On September 17, 2007, the European Court of First Instance largely dismissed Microsoft’s appeal and upheld the main pillars of the European Commission’s decision that Microsoft had abused its dominant position. The court did not reduce or otherwise vary the fine imposed by the Commission of just over €497 million.

Prior to the judgment being read out, most commentators were of the view that the Court of First Instance (CFI) would hedge its bets with a judgment which gave some wins to the European Commission and some to Microsoft. Instead, the judgment is a comprehensive win for the Commission on the substantive Article 82 issues with Microsoft winning on the ancillary and altogether less important issue of the Commission’s powers in respect of the appointment of a monitoring trustee.

The judgment’s categoric endorsement of the Commission’s approach is likely to empower the Commission to take further action on the issue of interoperability and bundling. Companies with strong market positions in other technology markets are also likely to be scrutinizing the judgment.

The Commission Decision

On March 24, 2004, the Commission adopted a decision stating that Microsoft had abused its dominant position in the PC operating system market by: 

  • Refusing to supply interoperability information and allow its use for the purpose of developing and distributing work group server operating systems (refusal to supply and authorize abuse); 
  • Making the availability of the Windows Client PC Operating System conditional on the simultaneous acquisition of Windows Media Player (WMP) (tying abuse).

The decision imposed a fine of €497,196,304 and ordered Microsoft to bring the abuse to an end by licensing interoperability information and offering an unbundled version of Windows.

The decision also gave the Commission the power to appoint a monitoring trustee to monitor Microsoft’s compliance with the decision and to provide the Commission with impartial advice. Microsoft was required to bear all costs incurred by the monitoring trustee.

On June 8, 2004, Microsoft lodged an appeal with the CFI challenging all aspects of the Commission’s decision.

Extent of the Review by the CFI

At the beginning of the judgment, the CFI clarified the principles against which it would examine Microsoft’s application for the annulment of the Commission’s decision. The CFI made it clear that its review of complex economic appraisals made by the Commission was limited to: checking whether the relevant rules on procedure and on stating reasons had been complied with; whether facts had been accurately stated; and whether there had been any manifest error of assessment or misuse of powers.

Refusal to Supply and Authorize abuse

The CFI rejected all the arguments that Microsoft raised in defense of the alleged refusal to supply and authorize abuse.

It found that the Commission had been correct in its technical and factual findings in relation to the interoperability issue. It upheld the Commission’s decision on the necessary degree of interoperability and held that there was no inconsistency between that degree of interoperability and the remedy imposed by the Commission. It rejected Microsoft’s proposition that the Commission’s decision effectively ordered Microsoft to disclose its source code to its competitors so that they could clone Microsoft’s products.

The CFI held that there was no need to decide the issue of the validity and scope of Microsoft’s IP rights in relation to the refusal to supply and authorize abuse because the Commission had at all times proceeded on the basis that Microsoft could rely on such rights.

The CFI reiterated two fundamental principles: that undertakings were, as a rule, free to choose their business partners; and that the Community judicature considered that the fact that a holder of an IP right can exploit that right solely for his own benefit constituted the very substance of that exclusive right. However, the CFI made clear that in certain exceptional circumstances a refusal to supply and authorize an IP right by a dominant undertaking may constitute an abuse of a dominant position unless it was objectively justified (Magill and IMS Health).

Relying on earlier case-law, the CFI argued that three conditions have to be satisfied before a refusal by the holder of an intellectual property right to license a third party to use a product can be characterized as an abuse of a dominant position: 

  • The refusal must relate to a product or service indispensable to the exercise of an activity on a neighboring market. 
  • The refusal must be of such a kind as to exclude any effective competition on that market. 
  • The refusal must prevent the appearance of a new product for which there is potential consumer demand. The CFI acknowledged that the appearance of a new product was not an issue here. It argued, however, that the scope of this condition should be interpreted more broadly to also include limitations to technical development to the detriment of consumers. The CFI has therefore expanded the test applied in the Magill and IMS Health, and has potentially facilitated regulatory interventions against refusals to license intellectual property rights.

