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Backgrounder: Microsoft’s Competition Case in Europe
European Commission’s case boils down to two questions: Can companies add new features to products? Do leading companies have duty to share innovations with competitors?

Updated: September 2007

On September 17, 2007, the Court of First Instance in Luxembourg will issue a ruling on the European Commission’s competition case against Microsoft. That case began in December 1998 with a complaint by Sun Microsystems and culminated in a decision by the Commission in March 2004. Many of the claims at issue in the case have already been reviewed and resolved by the U.S. Department of Justice in its 2002 Consent Decree with Microsoft.

The Commission’s case boils down to two simple issues:

1. When may a company with leading market share improve its products by adding new features or improving existing features?

We live in a world in which many products result from adding new components and features to existing products – as anyone who owns a modern, feature-packed mobile phone can attest. The Commission’s 2004 Decision, however, held that Microsoft violated EU competition law when it improved the media playback features in its Windows operating system – improvements Microsoft made so that its customers could more easily enjoy a wide range of media on their PCs. It therefore ordered Microsoft to offer versions of Windows in Europe that cannot play audio and video files, even though virtually every competing product – such as those offered by Apple and many Linux vendors – includes these features.

Although the Commission defends this remedy as giving consumers greater choice, there has been effectively no demand for this version of Windows by consumers or PC manufacturers. Of the millions of Windows copies sold in the EU since this remedy went into effect, fewer than .005 percent have been the version with reduced functionality. Under established competition law rules, even leading companies may improve their products by adding new features, so long as this benefits consumers. And the integration of media playback capabilities in Windows clearly does benefit consumers, as well as the many companies whose products rely on these capabilities in Windows to function properly.

2. Does a company with leading market share have a duty to share its innovations with competitors so that they can copy those innovations in their own products?

The Commission also held that Microsoft violated EU competition law by failing to disclose to competitors some of its most innovative technologies relating to “server” operating systems (i.e., back-office computers that help run networks). The Commission reached this conclusion despite the fact that many of the world’s most powerful IT companies, such as IBM, Sun Microsystems, Hewlett-Packard, Novell, and Red Hat, compete vigorously in the supply of server operating systems. The Commission ordered Microsoft to create extensive documents describing its complex and innovative technologies – many of which are protected by patents and trade secrets – and to license these technologies to competitors. In recent months, the Commission has broadened the scope of this compulsory license considerably by holding that Microsoft: (i) must license these technologies even outside Europe; (ii) must license these technologies royalty-free; and (iii) cannot prevent licensees from disclosing Microsoft trade secrets in their source code.

Setting aside the fact that Microsoft did not hold a dominant position in the supply of server operating systems, the Commission’s compulsory license is incompatible with EU law. In essence, the Commission claims it may impose compulsory licenses on leading firms whenever it determines that, on balance, this would spur innovation. This is not and never has been the law in Europe (or anywhere else). This approach also frustrates the very incentives for innovation that intellectual property rights are meant to promote.

In addition, although the Commission contends a compulsory license is necessary to promote interoperability, the scope of information demanded by it is far broader than what is needed to achieve interoperability, which is the ability for products from different manufacturers to be able to exchange information and data – in essence, to talk to each other. Rather, the compulsory license will allow competitors to replicate Microsoft’s technologies such that their products would be indistinguishable from Microsoft’s products in important respects. This outcome will largely eliminate incentives for these companies to develop alternative or better technologies – precisely the opposite of what competition law is intended to achieve.

In addition to these two central issues, the Court of First Instance is likely to rule on two additional points in its September 17th decision:

Fines. The Commission’s March 2004 decision imposed a fine of just over €497 million (approximately $613 million) on Microsoft. This is the largest antitrust fine ever levied in the EU – far larger than the Commission has ever levied even against hardcore price-fixing cartels. Given also that the legal theories on which the 2004 Decision is based are novel in many respects and that there was never any evidence of consumer harm, this fine is clearly excessive.

Monitoring Trustee. The 2004 decision also requires Microsoft to pay for a Commission-appointed Monitoring Trustee to monitor Microsoft’s compliance with the decision. The Commission, however, does not have the legal authority to delegate its enforcement powers to a private party in this manner. Moreover, the Commission’s dealings with the Monitoring Trustee have been marred by irregularities that have deprived Microsoft of due process.

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