United States: Microsoft Bows To EU Court’s Ruling

On October 22, 2007, Microsoft Corporation announced that it would not appeal the September 17 decision of the Court of First Instance of the European Union, ending a long-running battle between European antitrust regulators and the software maker. Microsoft’s decision to forego further appeals establishes as final a 2004 decision of the European Commission that levied a € 497 million ($613 million) fine on the company and required it to license its intellectual property to competing software developers and to offer for sale in Europe a version of the Windows operating system without Windows Media Player software.

At a recent breakfast panel co-sponsored by Cooley Godward Kronish LLP, Clifford Chance, and Stafford Publications, Inc., and held at Cooley’s Palo Alto office, a group of experts—including members of the European Commission’s Directorate General for Competition, American and European antitrust practitioners, a noted antitrust academic, and the General Counsel of a major software corporation—discussed the Microsoft case and other issues at the intersection of antitrust and intellectual property law. The panelists contemplated the potential consequences of the Microsoft case for U.S. firms doing business in Europe—particularly those who enjoy a so-called "dominant" position in certain markets—and whether it signals a widening divide between the approaches of antitrust regulators in the U.S. and in Europe to single-firm behavior.

This Cooley Alert briefly summarizes the Microsoft case and highlights potential challenges for U.S. firms doing business in Europe.

The Court of First Instance affirmed, in almost every meaningful respect, the European Commission’s March 24, 2004 determination that Microsoft violated Article 82 of the Agreement on the European Economic Area by leveraging its dominant position in the market for desktop operating system software to impair competition and accumulate leading market shares in two related markets. Specifically, the Court found that Microsoft abused its dominant position by: (1) refusing to provide its competitors in the work group server market with full interoperability protocols that would enable work group servers to communicate with the Windows operating system in the same manner as Microsoft’s own work group server technology; and (2) "tying" its Windows Media Player technology to its Windows operating system, creating a likelihood of foreclosure in the media player market.

On the question of interoperability protocols, the Court found insufficient Microsoft’s offer to grant its work group server competitors "one way" protocols, which would allow those competitors’ products to interface with Windows. The Court instead upheld the EC’s determination that Microsoft must disclose "two way" interoperability protocols, which would allow competitors’ products to perform as intended on the Windows operating system and utilize the full functionality of Windows.

The Court found that Microsoft’s bundling of its Media Player technology with Windows gave it an advantage over its competitors unrelated to the merits of the product and thus distorted the normal competitive process. The Court rejected Microsoft’s argument that there are multiple avenues by which competitors can—and do—place their competing media players on Windows computers, even when Microsoft’s media player is pre-installed. Because the Windows Media Player was pre-installed on the Windows operating system, it enjoyed "ubiquitous" distribution that competitors could not duplicate without incurring significant costs. As a result, the Court ordered Microsoft to "offer a version of Windows without Windows Media Player," whether licensed directly to end users or to OEMs. While the Court permitted Microsoft to continue offering a bundle of Windows and Windows Media Player, it prohibited the company from adopting "any technological, commercial, contractual, or other measure which would have an effect equivalent to tying Windows and Windows Media Player" or designing the unbundled version to under-perform vis-à-vis the bundled version.

The panelists identified a number of important take-aways from the Court’s decision for firms doing business in Europe, including that:

In certain circumstances, firms with a dominant market position may be required to license their technology or property—even where protected by intellectual property rights including patents, copyrights, and trade secret protection—to competitors in order to ensure healthy competition. The Court noted that Microsoft’s server interoperability protocols were indeed protected by various forms of intellectual property, but nonetheless required Microsoft to disclose two-way protocols that would enable competitors’ products to interface with the Windows operating system environment in the same manner as Microsoft’s products.

A firm with dominance in one market may be prohibited from selling its dominant product solely as part of a bundle that includes another product or products over which the firm does not enjoy dominance, including where those products are tied together technologically. The Court noted that Microsoft’s bundling of Windows Media Player along with the Windows operating system gave Microsoft a clear advantage over competitors in the market for media player software and required Microsoft to offer an unbundled version of Windows to OEMs and end-users in order to level the playing field in the media player software market.

The Microsoft decision possibly signals a widening divide between the approaches of American and European regulators to these antitrust issues, particularly in the context of analyzing single-firm conduct involving intellectual property. In line with the Supreme Court’s 2004 decision in the Trinko case, U.S. courts and regulatory agencies continue to afford relative freedom to companies engaged in unilateral conduct even when they possess high market shares. Moreover, they are loath to require a firm to afford its competitors access to its valid intellectual property. However, the Microsoft decision signals that European regulators may be more skeptical of single-firm behavior and may be more willing to impose financial and injunctive penalties (including mandatory licensing) on dominant firms whose behavior threatens or harms competition.

Companies doing business in both the U.S. and EU should consult antitrust counsel regarding the specific circumstances under which they operate.

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