CFI Confirms Microsoft’s Breach of Article 82

14 March 2008

Emily Peters

CFI Confirms Microsoft’s Breach of Article 82

The CFI has upheld the Commission’s finding that the provision of Windows Media Player as an integral part of the Windows operating system and Microsoft’s refusal to disclose interoperability information are breaches of Article 82. In its decision released on 17 September 2007, the CFI has confirmed fines imposed by the Commission of some EUR497 million. It requested that Microsoft release information to enable the interface of third party software with Microsoft’s dominant client PC operating system. The CFI clarified the extent of disclosure required by a dominant party to remedy a breach of Article 82. Disclosure must be indispensable to a competitor in enabling access to the market and must not merely allow entry to the market but allow competition on an equal footing with that dominant party. Microsoft must also supply Windows Media Player as a separate application although it can continue to supply the bundled product. However, Microsoft was successful in overturning the order of the Commission to implement a monitoring mechanism through appointment of a trustee.

Background

The Commission initiated its investigation in respect of a potential breach of Article 82 by Microsoft in December 1998 following a complaint by Sun Microsystems. Sun Microsystems had requested that Microsoft provide information to enable Sun to develop Solaris, its UNIX based work group server operating system, the central systems used to run networks of individual PCs, to interface with the Windows PC client operating system. Sun requested disclosure of interoperability information to enable Solaris to interface with the Windows client PC operating system without deterioration in programme speeds or performance. Interoperability with the PC operating system is indispensable as this is the base software on a PC enabling a user to launch applications. The Commission defined interoperability as “the ability for them [two software packages] to exchange information and mutually to use that information in order to allow each of those software products to operate in all the ways contemplated”. Microsoft, with a 95% market share in respect of its Windows client PC operating system, refused to provide the interoperability information requested. In its refusal, Microsoft stated that it had already disclosed sufficient information as part of the Microsoft Developer Network (MSDN) Universal Product and at the Microsoft Professional Developers’ Conference to allow third party products to interoperate.
In February 2000 the Commission extended its investigation to consider the supply of Windows Media Player (WMP) as a tied product with the Windows 2000 PC client operating system, the offence of bundling.

The Commission identified three distinct product markets as being relevant to the assessment of Microsoft’s anti-competitive behaviour: (i) client PC operating systems; (ii) work group server operating systems and (iii) streaming media players. Microsoft held 95% of the market share in client PC operating systems. It was shown that interfacing with the client PC operating system was a key consumer requirement when networking or purchasing software. The Commission found that the manner in which Microsoft exercised its dominance in the core market of client PC operating systems, was effectively eliminating competition in the other two markets identified.

The Commission noted that consumers require non-Microsoft work group servers to interface fully with the individual PC running Microsoft’s client operating system. Thus, Microsoft’s dominance in the client PC operating system market and the inability of competitors to interface with this system had an anti-competitive effect on the second market of work group server operating systems. In order to interoperate with the Microsoft client PC operating system on an equal footing with Microsoft’s own work group server products, Microsoft would need to disclose full interoperability information. The Commission held that Microsoft’s failure to disclose interoperability information in respect of its client PC operating system was a breach of Article 82. The Commission further held that Microsoft’s supply of WMP as a bundle with its dominant Windows client PC operating system was eliminating competition in the media player market and constituted a second abuse of its dominant position.

The Commission imposed a combined fine of EUR 497,192,304 in respect of the two findings of breach of Article 82. It ordered Microsoft to release information to remedy its breach of Article 82 by its refusal to disclose the interoperability information of its dominant client PC operating system. This information would enable competitors to develop products in the second market of work group server operating systems which can interoperate effectively with the Microsoft products. The Commission highlighted that it required Mircrosoft to release the specification encompassing the communication protocols but not the source code itself. In respect of the bundling abuse, the Commission requested that Microsoft supply its operating system without WMP and that discriminatory pricing should not be applied to the individual products. Finally, the Commission ordered that Microsoft should provide a suggested mechanism for the continued monitoring of its compliance with the Commission’s order. The Commission ordered that such mechanism should incorporate a monitoring trustee who must have access to all Microsoft systems and staff.

Microsoft’s Appeal

Microsoft lodged an appeal at the Court of First Instance (CFI) on 8 June 2004. Microsoft appealed the finding of abuse in relation to its client PC operating system on a number of grounds:

  • that the Commission had erred in its calculation of market shares;

  • that the order to disclose the interoperability information amounted to a requirement to license its intellectual property and that the criteria for such a compulsory licence had not been met;

  • the extent of disclosure of interoperability information ordered by the Commission went further than was necessary to enable competitors to interface with Microsoft’s operating system and hence access the market;

  • the information which the Commission ordered it to disclose was not information which it had refused to supply as this was not the same information as had been requested by Sun Microsystems.

Microsoft appealed the bundling decision on the basis that the Commission had erred at law in the criteria it had applied to establish bundling. Microsoft further challenged the legal basis and quantum of the fine imposed and the appointment of a monitoring trustee. Microsoft claimed such appointment was ultra vires the Commission’s powers.

