European Court of First Instance upholds infringement findings against Microsoft

30 October 2007

Richard Eccles

On 17 September 2007, the European Court of First Instance (“ECFI”) issued its judgment reviewing in detail, and substantively upholding, the European Commission’s 2004 decision which had imposed a fine of €497 million on Microsoft for two abuses of dominant position. The abuses identified by the Commission were, first, a withholding of interface information in respect of Windows PC operating system software, for the purposes of enabling interoperability for competing work group server operating systems; and second, tying Windows Media Player into the supply of Windows PC operating system software. Microsoft was required to supply the required interoperability information for work group server software development and to offer an unbundled version of Windows (without Media Player).

The two abuses were quite distinct, so that the Commission’s decision and the ECFI’s judgment can each be regarded as, in effect, two abuse cases in one. They are both based on the dominance of Microsoft in PC operating systems software. The first abuse was characterised as a refusal to license the intellectual property in the interface information to competitors of Microsoft in the work group server operating systems market, thereby (the Commission found) leveraging Microsoft’s dominance in PC operating system software into a neighbouring area of operating system software, that for work group servers. The second abuse involved the Commission’s findings that Microsoft was using a tie-in to leverage its dominance in PC operating system software to strengthen its position in a market for application systems software, that for media player software.

The judgment of the ECFI is extremely lengthy on both aspects, and is to a large extent based on the specific facts of Microsoft’s position. Nonetheless, it is possible to highlight various features of the case which are interesting and important for the development of EC competition law generally in these areas.

The interoperability abuse

The Commission found that it was essential for the development of competing work groups server operating systems that the developers have access to information relating to interoperability with the Windows domain architecture, given the ubiquity of the Windows PC operating system and Microsoft’s virtual monopoly in that market.

The ECFI noted that a degree of interoperability with the Windows domain architecture was already possible, but that this level of interoperability was too low to enable developers of non-Microsoft work group server operating systems to remain viably on the market. Article 82 was stated to require a higher standard of disclosure than Directive 91/250 on the legal protection of computer programs, which requires that decompilation of programs be allowed so far as necessary to allow the development of interoperable software products. The Commission and the ECFI required that competitors be able to interoperate on an equal footing with Windows work group server operating systems and for this purpose access must be provided by Microsoft to both the client/server communication protocols and the server/server communication protocols, so as to achieve client/server interoperability and server/server interoperability.

The definition of interoperability information was important to the decision, and judgment, because Microsoft alleged that the disclosure of interoperability information would enable competitors to “clone” certain features of its products. The interoperability information required by the Commission were the specifications, i.e. the descriptions of the functionalities of the relevant software and the technical details of what the interoperable software product must achieve. This included a detailed technical description of the rules of interconnection and interaction that can be used within Windows work group networks to deliver work group services. By contrast, Microsoft was not required to provide implementation data, i.e. the actual code and in particular the internal structure or source code of its software.

Microsoft argued that the interoperability information comprised technologically innovative data, the disclosure of which unfairly deprived it of the results of its technological innovation and its intellectual property. Following careful analysis, the question of whether the interoperability information was covered by intellectual property rights or not was left open, but for purposes of analysing whether there was an abuse of dominant position, the Commission and the ECFI proceeded on the basis that the information was protected by intellectual property rights. On this basis, a higher legal standard needed to be satisfied in order for the disclosure and therefore licensing of the information to be required under Article 82 EC, than if the information were a facility not protected by intellectual property.

Therefore the relevant legal test to be satisfied in order for Microsoft’s refusal to supply the interoperability data to be abusive was that derived from the Magill and IMS judgments of the European Court of Justice (“ECJ”). This test results in a refusal to license intellectual property rights being abusive in exceptional circumstances, defined as being where:

  • the refusal relates to a product or service which is indispensable to an exercise of an activity on a neighbouring market;

  • the refusal is of a kind that excludes any effective competition on that neighbouring market; and

  • the refusal prevents the appearance of a new product for which there is potential consumer demand.

