Microsoft has lost its appeal against the European Commission's 2004 decision which fined it EUR 497 million for abusing its dominant position. In a judgment issued today, the Court of First Instance of the European Communities (the CFI) upheld the Commission's decision on all the substantive points, and has reaffirmed the fine imposed by the Commission.
On 24 March 2004, after a five year investigation, the European Commission adopted a decision (the Decision) finding that Microsoft had infringed European competition law by leveraging its near monopoly position in the market for PC operating systems (OS) on to the markets for work group server operating systems and for media players.
In respect of the work group server operating systems the Commission found that Microsoft's refusal to supply certain "interoperability information" to its competitors and to allow that information to be used in the development and distribution of competing products in the period between October 1998 and March 2004 constituted an infringement. By way of remedy the Commission ordered Microsoft to disclose to any undertaking wishing to develop work group servers the "specifications" to its client-to-server and server-to-server communications protocols.
As regards the media players, the Commission found that Microsoft tied the supply of Windows Media Player to the supply of the Windows Operating System. The Commission found that this affected competition on the media player market. By way of a remedy, the Commission ordered Microsoft to offer for sale a version of Windows without Windows Media Player.
The Commission imposed a fine on Microsoft for these infringements of EUR 497 million.
In order to assist the Commission in monitoring Microsoft's compliance with the Decision, the Decision required the appointment of a monitoring trustee appointed by the Commission from a list of persons identified by Microsoft. The monitoring trustee's role was to issue opinions on whether Microsoft was complying with the Decision and on any issue of relevance to the enforcement of the Decision. The Decision specified that the monitoring trustee was to have access to Microsoft's assistance, information, documents, premises and employees and to the source code of relevant Microsoft products. The costs associated with the monitoring trustee were to be borne by Microsoft.
On 7 June 2004, Microsoft initiated proceedings before the CFI for the annulment of the Commission's Decision. Shortly afterwards, on 25 June 2004, Microsoft applied for suspension of the operation of the remedies imposed by the Decision and pending determination of this matter the Commission suspended the imposition of the remedies. The CFI decided on 22 December 2004 to dismiss Microsoft's application for interim measures. The Commission then sought to impose the remedies. Since then there have been a series of procedural disputes between the Commission and Microsoft as to the implementation of the remedies which resulted in the Commission issuing Microsoft with further fines of EUR 280.5 million in July 2006. The Commission is currently considering imposing further fines for non-compliance.
The CFI has now published its judgment on the Microsoft appeal. In a detailed and extensive judgment it has upheld the substantive findings in the Commission's Decision and affirmed the level of the fine imposed by the Commission.
The CFI confirmed, in respect of the work group servers, that the remedy imposed by the Commission requiring the disclosure of the "interoperability information" was reasonable. The CFI reconfirmed the basic principle of Community law that, although undertakings are free to choose their business partners, in certain circumstances a refusal to supply by a dominant company may constitute an abuse of a dominant position.
For a refusal by a holder of intellectual property rights to license those rights to a third party to be considered an abuse the settled case law of the European Courts is that three conditions must be satisfied: (1) the refusal must relate to a product or service indispensable to the exercise of an activity in a neighbouring market; (2) the refusal to supply must be of a kind to exclude any effective competition from the neighbouring market, and (3) the refusal must prevent the appearance of a new product for which there is potential consumer demand. The CFI upheld the Commission's analysis that all three criteria were satisfied and that Microsoft had no objective justification for the restrictions. In doing so, the CFI observed that circumstances relating to the appearance of a new product must be assessed under Article 82(b) of the EC Treaty. The CFI considered that the Commission's finding that Microsoft's refusal limits technical development may be sufficient to satisfy this condition.
In respect of the bundling of the Windows Media Player with Window OS, the CFI considered that the factors applied by the Commission were consistent with the case law. Those factors were as follows (1) the undertaking concerned must have a dominant position on the market for the tying product (in this case the OS market), (2) the tying product (the OS) and the tied product (the Media Player) are separate product markets, (3) consumers must not have a choice to obtain the tying product without the tied product (i.e. it was not possible to obtain Windows OS without Windows Media Player) and (4) the practice must foreclose competition. The CFI held that in respect of each of the factors the Commission's Decision was well founded. As a consequence the CFI upheld in its entirety the Commission's findings in respect of the bundling of Windows Media Player.