Breach of Article 82 by Failure to Disclose Interoperability Information

The CFI approved the Commission’s calculation of market shares identifying Microsoft as dominant in the market of client PC operating systems. The CFI confirmed that it was the exercise of Microsoft’s dominance in the market of client PC operating systems which was eliminating competition in the other two markets of work group server operating systems and streaming media players.

In its appeal Microsoft stated that it owned intellectual property in the communications protocols which the Commission had ordered it to disclose. This disclosure, Microsoft contended, would enable its competitors to have free use of it’s intellectual property and amount to a compulsory licence of Microsoft’s intellectual property. Microsoft challenged the criteria applied by the Commission in finding that Mircosoft’s refusal to licence the intellectual property in its interoperability information was a breach of Article 82.

The CFI noted that in accordance with case law, a dominant undertaking’s refusal to licence its intellectual property could not amount to an abuse of its dominant position except in exceptional circumstances. The CFI followed the criteria set out by the Court of Justice in Magill (RTE and ITP v Commission [1995] ECR I 743) and IMS Health [2004] ECR I 5039 and considered exceptional circumstances to exist where:


  1. there are two identifiable markets and the undertaking has refused to grant a licence in relation to the market in which it is dominant;

  2. the refusal excludes competition in the second market;

  3. the refusal and exclusion of competition restricts development of new products in the second market and there is a demand for such products;

  4. the refusal is not objectively justified.

The CFI approved the Commission’s conclusion that the Windows operating system had become the “de facto standard for work group computing”. In failing to disclose the requested interoperability information in respect of the Windows client PC operating system, Microsoft had prevented its competitors from developing work group server operating systems which could interact with Windows client PCs. This effectively prevented its competitors from entering the work group server market. In reaching this conclusion, the Commission had considered data generated from a market enquiry which revealed that Microsoft’s competitors were not able to interoperate with the Windows operating system on the same footing as Microsoft’s own products. The CFI confirmed that this restricted the development of new products as they could not interface as effectively as the Microsoft products and that this represented an “exceptional circumstance”.

The CFI went on to consider the extent of disclosure required by Microsoft to allow the operating systems of other work group server suppliers to interact with the Windows client PC operating system and achieve full interoperability.

Microsoft appealed the extent of interoperability ordered by the Commission stating that its release of interface information through its MSDN product was sufficient to enable full interoperability to be achieved. Microsoft contended that the Commission required it to release information to an extent sufficient to enable competitors to develop work group server operating systems which would function in the same way as the Microsoft product. In practice this would mean that competitors would essentially be “cloning” the Microsoft product.

The CFI approved the Commission’s assessment of the extent of interoperability information that was necessary to be disclosed to allow access to the market. Disclosure was limited to the interoperability information that was strictly necessary to allow competitors to access the market but not the release of the source code which could enable cloning. However, the CFI stated that the extent of such disclosure must be sufficient so as to allow a developer to develop a product which is compatible with the Microsoft products in issue and could compete on an equal footing with the Microsoft product. This would allow the competing product to achieve the same technical effect as the Microsoft product but via a different route and so would not be a “clone” of the equivalent Microsoft product.

The CFI rejected Microsoft’s submission that the Commission had applied the wrong test in assessing elimination of competition. Microsoft stated that the test to be applied when considering the compulsory licensing of intellectual property rights was whether its refusal to disclose the interoperability information was “likely to eliminate all competition”. This, Microsoft submitted, meant that there must be a high probability that competition would be eliminated rather than the test of mere “risk” of elimination of competition applied by the Commission. The CFI approved the Commission’s analysis stating the words “risk” or “likely” elimination of competition are used interchangeably when considering breach of Article 82. The CFI held that Microsoft had failed to show that its increasing strength in the work group server market and the corresponding decline of its competitors’ products were independent. The CFI concluded that Microsoft’s refusal to disclose interoperability information in its Windows client PC operating system was eliminating competition in the secondary market of work group server operating systems.

The CFI considered Article 82(b) of the EC Treaty which states that “limiting production, markets or technical developments to the prejudice of consumers” is prohibited as abusive. Accordingly, the Commission had correctly found that the restriction on development of new products caused by Microsoft’s refusal to release interoperability information was abusive. The CFI stated that Microsoft’s argument that licensing of its IP would reduce its motivation to innovate was irrelevant as the correct test was whether there was a restriction on a competitor’s incentive to innovate.

The CFI noted that Microsoft’s attempted justification that the information which was the subject of disclosure was protected by intellectual property rights was irrelevant for the purposes of the test in Magill and IMS Health. Accordingly, the CFI concluded that Microsoft had failed to objectively justify withholding the requested information.

Microsoft challenged the Commission’s finding of abuse stating that the information it was ordered to disclose was not the information requested by Sun Microsystems Accordingly, Microsoft had not refused to make disclosure as such disclosure had not been requested. The CFI held that the essence of Sun Microsystem’s request was for information to enable interoperability and Microsoft had refused to honour this request. Accordingly, the finding of abuse was upheld.