Where these criteria are satisfied and there is no objective justification for the refusal to grant a licence, the refusal by a dominant company is likely to infringe Article 82 EC.

The ECFI upheld the Commission’s finding that PC operating systems software and work group server system software were separate but neighbouring markets, by reference to the patterns of usage, supply and demand characteristics (including a lack of substitutability of supply as between the two types of software) and the purposes for which the two different types of software were marketed. The Commission and the ECFI then proceeded on the basis that interoperability data in respect of the PC operating system software was indispensable to activities in the work group server system software market (so that the first of the above criteria was fulfilled).

On the question of whether the refusal to supply the interoperability data suppressed all effective competition (the second criterion), the ECFI held that it was sufficient that the refusal to license the data is liable to, or is likely to, eliminate all effective competition on the market. The continuation of a marginal presence of competitors in certain niches of the market (for work group system software) does not represent sufficient effective competition. Moreover, the ECFI confirmed the Commission’s finding that all effective competition was at risk of being eliminated. Thus the ECFI upheld the Commission’s broadening of the circumstances in which a refusal to license intellectual property is to be considered an abuse of dominant position.

The test was also lowered in respect of the above criterion of a “new product”, i.e. the third criterion of the IMS case. The ECFI held that the test was not only satisfied where the refusal to license prevented the appearance of a new product, but also where there is a limitation of technical development. This conclusion was reached on the basis that Microsoft’s refusal to provide the interoperability information prevented its competitors from developing and marketing work group server operating systems with innovative features. The ECFI considered that the competitive circumstances made it a prerequisite that competitors would innovate in order to differentiate their products from Microsoft’s products with regard to certain parameters and certain features, for which significant investment of time and money would be required. The ECFI held that suppressing such innovation would be to consumers’ disadvantage, and also stated that Article 82 covers practices which prejudice consumers only indirectly by impairing an effective competitive structure.

Comment on the interoperability abuse ruling

This reasoning of the Commission and the ECFI should be read in the context of the findings of the virtual monopoly of Microsoft in relation to PC operating system software. However, the conclusions on the interpretation of the Magill and IMS criteria are stated in sufficiently general terms that, despite the exceptional circumstances of the particular case, the ECFI has broadened the legal scope for findings of abuse of dominant position through the refusal to license intellectual property. As a general matter, it will be less difficult to demonstrate that a refusal to license intellectual property suppresses technical innovation, as opposed to suppressing particular, identifiable new products. In this respect, the ECFI has perhaps removed some of the uncertainty surrounding this aspect of the IMS judgment of the ECJ whilst at the same time increasing the scope for complaints and claims in future regarding this type of abuse of dominant position.

The bundling abuse

The ECFI upheld the Commission’s finding that the tie-in of Microsoft’s Media Player to the Windows PC operating system led to a lessening of competition, preventing effective competition in the foreseeable future. This was due to the resulting distortion of the choices and incentives to users and OEMs through the tie-in. The Commission (and the ECFI) did not object to the bundling of the two types of software, provided that the Windows operating software was also made available separately (i.e. without pre-installation of Windows Media Player) and this was the remedy imposed by the Commission in respect of the bundling abuse.

One of Microsoft’s main arguments was that there is no separate demand for media player software and that therefore, in accordance with the European Commission’s Guidelines on Vertical Restraints, it was appropriate to treat the two software products as one and to supply them together only. The Commission, however (upheld by the ECFI), found that there was a separate market for media players due to the technical differences between system software and application software and the various identifiable features of supply and demand. These features included the fact that some users choose to acquire media players from Microsoft’s competitors (despite Microsoft’s tie-in), the history of separate development of media players from PC operating systems, and the fact that Microsoft markets, supplies and licenses Windows Media Player separately from its Windows PC operating system, despite the tie-in. Also other software providers such as Apple and RealNetwork supply their media player software separately.

