RealTime IT News

Microsoft Takes IP Argument to EU Appeal

Microsoft's next days in a European court to request suspension of anti-competition penalties may be more critical than the appeal itself.

On Thursday, Microsoft lawyers are expected to troop back to court in Brussels for another step in what promises to be a years-long process. In a hearing before Judge Bo Vesterdorf of the European Court of First Instance, Microsoft will ask that an antitrust judgment against it for abusing monopoly power be stayed until the appeal is completed.

In March, the European Commission levied a $613 million fine on the company, rebuking it for stifling competition and shutting out rivals in the server and media player industries. The EU's regulatory body also ordered Microsoft to offer a version of Windows that didn't include Windows Media Player and to open its APIs to rival server software makers.

The appeal will be heard before a panel of three judges in the Court of First Instance, a body that handles actions brought against the EU or its commissions, including requests for annulment of their rulings. Both the Commission and Microsoft could appeal the Court of First Instance's decision on both the original penalty and the suspension of penalties to the European Court of Justice, the highest court of the EU.

But Vesterdorf alone will decide whether to force Microsoft to comply with what the company has characterized as compulsory licensing of its intellectual property or let Redmond continue its bundling strategy past the launch of Longhorn, its next-generation operating system, expected in 2006.

Vesterdorf is inclined to side with intellectual property owners, rather than the interests of competition, said Frank Fine, an attorney specializing in EU competition law. Fine represented NDCHealth, a U.S.-based provider of software and research to the healthcare industry, before Vesterdorf.

The NDCHealth case was related to actions by IMS, the world's largest provider of pharmaceutical market research, which had developed a proprietary system for dividing Germany into regions and providing aggregated data about drug sales by region. When NDCHealth tried to enter the market, it found that pharmaceuticals companies would only buy data that conformed to IMS' format -- but IMS wouldn't license the format.

In 2001, the European Commission ruled that IMS was abusing its dominant position to lock out competition, just as it decided Microsoft had. It ordered IMS to license its format, as it ordered Microsoft to license its server protocols.

When IMS appealed to the Court of First Instance, Vesterdorf suspended the penalty pending the appeal trial. On Thursday, Microsoft will ask Vesterdorf to let it off from opening the server APIs and detaching Media Player from Windows.

"Judge Vesterdorf showed in his suspension hearings in [the IMS] case that he was prejudiced toward the IP owner," Fine said.

Fine said that Vesterdorf's IMS ruling found that, even though IMS had 90 percent of the market for pharmaceutical sales research, upholding the Commission's penalty would destroy innovation.

Microsoft would hope that Vesterdorf would show the same approach to its own IP rights.

However, in April, the European Court of Justice, the EU's highest court, overruled Vesterdorf and let the IMS penalty stand, narrowing the definition of when market domination crosses the line and becomes abuse.

"The implication of that ruling is that IP rights are not sacrosanct," he said. "Because of the ECJ ruling on our case in April, it's going to be hard for Vesterdorf to play that game again. He can't say that IP rights are sacrosanct. He can't say, 'Even though you have 90 percent market share, I'm going to protect your IP rights above everything else.' He's going to have to play it straight."

Fine said that if Vesterdorf suspends the penalties, the European Commission will appeal to the ECJ, which could reverse his decision.

Handicapping The Media Player Market?

European consumers aren't anxiously awaiting a Media Player-free version of Windows, said Paul Jackson, a senior analyst in the Amsterdam office of IT research firm Forrester. "Most European consumers view the EU in same way that U.S. consumers view the federal government. The public is largely indifferent." Jackson said EU consumers, like those in the States, view the operating system as a commodity, something that comes along with the computer.

But some in the tech industry agree that the case has potentially huge implications -- even if they don't agree on how the court should rule.

Microsoft will argue that forcing it to open its server APIs to rivals will cause this intellectual property to lose most of its value. It also will claim that such a ruling would stifle innovation: Other companies would not be willing to spend money on research and development of new products if they thought they would be forced to license it or disclose it to others.