However, the CFI annulled the decision in so far as it ordered Microsoft to submit a proposal for the appointment of a monitoring trustee with the power to have access, independently of the Commission, to Microsoft’s assistance, information, documents, premises and employees and to the source code of the relevant Microsoft products and in so far as it provided that all the costs associated with that monitoring trustee be borne by Microsoft.
Because the CFI's finding upheld the Commission's Decision as regards the existence of an infringement and the gravity and duration of the infringement and the CFI found that the Commission did not err in setting the amount of the fine, the CFI also upheld the level of the fine.
This case represents a substantial victory for the Commission and its approach. However, it does not appear to represent a significant development to Community law.
The CFI has reaffirmed the principles of the existing EC case law that, in particular circumstances, a refusal to license intellectual property rights can be an abuse of a dominant position and that the protection of such intellectual property rights and a potential effect on incentives to innovate will not be an objective justification for a refusal to supply. It confirms the principle that the licensing of intellectual property rights, even in high tech industries where such rights can be crucial to competitiveness, can be justified where a company is dominant in circumstances where it abuses that dominant position.
One point to note, which could have an impact on EC competition law, is the CFI's comment that circumstances relating to the appearance of a new product must be assessed under Article 82(b) of the EC Treaty and that a refusal which limits technical development may be sufficient to satisfy this criteria. This finding may broaden the circumstances in which a refusal to license will give rise to an abuse.
The Competition Commissioner in a speech following the judgment stressed the importance of interoperability for both consumer choice and innovation. It therefore seems likely that ensuring interoperability may be the focus of future Commission investigations in high tech industries.
The CFI has upheld the existing case law on tying and bundling by dominant undertakings. It was unsurprising that the CFI upheld the finding on the bundling of Windows Media Player with the Windows OS given its assessment of the facts. Although the fact that the CFI upheld this part of the Commission's decision is interesting as the evidence was that there was little customer demand for a version of the Windows OS without a bundled media player and the introduction of the Apple's iTunes product suggested there may be grounds for considering that Microsoft's dominance on the relevant market might not be sustainable long-term. It was also not clear how consumers would be harmed in the long term.
As regards the monitoring trustee, the role of the trustee has been controversial with Microsoft and the Commission having a number of public disagreements about the role of the trustee. The CFI's rejection of the Commission's approach in respect of the trustee must raise potential issues going forward as to the implementation of the remedies and in particular as to their likely effectiveness, but it is not clear whether this will have any wider effects on the Commission's procedures.
This judgement seems unlikely to bring this long-running case to an end. Many issues remain to be resolved including monitoring of and compliance with the remedies and the possibility of the Commission fining Microsoft further for any non-compliance with the remedies imposed. The judgment could also be appealed further. Microsoft has two months within which it can appeal the judgment to the European Court Justice on points of law and given what is at stake, Microsoft may decide to appeal so we may need to wait another 3 years before this case finally reaches its conclusion. Although given the comprehensive nature of the judgment rejecting the appeal it may be difficult for Microsoft to be successful on appeal.
The judgment is likely to have some impact on the Commission's activities. If the Commission had lost then that would undoubtedly have made the Commission more cautious when approaching dominance cases and particularly cases in high tech industries. It is also likely to impact other current cases as the Commission is investigating a number of other cases of abuse of dominance involving software and hardware suppliers (including a further investigation into Microsoft's conduct). This judgment is therefore likely to give further encouragement to the Commission in the pursuit of those cases.
The judgment continues to highlight differences in approach between the US and the EU with regard to the application of antitrust law on dominant companies. It remains to be seen how the Commission will take the judgment into account in its review of Article 82.
In conclusion, although the case may have a significant impact on the way that Microsoft does business and the way in which the Commission approaches future cases in high-tech industries involving dominant companies, it has not given rise to significant substantive changes in the law. The size of the fine imposed on Microsoft is a reminder of the special responsibility on dominant undertakings not to engage in conduct which would abuse that dominant position.