The tie-in was underlined by the fact that it was technically impossible to uninstall Windows Media Player from the Windows operating software. Even though there was no separate charge by Microsoft for the Windows Media Player element of the package, this did not prevent there being a tie-in situation. The ECFI observed that the absence of a separate charge for the software did not mean that such a charge is not included in the price of the package. The provision of PC operating software with Windows Media Player pre-installed removed the incentive for consumers and also OEMs generally to choose between competing media player products, to the disadvantage of any competitors providing better products. Also, the fact that a number of OEMs did continue to add third party media players does not alter the conclusion that there was a tie-in which weakened competition. Likewise, the fact that consumers are free to install any other supplier’s media player software, it was held, did not prevent the tie-in being anti-competitive.

The ECFI stated that developers of third party media players compete with each other to have their products pre-installed on client PCs, but Microsoft avoided (and foreclosed) such competition through the tying. Although media players can be down-loaded at no cost to the user, the Commission and the ECFI did not regard this as effective competition due to the inertia of most users, and the technical difficulties that prevent many attempted downloads being successfully completed.

The anti-competitive effects of the tie-in were found to result from the ubiquity of the Windows PC operating system (and vice-versa), and the indirect network effects which meant that content providers and software developers chose the Microsoft technology for developing their products. The ECFI upheld the Commission’s findings that content providers would be inclined to use the Windows Media Player format because it is less expensive for them than developing separate formats for each of the media players available, and because usage of a format compatible with Windows Media Player enables them to reach the widest audience. Overall, the ECFI held that the tying increases the content and applications barriers to entry, reduces the talent and capital invested in innovation of media players and places competing providers a priori at a disadvantage (even if their products are superior).

Further, software developers were also inclined to create software applications for a single platform as that enabled them to reach virtually all potential users of the products, whereas creating and marketing software for other platforms would give rise to additional costs. The ECFI agreed that as a media player is more widely distributed, content providers will be inclined to create content for the technology implemented in that media player.

The ECFI further upheld the Commission’s conclusions that there was no objective justification for the tie-in. Any such efficiency benefits as were claimed by Microsoft for the combination of Windows operating system and Windows Media Player software could be achieved in the absence of tie-in, and Microsoft was still free to offer a bundled product as long as it also offered Windows operating software independently. Microsoft had not satisfied the Commission that the integration of Windows Media Player with Windows created any technical efficiency over the usage of other media players within the Windows operating system. Also, it had not proved that other media player applications would not function effectively within Windows, nor had it proved that the removal of Windows Media Player could affect the functioning of other parts of the Windows operating system. On this basis, the ECFI upheld the Commission’s conclusions on the lack of objective justification.

Comment on the bundling abuse ruling

The ECFI judgment has been criticised in some quarters for not sufficiently identifying any consumer harm, taking into account the fact that media player software can generally be downloaded free of charge by users. However, bundling abuse ruling can be explained on the basis that the majority of users, and also OEMs, will through inertia or through technical difficulties be disinclined to install additional media player software when Microsoft’s Media Player is already pre-installed, and that in practice choice and competition is therefore reduced.

Also, however, to some extent the adverse effects on competition could be seen in terms of the reduced ability of competing media players to generate revenue from content providers, who were disinclined to format their content other than for Windows Media Player. However, the judgment contains relatively little analysis of this aspect. Moreover, the Commission had found that prior to the tie-in, RealNetwork had been the leader in the media players market, which position had been lost during the period of the identified abuse.

Indeed, one may argue that the remedy (the requirement to supply Windows without Media Player) was introduced too late to safeguard competition. The Commission’s investigation was launched in 2000, its infringement decision was adopted in 2004 and the decision and remedies were under appeal until the ECFI’s judgment of September 2007. Assuming that the Commission’s finding and the ECFI’s ruling were correct, arguably the competition law enforcement process should have proceeded much faster in order to make a difference.

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