The Microsoft Decision

In understanding the implications of the Microsoft case, it is important to appreciate that the principles will only apply to companies with a relatively high degree of dominance that operate in dynamic, innovative, IP-rich markets, as opposed to more traditional sectors such as manufacturing.

Refusal to Supply/License

The Commission's position, upheld by the CFI, was that Microsoft should disclose sufficient interface specifications to enable competitors to create a functional equivalent to Microsoft's Work Group Server. Information enabling competitors to clone or reverse engineer products was not part of the decision. The code required to operate PCs did not have to be disclosed. Microsoft's legitimate intellectual property rights were not infringed.

The CFI upheld the Commission's assumption that so far as it related to interoperability information, Microsoft's conduct was not a mere refusal to supply a product or service but a refusal to license intellectual property rights. Thus, the EU chose the strictest legal test and the one most favorable to Microsoft.

The difference between the parties over the extent to which competition must be eliminated was profound. Microsoft argued that its refusal was not enough to exclude all competition in the Work Group Server Operating Systems market. In contrast, the Commission considered that a mere 'risk' of elimination of competition was enough. Microsoft argued that since there were still numerous competitors ' including IBM, Novell, Redhat and Sun as well as suppliers of Linux products ' six years after the alleged refusal to supply, there could not have been an adverse effect on competition.

Microsoft said that the Commission had to demonstrate that the refusal to license an intellectual property right to a third party is 'likely to eliminate all competition' or, in other words, that there was a 'high probability' that the conduct will have such a result.

The CFI was scathing in its response to Microsoft's complaint, commentating that it 'is purely one of terminology and is wholly irrelevant.' It observed that there were significant network effects on the market and that consequently the elimination of competition would be difficult to reverse. It also pointed out that if the Commission was required to wait until competitors were eliminated from the market, or until their elimination was sufficiently imminent, that would run counter to the objective of maintaining undistorted competition. The CFI upheld the Commission's decision that Microsoft's refusal to provide interoperability did not have an objective justification.

Consequently, far from laying down general principles of interoperability that are applicable to all software companies, the Microsoft decision is highly focused on the specific circumstances of the market in which Microsoft operates and cannot easily be extended, by analogy, to other software products.

Tying

The second element to the Microsoft case is the tying of Windows Media Player to the supply of the Windows Operating System. Anyone who purchased the Windows Operating System automatically got the Windows Media Player in a form that could not be uninstalled.

Having concluded that Windows Media Player was a separate product for competition purposes from Windows Operating System, with a separate demand, the CFI noted that the fact that the tying took the form of the technical integration of one product into another did not mean that it couldn't amount to bundling of two separate products for the purposes of EU competition law. The CFI dismissed Microsoft's argument that integration was dictated by technical reasons as 'scarcely credible'. It then analyzed whether there was any objective justification for the tying, and emphasized that it was up to Microsoft to support its arguments with evidence. Microsoft tried to argue that the efficiency gains arising from the tying of Windows Media Player outweighed the anti-competitive effects identified. It argued that the Commission had ignored the benefits flowing from its business model that entailed ongoing integration of new functionality into the Windows Operating System and that the removal of functionality would create problems.

In previous cases, the Commission and the European Courts had tended to regard tying, by its very nature, as liable to restrict competition. In this case, and in accordance with the trend towards a more economic based approach, the Commission analyzed the effects of tying. It found that Windows Media Player was the platform of choice for complimentary content and applications which created a risk of foreclosing competition in the market for media players. It also found spillover effects in a number of neighboring markets.

The CFI did not accept these arguments. It explained that the Commission had not interfered with Microsoft's business model. The problem, according to the CFI, was not the integration of Windows Media Player as such but that Microsoft only offered a version of its Windows Operating System in which Windows Media Player was integrated. The CFI observed that even though standardisation may provide certain advantages it was not permissible for standardization to be achieved, unilaterally, by a company in a dominant position. Finally, the CFI considered that Microsoft had not established that Windows Media Player integrated into Windows created technical efficiencies and a superior technical product performance.

