Microsoft Loses First Appeal in EU Case

Microsoft's effort to delay European antitrust measures until the end of the appeals process failed with the release of an order Wednesday by the European Court of First Instance in Luxembourg.

The order upheld the March 2004 decision of the European Commission, which concluded after a five-year investigation that Microsoft had illegally abused its dominance in the desktop operating system market. The Commission called for Microsoft to pay a record fine of 497 million Euros, disclose Windows communications protocols to competitors to re-establish workgroup server operating system competition and release a version of Windows excluding Windows Media Player to invigorate media player competition.

Microsoft quickly paid the fine but contested the communications protocol and media player provisions of the decision by the European Commission, which is the European Union's enforcement arm. The company had argued that adopting the other provisions would do permanent damage to the company's ability to compete.

In a statement Wednesday, the court disagreed: "Microsoft has not shown that it might suffer serious and irreparable damage as a result of implementation of the contested decision."

While Microsoft has not publicly ruled out appealing the court's order, the company is moving immediately to comply. By the end of the day Wednesday, Microsoft plans to post a registration page for competitors to obtain the communications protocols. Company officials also said the stripped-down version of Windows would be sent to PC manufacturers in January and would be available through all regular European channels in February.

The ruling on Wednesday is the smaller of two related actions before the Court of First Instance. The order is about Microsoft's request for suspension of the Commission's March decision until the court rules on Microsoft's request for annulment of the entire decision. Microsoft has two months to file an appeal of the order. Meanwhile, the case for the annulment will proceed with filings due to the court by June and oral arguments expected in the fall, with a decision a few months after that.

"Even after a decision on the merits by the Court of First Instance, there can be an appeal on the merits to the European Court of Justice," said Brad Smith, Microsoft vice president and general counsel. "So this case may keep lawyers on all sides busy for months and some additional years before there's a final resolution."

The Parties React

The European Commission welcomed the order that made its March decision effective, saying it would benefit consumers by improving choice in media player and workgroup server markets and stimulate innovation.

"Today's order is important because it preserves the effectiveness of antitrust enforcement, in particular in fast-moving markets as in this case. The order confirms, as the Commission claimed, that this type of case does not fulfill the criteria for a decision to be suspended," the Commission said in a statement.

Smith acknowledged that the decision was a setback, noting especially that once the communications protocols are published, "You just simply can't unring the bell."

But Microsoft's attorneys found cause for optimism in the court president's admittedly "circumspect" discussion in the 90-page order of the merits of Microsoft's arguments. "The court nonetheless recognized that we have a number of arguments that are important, that will need to be weighed seriously by the panel that will decide the merits, and could well enable us to win at the end of the judicial day," Smith said.

Smith interpreted the order's mention of four of Microsoft's arguments against the European Commission decision on the Windows Media Player side as a positive for the software giant. The Microsoft arguments are that:

  • integrating new technology into a consumer product is not a practice that by its nature is likely to restrict competition,
  • the Commission should have given greater weight to the positive effects of the Windows operating system design concept on consumers and software developers,
  • content providers continue to have access to different formats and
  • Windows and its media functionality are not two distinct products.

    Armed with that list, Microsoft officials are claiming renewed hopes of reaching a settlement with the European Commission. "We are hopeful that the issues highlighted by the Court will create an opportunity for the parties to discuss settlement," Microsoft said in a statement.

    Enterprise Implications

    The European Commission case has always held more significance for the enterprise than the U.S. antitrust case because half the case deals overtly with the issue of whether Microsoft was abusing its desktop operating system monopoly to gain unfair advantage in the workgroup server market.

    While Microsoft agreed to publish Windows communications protocols under the Consent Decree in the U.S. antitrust case, this time around Microsoft must do more than republish the same information it has been sharing for two years to about 20 companies. Because the Commission's case deals with workgroup server interoperability, the decision for the first time calls for Microsoft to license Windows server communications protocols to competitors. Other server operating system vendors can then bring those protocols into their server operating systems.

    Although the Commission claims the order is proof that regulators can keep up with a fast-moving industry, events appear to prove otherwise. Microsoft's legal maneuvers in the months since the Commission's decision and the company's interpretation of the language in the decision and court order could minimize the damage.

    The main beneficiary of the availability of the workgroup server communications protocols would have been Sun Microsystems, which was originally a complainant in the European Commission case. However, Sun and Microsoft officially buried the hatchet with a massive cash and technical exchange in April that gave Sun access to the protocols Microsoft is now being forced to license. Another likely beneficiary, Novell, which was an intervener in the EU case, settled with Microsoft more recently. Novell's agreement did not secure access to Microsoft protocols, and Novell may choose to license the protocols from Microsoft now.

    In a global market, one key caveat will further prevent the server communications protocols from being important. The decision requires that the licenses apply at least to the European Economic Area, and Microsoft intends to issue licenses in a way that ensures that the European Economic Area is all that they apply to.

    "The license rights that are provided are confined to the European Economic Area. You can obtain a license from Microsoft, but ultimately to use that license, the software will have to be developed in the European Economic Area and distributed in the European Economic Area. That will obviously be one aspect that people will want to think about," Smith said.

    One other red flag on the protocols emerged immediately. In interpreting the court's order, Smith said, "The court noted that it would be appropriate for us to have safeguards in place with respect to the compulsory licensing of our communications protocols. That's helpful, I think, to the company. We're studying that part of the decision carefully." That statement should give pause to any software company considering entering a licensing agreement with Microsoft.

    On the consumer side of the case, Microsoft continued a similar campaign to undermine the public perception of the value of a Windows operating system apart from Windows Media Player. The agreement requires Microsoft to charge no more for the unbundled version of Windows than for regular Windows. Microsoft expects to charge the exact same amount.

    Smith on Wednesday accelerated the drumbeat started in March, when Microsoft asserted that removing Windows Media Player would disable 20 features of the operating system. Smith said European families and PC makers do not want the stripped-down version.

    "We've always been skeptical … that there would be significant customer demand for this additional version of Windows," Smith said. "It will work less well than the version of Windows that they receive from Microsoft and computer manufacturers today." He added that removing Windows Media Player will break some functionality in third-party media players.

    With the communications protocol issue largely sidestepped, there is an enterprise implication from the media player issue. The broad question will be whether the case will set a legal precedent that courts can strike components out of Windows, opening the way for a flood of lawsuits.

    "The reality is that we won't know and no one will really know what precedent is set by the court until the court makes a determination on the merits of the case," Smith said.

    This story has been extensively updated from the short version that appeared Wednesday morning.

  • About the Author

    Scott Bekker is editor in chief of Redmond Channel Partner magazine.


    comments powered by Disqus

    Subscribe on YouTube