On 17 September 2007, the Court of First Instance handed down its long-awaited judgment in the Microsoft case.  

In summary, on the key issues the Court upheld the Commission’s findings:

• Microsoft abused its dominant position by refusing to supply interoperability information to competitors for work group server operating systems.
• Microsoft abused its dominant position by bundling the Windows media player with its Windows PC operating system.
• The Commission did not err in assessing the gravity and duration of the infringement and did not err in setting the amount of the fine.  The €497 million fine imposed on Microsoft stands.

On a significant process issue, the Court annulled the Commission’s appointment of a Monitoring Trustee with far reaching rights and powers, including access to Microsoft premises, employees and source code, as having no legal basis in EU law.

Microsoft has two months to decide whether to appeal the Court’s ruling to the European Court of Justice. An appeal must be limited to points of law only.

Case Background: The Court proceedings date back to 2004 when Microsoft appealed the European Commission’s Decision finding that Microsoft had infringed EU competition law by abusing its dominant position in the markets for PC operating systems and “work group” server operating systems. The Commission’s Decision was the result of five years of investigation, several hearings and three formal and changing statements of objection issued by the Commission. The investigation was initiated by Competition Commissioner Mario Monti, who at one stage was close to settling the dispute with Microsoft but later retracted on the basis that it was necessary for the Commission to set a strong precedent and this could only be achieved by a formal Decision. 

Below we discuss the Court’s ruling on Microsoft’s grounds of annulment.

A.        Refusal to supply competitors with interoperability information for Microsoft’s “work group” server operating systems

Commission Decision: In its 2004 Decision, the Commission found that Microsoft had abused its dominant position, and thus infringed Article 82 of the Treaty of Rome, by refusing to supply competitors with interoperability information and allow its use for the purpose of developing and distributing work group server operating system products. The Commission ordered Microsoft to make the interoperability information available to competitors for such purpose on reasonable and non-discriminatory terms.  The obligation was not limited in time.  

Microsoft’s Appeal: Microsoft’s arguments focused on the following points:

• The strict conditions required by the European Courts before a dominant company is obliged to license its intellectual property rights to its competitors were not met; 
• There is in fact substantial interoperability in the market among competing work group server systems, including Microsoft operating systems;
• The new “balancing test” adopted by the Commission is legally defective.  The test weighed the potential negative impact of forced licensing on Microsoft’s incentives to innovate against the positive effects on the level of innovation in the industry as a whole;
• The Commission’s interpretation of “interoperability” as the ability of competitors to duplicate the functionality of Windows server operating systems is deeply flawed under EU law and violates Microsoft’s intellectual property rights. 

Court Ruling: The Court noted that, as a rule, companies are free to choose their business partners. In certain circumstances, however, the holder of an intellectual property right may abuse a dominant position by refusing such supply. This is the case where (i) the refusal relates to a product which is indispensable for competitors to exercise their activities on a neighbouring market; (ii) the refusal excludes any effective competition on that market; (iii) the refusal prevents the appearance of a new product; and (iv) the refusal is not objectively justified.[1]  In the Microsoft case, these conditions were met. 

The Court held that the necessary degree of interoperability required by the Commission was well founded and there was no inconsistency between that degree of interoperability and the remedy imposed by the Commission. The degree of interoperability required by the Commission was not intended to enable competitors  server operating systems to function in every respect like – or to “clone” - a Windows system. The Court emphasised that Microsoft source code was not being disclosed to third parties.

The Court also found that Microsoft had failed to show that if it were required to disclose the interoperability information that would have a significant negative effect on its incentive to innovate.

B.        Tying Microsoft Windows with Windows Media Player

Commission Decision:  In 2004, the Commission found that Microsoft had abused its dominant position by making the availability of Windows PC Operating System (“Windows OS”) conditional on the simultaneous acquisition of Windows Media Player. The abuse was triggered not by the integration of media functionality into Windows but rather from an incremental improvement made to that functionality, namely the addition of streaming capability.[2]  It ordered Microsoft to offer a “full-functioning” version of Windows OS which did not incorporate Windows Media Player. Microsoft retained the right to offer a bundle of Windows OS and Windows Media Player.

Microsoft’s Appeal: Microsoft argued that the Decision failed to meet the conditions required to establish a violation of Article 82:

• The Commission failed to demonstrate that Windows and its media functionality were two separate products; 
• Competitors have not been foreclosed from creating media players for use with Windows or from distributing those products broadly; 
• The remedy which required Microsoft to provide a version of Windows without media functionality interfered with its intellectual property rights. 

Court Ruling: The Court found that media players and operating systems are distinct products.  The Court noted that there was a separate consumer demand for media players and that competitors design and supply media players independently of operating systems. 

Tying of Windows Media Player and Windows OS, the Court held, appreciably altered the balance of competition in favour of Microsoft by giving it unparalleled advantage in relation to distribution of its media player and ensuring ubiquity of its media player on PCs. This acted as a disincentive to OEMs from pre-installing competing media players on PCs with the result that an effective competitive structure would not be ensured in the near future.  The Court noted that Microsoft did not dispute it had a dominant position in client Windows OS and concluded that Microsoft had abused its dominant position by bundling Windows Media Player and Windows OS. 

The Court noted that Microsoft was required only to make it possible for consumers to obtain Windows OS without the media player, a measure which, according to the Court, does not mean any change in Microsoft’s current technical practice other than the development of the relevant version of Windows. 

C.        Annulment or reduction of the fine imposed on Microsoft[3]  

The Commission fined Microsoft €497 million for its alleged violation of Article 82.  Microsoft argued that there was no basis for imposing a fine on Microsoft as no infringement was committed and, alternatively, the fine was disproportionate and should be annulled or substantially reduced. Moreover, Microsoft claimed, fines should not be imposed for liability under novel theories of law.

Court Ruling: The Court held that the Commission did not err in assessing the gravity and duration of the infringement and did not err in setting the amount of the fine.

The full opinion of the Court is available at: http://curia.europa.eu.

If you have any questions relating to the Microsoft case please contact:

Ted Henneberry (ted.henneberry@hellerehrman.com / +44 20 7469 4275) or

Douglas Lahnborg (douglas.lahnborg@hellerehrman.com / +44 20 7469 4267)

in our London office. We will shortly produce a full analysis of the Decision to those interested. Please let either one of us know if you would like to receive this note.

[1] This reflects the test for forced licensing of intellectual property rights established by the Court in IMS Health 2004. 

[2] “Streaming” is a technology which allows users to start viewing and listening to films and music before the downloading of the relevant film or music has been completed.

[3] The third ground of annulment, which was “The requirement that Microsoft appoint a trustee to monitor its compliance with the Decision is legally flawed”, concerned a point of procedure and is not discussed here.