In dismissing Microsoft's arguments on objective justification the CFI noted that Microsoft's claim that an unbundled version would no longer work correctly had not been demonstrated to the required legal standard. Arguments that the remedies were disproportionate were rejected by the CFI on substantially the same grounds as the grounds that the CFI had dismissed Microsoft's objective justification arguments.

Significance of the Decision

The Microsoft judgment broadly leaves more questions than answers. Given the importance and complexity of the case, the CFI was anxious to strictly limit himself to the facts and legal issues presented to him by the parties. While judicial self-restraint is a virtue, it is probably fair to say that the CFI at the same time has missed an opportunity to flesh out the 'big picture' of a revised and modern concept of the application of Article 82 EC in a highly dynamic, innovative and technology-driven environment.

This being said, there are still some important conclusions to be drawn from the decision.

First, the court clarified the criteria on which an undertaking in a dominant position may be compelled to grant a license and tying constitutes an abuse of a dominant position.

Compulsory licensing of interoperability information: Whereas the CFI confirms that it is settled case law under Article 82 that the refusal by a dominant undertaking to license a product or service covered by an intellectual property right cannot in itself constitute an abuse of a dominant position, it defines, though not conclusively, exceptional circumstances in which the exercise of the exclusive right by the owner of the intellectual property right may be viewed as running afoul Art. 82 EC: 1) the refusal relates to a product or service indispensable to the exercise of a particular activity on a neighboring market (i.e. the market on which the product or service is used in the manufacture of another product or for the supply of another service); 2) the refusal is of such a kind as to exclude any effective competition on the neighboring market; 3) the refusal prevents the appearance of a new product for which there is potential consumer demand and no risk of cloning or reproduction; and 4) there is no objective justification for the refusal.

Tying: The court concluded that Microsoft had abused its dominant position by tying the Windows Media Player (WMP) to Windows, because: 1) the tying and tied products were two separate products; 2) the undertaking concerned was dominant in the market for the tying product; 3) the undertaking concerned does not give customers a choice to obtain the tying product without the tied product; 4) the practice in question forecloses competition; and 5) the tying was not objectively justified. Notably, the CFI expressly confirmed that the Commission was right to separately ascertain that the tying of WMP to Windows constitutes a conduct that is liable to foreclose competition. Usually, i.e., in classical tying cases, the Commission and the Community Courts take the position that the foreclosure effect for competing vendors is demonstrated by the bundling of a separate product with the dominant product.

Second, the merits of the decision and the wording chosen by the CFI seem to indicate that the court at least takes a favorable look on the so-called more economic approach developed by the EU Commission and laid down in a staff discussion paper that was published in December 2005. The overarching idea is that the Commission is prepared to focus on the effects of an allegedly abusive conduct, i.e. the extent of its application in the market rather than to undertake a formal analysis which is principally based on market shares and the form or nature of the conduct. The central element of this new effects-based approach is the risk of market foreclosure that hinders competition and thereby harms consumers.

An endorsement of the more economic approach by the CFI would mark a silent turn of the tide in the application of the EU's dominance rules. Given that the Microsoft decision was adopted by the Great Chamber of the CFI, it can be assumed that the judges knew exactly what they were doing when they drafted the judgment. Notably, the CFI carried out a detailed analysis of the effects of Microsoft's conduct on competition and consumers, taking into account factors like market coverage, the degree of dominance, or the existence of network effects. In the context of this analysis, the court repeatedly refers to the central elements of the more economic approach, particularly the foreclosure effects and the harm thereby inflicted on consumers. As to tying, the court determines that consumers not only have to pay more for Windows and the WMP, although they do not necessarily wish to purchase the latter but in addition end up having less choice, less service, less innovation and an inferior product quality. Likewise, in the context of the refusal to supply interoperability information, the court puts strong emphasis on the harm inflicted on consumers by finding that 'consumers are locked into the homogenous Windows solution,' 'consumers' purchasing decisions are channeled toward[s] Microsoft's products,' 'limitation [was being] placed on consumer's choice,' 'the refusal caused prejudice to consumers,' etc.