The CFI held that the Commission did not commit any manifest error in considering that the three conditions were met in this case. Indeed the judgment cited numerous factors indicating the correctness of the Commission’s approach.

The CFI rejected Microsoft’s argument that the refusal was objectively justified because it was covered by IP rights. It held that if Microsoft were correct then a refusal to license an IP right could never be considered to constitute an infringement of Article 82 even though in Magill and IMS Health the Court of Justice had explicitly stated the contrary. The CFI held that Microsoft’s assertion that the Commission had applied a new evaluation test when rejecting the objective justification was based on a “misreading of the decision”.

The CFI therefore concluded that the exceptional circumstances necessary for finding that a refusal to supply IP protected information amounted to a breach of Article 82 applied in this case and dismissed Microsoft’s appeal on this point as “unfounded in its entirety.”

Tying Abuse

Microsoft appealed this part of the decision on two grounds: no breach of Article 82 and breach of the principle of proportionality. The CFI confirmed that the Commission had adopted the correct approach when concluding that there had been abusive tying. The approach was consistent with Article 82(d) EC and case law. The CFI confirmed that four factors were required: (i) the undertaking must have a dominant position on the market for the tying product, (ii) the tying product and the tied product must be two separate products, (iii) consumers must not have a choice to obtain the tying product without the tied product, (iv) the practice must foreclose competition.

Microsoft argued that factors (ii) – (iv) were not made out in this case. The CFI held that the Commission’s decision that all four factors were established was well founded. In particular, the CFI concluded that Microsoft’s objections on the issue of the foreclosure of competition were unfounded and were based on a “selective and inaccurate” reading of the decision.

The CFI found that Microsoft had not demonstrated the existence of objective justification for the tying. Microsoft had sought to show that the bundling produced efficiency gains that outweighed the anti-competitive effects.

Microsoft’s plea that the remedy imposed was disproportionate was also dismissed. The CFI observed that the plea was based on the same arguments that were presented to show objective justification. The CFI emphasized that Microsoft was still able to offer the tied version of Windows. The remedy proposed by the Commission was an appropriate means of ending the abuse and resolving the competition issue while causing the least possible inconvenience to Microsoft and its business model.

The CFI rejected the entirety of Microsoft’s appeal against the finding of breach of Article 82 in relation to the tying abuse and the Commission’s remedy.

Monitoring Trustee

The CFI was critical of the Commission’s actions in relation to the appointment of a monitoring trustee. It held that the appointment of the monitoring trustee had to be assessed by reference to the law in force at that time, i.e. Regulation 17/62 rather than Regulation 1/2003.

The CFI held that the Decision purported to confer on the monitoring trustee wide ranging powers. It found that the Commission had no authority to compel Microsoft to grant to a monitoring trustee powers which the Commission was not authorized to confer on a third party.

It also held that the Commission had exceeded its powers by making Microsoft responsible for all costs associated with the monitoring trustee: there was no provision of Community law that authorized the Commission to require an undertaking to bear the costs which the Commission incurs as a result of monitoring the implementation of remedies.

The CFI therefore annulled that part of the Decision which ordered Microsoft to submit a proposal including the appointment of an independent monitoring trustee.

Fine

The CFI dismissed Microsoft’s claims that the fine was excessive and disproportionate and upheld the fine imposed by the Commission. The Commission was entitled to impose a single fine for two abuses, which it considered to amount to a single infringement: leveraging a dominant position on the client PC operating systems market.

Appeal

At the time of writing, Microsoft has not indicated whether it intends to appeal the CFI’s decision to the European Court of Justice. Any appeal must be on a point of law and made within two months. In a judgment of this length and complexity it would be foolhardy to suggest that there were no potential points of appeal. Nonetheless, the judgment is strongly focused on facts, which will make it more difficult for Microsoft to tease out points of law for appeal.