"There's been a great deal of interest in industries and among European companies over the potential ramifications of the commission's decision," said Microsoft spokesperson Jim Desler. "We've had companies contact us, and it's come up in our ongoing dialog on other issues with other companies. Given this interest, there have been some companies that have expressed interest in intervening on behalf of Microsoft in this process."

Boeing was asked by Microsoft to support its position and agreed to consider the request, a Boeing spokesperson confirmed. The company ultimately decided against getting involved, declining comment on its reasoning. Airbus, the French consortium, did file a brief on Microsoft's behalf, according to news reports.

Another organization, CompTIA, has weighed in on Microsoft's side, filing a brief urging the penalties be suspended and the ruling overturned. CompTIA is a trade association with over 16,000 member companies in the hardware and software industries. Microsoft is one of 17 members of its public policy board of directors; a spokesperson said that the company contributes less than 5 percent of the organization's operating budget.

The issues in the case are related to an antitrust policy statement that CompTIA adopted a few years ago, said Lars Liebeler, the organization's antitrust counsel, who will testify during the suspension hearing.

"This action of the Commission favors competition enforcement too much over intellectual property. The results are profoundly negative for the whole industry."

While pulling in allies is a tactic Microsoft used in the U.S., Europeans are more solicitous of third-party points of view, said Mark Ostrau, co-chair of the antitrust practice at the law firm Fenwick & West.

"When the Court of First Instance considers the suspension, they're not immune to thinking about where they're going to go ultimately," he said. "It couldn't hurt Microsoft in this way, but it may have limited usefulness." He said Airbus's involvement could sway the court, because the company is one of the EU's commercial success stories, whereas Boeing's opinion might not seem relevant.

If Microsoft could dig up customers or other vendors in its technology supply chain to explain exactly how the penalties on Microsoft would harm them, that would have the greatest impact, Ostrau said.

CompTIA pointed to a study of eight Latin American markets that showed that for every 10 percent decline in software piracy rates, gross investment in IT capital increases. Although the study does not make a connection between software piracy in Latin America and piracy in the EU, CompTIA's brief argues that compulsory licensing of IP would have the same effect in Europe. "If the main proceeding extends for a considerable time as it is expected to do, the reduction in IT research and development investment during that time is likely to cause great harm to innovation in the industry," it said.

CompTIA's Liebeler couldn't give an example of a situation in which fears about a lack of protection for intellectual property caused a company to spend less on R&D. "It's a subtle process, it happens day by day," he said. "The venture capitalists who start new firms and R&D executives in existing firms are making decisions every day about what the legal landscape is, whether they're likely to have an investment recouped."

Ostrau is not sure how well this argument will play with Vesterdorf, or with the full court. "The European court of Justice has already gone on record acknowledging that IP is not sacrosanct, that there might be situations in which it needs to be shared," he said.

Going Playerless?

Microsoft also will argue, as it did in the U.S. Department of Justice's antitrust action against it, that the Media Player is part of the operating system and should not be separated. Microsoft has shifted its position a bit, no longer claiming that the media player can't be separated.

In August, Microsoft introduced Windows XP Starter Edition, a lower-cost version of the OS from which some features have been removed.

"If the court concludes that we must implement the Commission's decision, we of course will comply with the Court," Microsoft's Desler said, when asked if Microsoft could provide a playerless version of the OS.

In its supporting brief, CompTIA said that because the software industry relies so much on the Microsoft operating system, creating a version of Windows without the Media Player "will force software developers to expend vast amounts of resources to ensure that their products will interact and operate properly with the new operating system. The net result of the creation of a different version of Windows that does not perform all the functions of a full-feature Windows is that many complementary pieces of software may not operate properly."

"Unbundling the Media Player is the most straightforward aspect," Fine said. In his opinion, it's clearly a case of tying two products together, a practice that frequently runs afoul of antitrust laws. "I don't think Vesterdorf has an ideological slant on that, and Microsoft faces a real risk," he said.

The hearing on suspending the penalties is expected to take two or three days, with a ruling expected in four to six weeks. Microsoft already has paid the fine and stands ready to license the APIs and provide an alternate version of Windows.

Said Microsoft's Desler, "We are very confident in our case as we enter the Luxembourg hearings and believe that the Commission's decision would represent a bad precedent for European consumers and companies."