What does this mean for companies with a strong market position in Europe? In future dominance cases, the Commission has to prove to the requisite standard that the allegedly abusive conduct actually does or likely will eliminate competition and thereby harms consumers. To that end, the Commission will have to conduct a detailed and comprehensive analysis of the facts that could be relevant for the finding of an abuse. For the undertakings concerned, this will provide a better opportunity to defend themselves by rebutting the presumptions or fact-specific conclusions drawn by the Commission for example by showing that the dominant companies' conduct does not have sufficient market coverage to eliminate effective competition, or that there are a number of strategic customers or important competitors left on the market who are unaffected by the allegedly abusive conduct or in a position to fight back in any event. The Commission and the undertakings concerned may also refer to market characteristics including for example economies of scale and scope to argue in favor or against an actual or potential foreclosure effect. On top, especially in technology-rich industries, dominant companies may defend themselves by invoking objective justifications and efficiency considerations (e.g., adequate return on investment defense).

Conceptually, the more economic approach probably deviates from the previous practice in the EU to the extent that the Commission and the CFI will: 1) align the application of Article 82 more closely with the specific market context; and 2) put more emphasis on the issue whether the conduct of a dominant company has a negative or positive effect on consumers. If such conduct has a positive effect, it will likely be more difficult for the Commission to argue that the dominant company violates Article 82 EC. Indeed, if the Microsoft-court intended to adopt the more economic approach described above, this could cause a significant shift in the Commission's and the European Court's dominance analysis which traditionally is primarily concerned with maintaining a market structure that ensures effective competition and thus ' indirectly ' increases consumer welfare.

Third, it has been suggested that the EU is out of step with the reality of dynamic, knowledge-based industries where bundling is normal, economically rational behavior. We do not share this point of view in its entirety. Where bundling is normal, economically rational behavior, there should be an objective justification. However, it is true that the Commission and the CFI failed to apply the more economic approach also to the issues of market definition and the finding of dominance. Insofar it is probably right that neither the Commission nor the CFI took sufficiently into account that markets with significant network effects tend to have a highly concentrated equilibrium (a close oligopoly or quasi-monopoly). In such an environment, competition is certainly rather for the market than on the market and therefore predominantly driven by innovation instead of price or services. Perhaps these aspects are the new frontier of EU competition law where battles are going to be fought in the coming years.

In the aftermath of the Microsoft judgment it was made clear from various organizations that there is still an issue with Microsoft's market conduct, for example with regard to the integration of the WMP into Windows Vista or the refusal to supply interoperability information that is necessary for competitors to produce office software that is compatible e.g. with Microsoft's Word. Very recently, Opera Software SA, a company that ' according to its own statement ' can put the Web on any device, announced that it filed a complaint with the Commission on the ground that Microsoft is allegedly abusing its dominant position by tying the Internet explorer to the Windows operating system and by hindering interoperability by not following generally accepted web standards.

Conclusion

Finally, some have suggested that the EC authorities should have reached the same conclusions as the U.S. authorities. It is unsurprising that slightly different conclusions were reached, bearing in mind that the legislative base is different. Indeed, it would be surprising if identical outcomes had occurred given this starting point. While it is true that the Commission's remedies were more far-reaching than those in the settlement with the DOJ and the Attorneys General of nine states, the decisions are more notable for their similarities rather than their differences. One might also ask whether the DOJ might have achieved more if the political climate at the time had been more favorable. At least until the DOJ adopts a more muscular approach to antitrust enforcement, the European Commission can be expected to take the lead in enforcing antitrust rules involving global players in the knowledge-based economy.

Dr. Michael Dietrich is a partner at Taylor Wessing's EU, Competition and Trade group in Dsseldorf, Germany. Martin Baker is an international Commercial partner at Taylor Wessing LLP in London.

Microsoft's recent decision not to appeal the landmark ruling of the European Court of First Instance (CFI) regarding anti-competitive practices provides an opportunity for reflection and analysis.

An assessment of the Microsoft saga for technology and other IP-rich businesses depends upon a clear understanding of what the European Commission and the CFI decided and, perhaps even more importantly, what they did not decide.

