will be a welcome development for smaller and emerging players in the IT sector.
Conclusion
Once the hyperbole is swept away, the Microsoft judgment is about guaranteeing competition in the market for IT. Law is often criticised for not keeping up with the times. This judgment, in recognising that intellectual property rights are necessary not only for the development of new products but also for the technical evolution of such new products is a sensible finding. In a world where products are no longer just manufactured in a factory but are developed and sold virtually, this view has to be commended for its modern approach. The Microsoft judgment does not open the flood gates to demands for licences to intellectual property rights; rather it provides a safety valve for ensuring that competition remains a vital part of innovation in technological markets occupied by super-dominant players.
Davina Garrod is a Partner working in the EU?Competition Group of McDermott Will & Emery/Stanbrook LLP and is based in their London office: dgarrod@europe.mwe.com
Benoît Keane is an associate in the Brussels office of McDermott Will & Emery/Stanbrook LLP. He is specialised in European Union law and is a member of the Firm’s European Competition group: bkeane@europe.mwe.com
