European Court to Microsoft: You Lose

UPDATED: In a stunning loss to Microsoft, the European Union’s second
highest court Monday turned down most of the software company’s appeal of
its 2004 antitrust ruling by the European Commission (EC).

In an announcement from Luxembourg, the European Court of First Instance
(CFI) upheld the EC’s March 2004 decision that the company was in breach of
European competition law through the abuse of its dominant market position.

Microsoft had appealed that order, but today the CFI sided with the EC on all but one matter in the case. The findings have been anticipated for months.

The EC’s 2004 ruling ordered Microsoft to share protocol information with competitors in the workgroup server market, which the company had defended as being proprietary information. The CFI found the EC was well within its rights to demand that Microsoft license that information in order to enable interoperability among products in that market.

Additionally, the CFI found that the EC was also correct in deciding that Microsoft had illegally tied Windows Media Player to Windows. Microsoft now offers a version of Windows in Europe that does not include WMP.

During a press conference today, Brad Smith, general counsel of
Microsoft, said it was too soon to say whether Microsoft would appeal the
ruling. “I believe in these kinds of things that although there’s a lot of
drama, one needs to step back and read first, think second, and decide
third, and I think that’s the right order, and that is the order in which
we’re going to take this.”

Smith noted that the company was committed with meeting its obligations
under European law. “We’ll study this decision carefully, and if there are
additional steps that we need to take in order to comply with it, we will
take them.”

One of them is the interoperability issue, and how much Microsoft charges
for licensees to gain access to Windows operating system protocols, which
has been a point of contention between the EC and Microsoft since the 2004
antitrust decision.

“Everyone agrees, for example, that the version of Windows that we offer
in Europe today is in compliance with the commission’s 2004 decision, and
I’m also gratified that we were able to have the kinds of constructive
discussions with the European Commission last year that enabled us to bring
to market Windows Vista in conformity with the commission’s 2004 decision,”
Smith said today.

“In addition, there’s obviously a lot of work that has gone into our efforts
to comply with the commission’s terms with respect to communications
protocols and our duty to license them, a duty that obviously was reaffirmed
by the court’s decision today. We’ve made a lot of progress in that regard,
and yet we all have to acknowledge that there are some issues that do remain

The current price for those protocols, he added, is 1 percent of the
revenue generated from the product. “We’ll be
focused on addressing that quite quickly,” as well as questions related to
trade secrets and protection of trade secrets.

Where the CFI differed with the EC in upholding most of the EC’s
antitrust ruling is in the area of whether the EC had the power to legally
appoint an external trustee to monitor Microsoft’s progress in fulfilling
the EC’s remedies. The CFI decided it did not, although the question appears
to be more one of degree.

“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 CFI said in a

Finally, the CFI let the fines that the EC had imposed to stand.
Microsoft was fined a total of $970 million — an initial $613 million in
March 2004 and then, two years later, an additional $357 million as penalty
for dragging its feet in delivering interoperability documentation to the
EC’s trustee.

Microsoft presented its appeal to the CFI in April 2006.

A win for the EC in the case has been widely seen as liable to embolden
the commission in its probes into Intel, Apple and Google. The ruling may
also motivate the EC to take an even harder look at Windows Vista and other
Microsoft technologies and business practices.

“It’s clearly important to us as a company to comply with our obligations
under European law,” Smith said. He pointed out that the company has been
working to address the EC’s complaints and that “the world has changed a
lot” since the case was first filed.

For one thing, he noted that just last week Sun Microsystems and Novell — two companies that were among the chief complainants that kicked off the original investigation in 1998 — are now engaged in partnerships with
Microsoft that center on interoperability.

In a statement, Competition Commissioner Neelie Kroes called the decision
a landmark decision that gives 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.”

The European Union’s court system allows appeals of CFI’s decisions
to the European Court of Justice — the EU’s highest court — but only on
questions of law.

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