The Commission concluded that Microsoft had approaching a 95% share of the market for operating system for PCs and, unsurprisingly, that Microsoft held a dominant position. That finding was not appealed. The thrust of the Commission's argument was that Microsoft's dominant position meant that it was under an obligation to disclose interface specifications and that it was under a separate obligation not to tie Windows Media Player into the Windows Operating System

In understanding the implications of the Microsoft case, it is important to appreciate that the principles will only apply to companies with a relatively high degree of dominance that operate in dynamic, innovative, IP-rich markets, as opposed to more traditional sectors such as manufacturing.

Refusal to Supply/License

The Commission's position, upheld by the CFI, was that Microsoft should disclose sufficient interface specifications to enable competitors to create a functional equivalent to Microsoft's Work Group Server. Information enabling competitors to clone or reverse engineer products was not part of the decision. The code required to operate PCs did not have to be disclosed. Microsoft's legitimate intellectual property rights were not infringed.

The CFI upheld the Commission's assumption that so far as it related to interoperability information, Microsoft's conduct was not a mere refusal to supply a product or service but a refusal to license intellectual property rights. Thus, the EU chose the strictest legal test and the one most favorable to Microsoft.

The difference between the parties over the extent to which competition must be eliminated was profound. Microsoft argued that its refusal was not enough to exclude all competition in the Work Group Server Operating Systems market. In contrast, the Commission considered that a mere 'risk' of elimination of competition was enough. Microsoft argued that since there were still numerous competitors ' including IBM, Novell, Redhat and Sun as well as suppliers of Linux products ' six years after the alleged refusal to supply, there could not have been an adverse effect on competition.

Microsoft said that the Commission had to demonstrate that the refusal to license an intellectual property right to a third party is 'likely to eliminate all competition' or, in other words, that there was a 'high probability' that the conduct will have such a result.

The CFI was scathing in its response to Microsoft's complaint, commentating that it 'is purely one of terminology and is wholly irrelevant.' It observed that there were significant network effects on the market and that consequently the elimination of competition would be difficult to reverse. It also pointed out that if the Commission was required to wait until competitors were eliminated from the market, or until their elimination was sufficiently imminent, that would run counter to the objective of maintaining undistorted competition. The CFI upheld the Commission's decision that Microsoft's refusal to provide interoperability did not have an objective justification.

Consequently, far from laying down general principles of interoperability that are applicable to all software companies, the Microsoft decision is highly focused on the specific circumstances of the market in which Microsoft operates and cannot easily be extended, by analogy, to other software products.

Tying

The second element to the Microsoft case is the tying of Windows Media Player to the supply of the Windows Operating System. Anyone who purchased the Windows Operating System automatically got the Windows Media Player in a form that could not be uninstalled.

Having concluded that Windows Media Player was a separate product for competition purposes from Windows Operating System, with a separate demand, the CFI noted that the fact that the tying took the form of the technical integration of one product into another did not mean that it couldn't amount to bundling of two separate products for the purposes of EU competition law. The CFI dismissed Microsoft's argument that integration was dictated by technical reasons as 'scarcely credible'. It then analyzed whether there was any objective justification for the tying, and emphasized that it was up to Microsoft to support its arguments with evidence. Microsoft tried to argue that the efficiency gains arising from the tying of Windows Media Player outweighed the anti-competitive effects identified. It argued that the Commission had ignored the benefits flowing from its business model that entailed ongoing integration of new functionality into the Windows Operating System and that the removal of functionality would create problems.

In previous cases, the Commission and the European Courts had tended to regard tying, by its very nature, as liable to restrict competition. In this case, and in accordance with the trend towards a more economic based approach, the Commission analyzed the effects of tying. It found that Windows Media Player was the platform of choice for complimentary content and applications which created a risk of foreclosing competition in the market for media players. It also found spillover effects in a number of neighboring markets.

