N. 39, July - September 2008 
IP & RTD: Articles 

Microsoft's troubles with antitrust rules in 2008


Begoña Uriarte Valiente
Abogado – Landwell-PricewaterhouseCoopers
 
In February 2008, the European Commission imposed a new penalty on Microsoft for the infringement of antitrust rules1. This time, the penalty was €899 million and was due to non-compliance with the obligations the Commission imposed on Microsoft in its decision of March 2004 within the time limit set up by this decision.


Background

In the 2004 Decision, Microsoft was deemed to have infringed the EC Treaty rules on abuse of a dominant position (Article 82) by refusing to supply its competitors with interoperability information and refusing to authorise them to use that information to develop and distribute products competing with its own products on the work group server operating system market, among other things. As a consequence, the Commission came to the conclusion that Microsoft has leveraged its near monopoly in the market for PC operating systems onto the market for work group server operating systems.

The Commission imposed a fine of €497 million and required Microsoft to disclose to developers of work group server operating systems, on reasonable terms, complete and accurate information so they could interoperate with Windows PCs and servers.

This decision was appealed before the Court of First Instance, which dismissed the request for suspension of the Decision2. Microsoft therefore had to comply with the decision by providing the necessary interoperability information immediately.

According to the Commission findings, Microsoft has a 95% market share on the desktop operating system market, and in excess of 70% on the market for work group server operating systems. Therefore, open source work group server products are the only alternative for users and the main surviving competitive constraint on Microsoft. The Commission decided that more competition in this market would offer consumers more innovative products with improved functionality at better prices. For that reason, it was vital to the effectiveness of the 2004 Decision that Microsoft give the open source developers access to the interoperability information.

By June 2006, Microsoft had not yet provided the complete and accurate interoperability information, and the Commission imposed a continued non-compliance penalty of €280.5 million.


Negotiating a solution



The implementation of the 2004 Decision solution presented two main problems: (i) the existence of IPRs protecting part of the interoperability information, and (ii) the assessment of the reasonableness of Microsoft's prices.

Since part of the information was protected by patent rights, Microsoft provided two separate licensing arrangements to companies wishing to obtain the interoperability information:

  • The "No Patent Agreement", which allows licensees to use the protocols which together comprised the interoperability information, but without taking a licence for patents which Microsoft claims necessary, a claim disputed by some third parties.

  • The "All IP Agreement", which combines this first licence with a licence for these disputed patents.

Companies therefore had a choice of agreement, depending on whether they consider a patent licence necessary.

Regarding the reasonableness of Microsoft's prices, this would largely depend on whether there was innovation in the protocols and on the prices charged for comparable technologies on the market.

Initially, Microsoft had demanded a royalty rate of 3.87% of the licensee's product revenues for a patent licence and 2.98% for a licence giving access to the secret interoperability information.

The Commission determined that this was not reasonable, and Microsoft reduced the royalty rates (0.7% for the patent licence and 0.5% for the information licence), for the EEA area alone, in May 2007. Such prices were not reasonable enough for the Commission.

Finally, on 22nd October 2007, the Commission accepted Microsoft’s decision to provide the information licence for a flat fee of €10,000 and an optional worldwide patent licence for a reduced royalty of 0.4% of a licensees’ product revenues.


The 2008 Decision

According to the Commission, the infringement of Article 82 of the EC Treaty then continued until October 2007, when reasonable prices for the information licences were finally settled.

In February 2008, the Commission issued a decision concluding that the royalties that Microsoft had charged for the information licence until October 2007 were unreasonable. The Commission based its approach on the lack of innovation in a very large proportion of the unpatented interoperability information and a comparison with the pricing of similar interoperability technology.

In the Commission's view, Microsoft had failed to comply with the March 2004 Decision for three years, thereby continuing the abuse of dominant position. For this reason, the Commission imposed an additional fine of €899 million. The Court of First Instance had, in the meantime, confirmed3 the Commission's opinion of Microsoft’s behaviour and therefore the infringement of Article 82 of the EC Treaty.

In May 2008, Microsoft brought an action before the Court of First Instance for an annulment of the 2008 Decision. The appeal is currently pending before the Court of First Instance4. The Court will have to determine whether the periodic penalty payment imposed by the Commission is excessive and disproportionate.


Conclusions

Microsoft has finally agreed to give access to interoperability information both to group server operating systems and the ‘open source’ software developers. The level of prices charged for the licences is reasonable. According to the Commission, this will lead to more competition and innovation in this market.

But this is not the end for Microsoft. Licensees may raise additional issues, and Microsoft has an ongoing obligation to update the information as its products evolve. And the company will always be under the Commission's strict surveillance.





1. Decision of 2nd February 2008, not Published.(«)


2. Order of the Court of First Instance of 22nd December 2004, case T-201/04 R.(«)


3. Judgement of 17th September 2007, case T-201/04.(«)


4. Case T-167/08.(«)