Microsoft also claimed that the Commission’s order of a compulsory licence of its interoperability information was a breach of Article 13 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). Microsoft contended that the Commission must apply Community Law in a manner compatible with TRIPS. Article 13 states that “limitations” and “exceptions” can only be applied to intellectual property rights in “special circumstances”. The CFI rejected this approach stating that Community Law must only be interpreted in the light of international law where that Community Law has been enacted to give effect to a provision of international law. This was not the case for Article 82.

Breach of Article 82 by Supply of Windows Media Player as a Bundle with the Windows Client PC Operating System

Microsoft appealed the factors considered by the Commission in reaching its decision as to the bundling offence, asserting that those factors did not correspond with Article 82(d). The CFI considered the Commission’s approach in determining whether the sole supply of Windows Media Player (“the Tied Product”) as a bundle with the Windows client PC operating system (“the Tying Product”) amounted to a breach of Article 82. The Commission had considered the following factors in reaching its decision:

  • whether the Tying and Tied Products are separate products;

  • whether Microsoft is dominant in the market of the Tying Product;

  • that Microsoft has not offered consumers the option to purchase the Tied Product without the Tying Product;

  • whether the practice in question forecloses competition.

In reliance on established case law, the CFI confirmed that Article 82 does not set out an exhaustive list of abusive practices but merely provides examples of what can be held to be abuse. The CFI extended this reasoning to state that an offence of bundling could be found where the case at issue did not correspond exactly with the example of bundling set out at Article 82(d). The CFI held that the Commission was correct to apply Article 82 in its entirety in establishing abusive bundling and approved the factors set out above which the Commission had applied in reaching its conclusion.

Microsoft disputed the Commission’s finding that WMP and the Windows client PC operating system were two separate markets. The CFI confirmed that the Commission was correct to assess the relevant markets as they were in May 1999, the time when the alleged conduct became harmful. Further, the CFI stated that consumer demand for independent products and the nature and technical features of those products are relevant factors to consider in assessing the existence of separate markets. In this case the fundamental difference between system software (operating system) and application software (WMP) indicated that there are separate markets in respect of these products.

Microsoft had not offered WMP for sale as an independent product but argued on appeal that WMP did not prevent any other media player from being installed and operated on the Windows operating system. The CFI noted that WMP could not be uninstalled. The CFI confirmed that the fact that the two products could not be purchased independently was the relevant factor to consider in assessing bundling abuse. Further, it stated that the fact that consumers do not pay for a tied product or that consumers could still purchase and use other media players was irrelevant.

The CFI dismissed as being without merit Microsoft’s appeal that the bundling remedy was not proportionate and that the Commission had failed to establish that the supply of WMP as a tied product reduced competition from other media players. The CFI held that the Commission’s order, which permitted Microsoft to continue to offer a bundled product as well as offering the products separately would not affect Microsoft’s business model and would not affect the technical efficiency of each product. Microsoft’s submission that supplying the products separately would cause its Windows operating system to fragment was rejected.

Monitoring Mechanism

The CFI, applying Regulation 17/62 which was in force at the time of the initial complaint, held that the imposition of an independent monitoring trustee on Microsoft was without legal basis. The CFI confirmed that the Commission could appoint its own expert to monitor compliance but had no authority to appoint a monitoring trustee who was independent of either party and for which Microsoft would bear all costs. The CFI annulled both the obligation on Microsoft to propose a monitoring mechanism and the power of the Commission to impose its own mechanism.

Fine

The CFI dismissed Microsoft’s claims that the fine was disproportionate noting the serious nature of the breaches of Article 82 and that the quantum of the fine should be such as to act as a deterrent to Microsoft. The CFI confirmed that the Commission was entitled to impose a single fine in respect of the two breaches and that it was not required to disclose the calculation behind the fine imposed.

Comment

The Commission has welcomed the CFI’s decision to uphold what is viewed as a landmark decision. This decision will bolster the Commission’s confidence in its pursuit of further actions against dominance within the high tech sector and beyond. The Microsoft decision may indicate a more hardline approach to be taken by the Commission in future actions.

Although this decision did not introduce any new principles of law, it has clarified the extent to which interoperability information must be disclosed to remedy an Article 82 abuse. It was held that the test for disclosure was whether the information requested was indispensable to the competitor in accessing the relevant market. The CFI stressed that the extent of the information disclosed must be sufficient to enable a competitor to access and effectively compete in the relevant market. However, the CFI also made clear that Microsoft was required to disclose only its communication protocols and not its source code. This decision will go some way to responding to Microsoft’s pending appeal against the Commission’s request, made by letter, that it disclose source code (Microsoft Corporation v Commission Case T-313/05).

The ruling of the CFI raises the question of whether the decompilation exception set out in Directive 91/250/EEC is effective in facilitating access to interoperability information. The decompilation exception provides that it is not an infringement of copyright to decompile a program to obtain interoperability information unless that information has been made readily available. The exception only applies where the information is used to create an independent programme which can interface with the decompiled software and must be indispensable in developing the new product with full interoperability. It is notable that the level of disclosure ordered by the CFI does not extend beyond that intended to be available under the decompilation exception but suggests that the exception may be insufficient to fulfil its objective of facilitating access to interoperability information.

Microsoft has two months in which to appeal the decision of the CFI on points of law to the European Court of Justice.