The CFI did not accept these arguments. It explained that the Commission had not interfered with Microsoft's business model. The problem, according to the CFI, was not the integration of Windows Media Player as such but that Microsoft only offered a version of its Windows Operating System in which Windows Media Player was integrated. The CFI observed that even though standardisation may provide certain advantages it was not permissible for standardization to be achieved, unilaterally, by a company in a dominant position. Finally, the CFI considered that Microsoft had not established that Windows Media Player integrated into Windows created technical efficiencies and a superior technical product performance.

In dismissing Microsoft's arguments on objective justification the CFI noted that Microsoft's claim that an unbundled version would no longer work correctly had not been demonstrated to the required legal standard. Arguments that the remedies were disproportionate were rejected by the CFI on substantially the same grounds as the grounds that the CFI had dismissed Microsoft's objective justification arguments.

Significance of the Decision

The Microsoft judgment broadly leaves more questions than answers. Given the importance and complexity of the case, the CFI was anxious to strictly limit himself to the facts and legal issues presented to him by the parties. While judicial self-restraint is a virtue, it is probably fair to say that the CFI at the same time has missed an opportunity to flesh out the 'big picture' of a revised and modern concept of the application of Article 82 EC in a highly dynamic, innovative and technology-driven environment.

This being said, there are still some important conclusions to be drawn from the decision.

First, the court clarified the criteria on which an undertaking in a dominant position may be compelled to grant a license and tying constitutes an abuse of a dominant position.

Compulsory licensing of interoperability information: Whereas the CFI confirms that it is settled case law under Article 82 that the refusal by a dominant undertaking to license a product or service covered by an intellectual property right cannot in itself constitute an abuse of a dominant position, it defines, though not conclusively, exceptional circumstances in which the exercise of the exclusive right by the owner of the intellectual property right may be viewed as running afoul Art. 82 EC: 1) the refusal relates to a product or service indispensable to the exercise of a particular activity on a neighboring market (i.e. the market on which the product or service is used in the manufacture of another product or for the supply of another service); 2) the refusal is of such a kind as to exclude any effective competition on the neighboring market; 3) the refusal prevents the appearance of a new product for which there is potential consumer demand and no risk of cloning or reproduction; and 4) there is no objective justification for the refusal.

Tying: The court concluded that Microsoft had abused its dominant position by tying the Windows Media Player (WMP) to Windows, because: 1) the tying and tied products were two separate products; 2) the undertaking concerned was dominant in the market for the tying product; 3) the undertaking concerned does not give customers a choice to obtain the tying product without the tied product; 4) the practice in question forecloses competition; and 5) the tying was not objectively justified. Notably, the CFI expressly confirmed that the Commission was right to separately ascertain that the tying of WMP to Windows constitutes a conduct that is liable to foreclose competition. Usually, i.e., in classical tying cases, the Commission and the Community Courts take the position that the foreclosure effect for competing vendors is demonstrated by the bundling of a separate product with the dominant product.

Second, the merits of the decision and the wording chosen by the CFI seem to indicate that the court at least takes a favorable look on the so-called more economic approach developed by the EU Commission and laid down in a staff discussion paper that was published in December 2005. The overarching idea is that the Commission is prepared to focus on the effects of an allegedly abusive conduct, i.e. the extent of its application in the market rather than to undertake a formal analysis which is principally based on market shares and the form or nature of the conduct. The central element of this new effects-based approach is the risk of market foreclosure that hinders competition and thereby harms consumers.

An endorsement of the more economic approach by the CFI would mark a silent turn of the tide in the application of the EU's dominance rules. Given that the Microsoft decision was adopted by the Great Chamber of the CFI, it can be assumed that the judges knew exactly what they were doing when they drafted the judgment. Notably, the CFI carried out a detailed analysis of the effects of Microsoft's conduct on competition and consumers, taking into account factors like market coverage, the degree of dominance, or the existence of network effects. In the context of this analysis, the court repeatedly refers to the central elements of the more economic approach, particularly the foreclosure effects and the harm thereby inflicted on consumers. As to tying, the court determines that consumers not only have to pay more for Windows and the WMP, although they do not necessarily wish to purchase the latter but in addition end up having less choice, less service, less innovation and an inferior product quality. Likewise, in the context of the refusal to supply interoperability information, the court puts strong emphasis on the harm inflicted on consumers by finding that 'consumers are locked into the homogenous Windows solution,' 'consumers' purchasing decisions are channeled toward[s] Microsoft's products,' 'limitation [was being] placed on consumer's choice,' 'the refusal caused prejudice to consumers,' etc.

What does this mean for companies with a strong market position in Europe? In future dominance cases, the Commission has to prove to the requisite standard that the allegedly abusive conduct actually does or likely will eliminate competition and thereby harms consumers. To that end, the Commission will have to conduct a detailed and comprehensive analysis of the facts that could be relevant for the finding of an abuse. For the undertakings concerned, this will provide a better opportunity to defend themselves by rebutting the presumptions or fact-specific conclusions drawn by the Commission for example by showing that the dominant companies' conduct does not have sufficient market coverage to eliminate effective competition, or that there are a number of strategic customers or important competitors left on the market who are unaffected by the allegedly abusive conduct or in a position to fight back in any event. The Commission and the undertakings concerned may also refer to market characteristics including for example economies of scale and scope to argue in favor or against an actual or potential foreclosure effect. On top, especially in technology-rich industries, dominant companies may defend themselves by invoking objective justifications and efficiency considerations (e.g., adequate return on investment defense).

Conceptually, the more economic approach probably deviates from the previous practice in the EU to the extent that the Commission and the CFI will: 1) align the application of Article 82 more closely with the specific market context; and 2) put more emphasis on the issue whether the conduct of a dominant company has a negative or positive effect on consumers. If such conduct has a positive effect, it will likely be more difficult for the Commission to argue that the dominant company violates Article 82 EC. Indeed, if the Microsoft-court intended to adopt the more economic approach described above, this could cause a significant shift in the Commission's and the European Court's dominance analysis which traditionally is primarily concerned with maintaining a market structure that ensures effective competition and thus ' indirectly ' increases consumer welfare.

Third, it has been suggested that the EU is out of step with the reality of dynamic, knowledge-based industries where bundling is normal, economically rational behavior. We do not share this point of view in its entirety. Where bundling is normal, economically rational behavior, there should be an objective justification. However, it is true that the Commission and the CFI failed to apply the more economic approach also to the issues of market definition and the finding of dominance. Insofar it is probably right that neither the Commission nor the CFI took sufficiently into account that markets with significant network effects tend to have a highly concentrated equilibrium (a close oligopoly or quasi-monopoly). In such an environment, competition is certainly rather for the market than on the market and therefore predominantly driven by innovation instead of price or services. Perhaps these aspects are the new frontier of EU competition law where battles are going to be fought in the coming years.

In the aftermath of the Microsoft judgment it was made clear from various organizations that there is still an issue with Microsoft's market conduct, for example with regard to the integration of the WMP into Windows Vista or the refusal to supply interoperability information that is necessary for competitors to produce office software that is compatible e.g. with Microsoft's Word. Very recently, Opera Software SA, a company that ' according to its own statement ' can put the Web on any device, announced that it filed a complaint with the Commission on the ground that Microsoft is allegedly abusing its dominant position by tying the Internet explorer to the Windows operating system and by hindering interoperability by not following generally accepted web standards.

Conclusion

Finally, some have suggested that the EC authorities should have reached the same conclusions as the U.S. authorities. It is unsurprising that slightly different conclusions were reached, bearing in mind that the legislative base is different. Indeed, it would be surprising if identical outcomes had occurred given this starting point. While it is true that the Commission's remedies were more far-reaching than those in the settlement with the DOJ and the Attorneys General of nine states, the decisions are more notable for their similarities rather than their differences. One might also ask whether the DOJ might have achieved more if the political climate at the time had been more favorable. At least until the DOJ adopts a more muscular approach to antitrust enforcement, the European Commission can be expected to take the lead in enforcing antitrust rules involving global players in the knowledge-based economy.

Dr. Michael Dietrich is a partner at Taylor Wessing's EU, Competition and Trade group in Dsseldorf, Germany. Martin Baker is an international Commercial partner at Taylor Wessing LLP in London.