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EU Ct. of 1st Instance: Microsoft Abused its Dominant Position - Updated
Monday, September 17 2007 @ 05:37 AM EDT

The European Court of First Instance has upheld the commission's decision [PDF] finding that Microsoft abused its dominant position. It did this by refusal to supply and authorize the use of interoperability information and tying of the Windows client PC operating system and Windows Media Player. The EU Commission's reaction is here, including this statement from Neelie Kroes:
Competition Commissioner Neelie Kroes stated: “The Court has upheld a landmark Commission decision to give consumers more choice in software markets. That decision set an important precedent in terms of the obligations of dominant companies to allow competition, in particular in high tech industries. The Court ruling shows that the Commission was right to take its decision. Microsoft must now comply fully with its legal obligations to desist from engaging in anti-competitive conduct. The Commission will do its utmost to ensure that Microsoft complies swiftly."

A joint statement from FSF Europe and Samba here. "A triumph for freedom of choice and competition".

Thomas Vinje, Legal Counsel for ECIS, the European Committee for Interoperable Systems, gave this reaction: "This is a great day for European businesses and consumers. At long last, this decision opens the prospect for dynamic competition in the software industry. No more user lock-in, no more monopoly pricing."

Our own Sean Daly was there for the announcement and he got an exclusive statement [Ogg; MP3] from Mr. Vinje, who says he does expect Microsoft will likely appeal, as well as first reactions [Ogg; MP3] outside the courthouse from Volker Lendecke (Samba), Georg Greve (FSFE), and Jeremy Allison (Samba), who are clearly ecstatic. Greve calls it a screaming victory.

Sean reports:

The courtroom was subdued before the reading of the judgment summary, with lawyers, photographers, and press milling about; hardly an empty seat. Each lawyer wore the traditional garb of his country. Although everyone seemed relaxed, they were clearly expectant, watching the clock over the doors to the judges' chambers. At 9:29 AM, the room fell silent, flashbulbs stopped flashing, and everyone sat down. A couple of lawyers looked at their watches, as if to check the clock. A loud tone sounded, and the chamber doors were thrown open with a shout. All rose. Judge Bo Vesterdorf, on his last day at the Court, preceded his 12 colleagues who entered the courtroom in measured procession and took their seats. Judge Vesterdorf began speaking in a low, level voice, reciting the names of the parties in the litigation and enumerating the summary points of the ruling. No one said a word as they listened intently. Six minutes later it was over: the European Commission's positions were upheld save for the organization of the Monitoring Trustee, with Microsoft and its allies to bear nearly all legal costs and with the EC fines maintained. At the exit, a press release and hardcopy of the full judgement (248 pages!) were handed out. There were smiles and laughter from the FSFE and Samba people. Thomas Vinje, the lead lawyer for ECIS, made a statement before the cameras. The Microsoft representatives disappeared without comment.

You can find the Judgment here. You need Javascript turned on. The fines were upheld too. And Microsoft was ordered to pay the costs of SIIA, FSFE, and ECIS, including those relating to the interim proceedings. So Microsoft pays FSF Europe. Did you ever think you'd see *that* day? Microsoft has two months to appeal, but the appeal is limited to points of law only. There will be a Microsoft press conference, webcast live, at 2:30 PM CET, with Brad Smith in Brussels. Details here. The Rules of Procedure for the Court of First Instance are here [PDF] and you can find the statutes and treaties the Court of First Instance is guided by here.

Update: Microsoft's Brad Smith has now spoken. No immediate appeal, as they are still reading and analyzing the order. You can read it or view it here if you can use their proprietary format. And here's the reaction from Red Hat, on VNUnet:

"Red Hat would like to congratulate the Commission, and particularly Neelie Kroes and her services, for their persistence and courage in bringing this matter to a successful result," said Matthew Szulik, chairman of Red Hat.

"The Court has confirmed that competition law prevents a monopolist from simply using its control of the market to lock in customers and stifle new competitors.

"In our business, interoperability information is critically important and cannot simply be withheld to exclude all competition."

And Neelie Kroes, the European commissioner for Competition Policy, held a press conference, which you can read about on eWeek, and she said this:

"The court has confirmed that Microsoft cannot regulate the market by imposing its products and services on people," Kroes said. "The court has confirmed that Microsoft can no longer prevent the market from functioning properly and that computer users are therefore entitled to benefit from choice, more innovative products and more competitive prices....

"You may hear scare stories about the supposed negative consequences of this ruling for other companies and other innovation on the market," she said. "Recent years have certainly seen innovation in high technology markets—but largely in areas that Microsoft does not control."

With regard to interoperability, here is the ordered remedy by the EU Commission that was upheld:
48 By way of remedy for the abusive refusal referred to in Article 2(a) of the contested decision, Article 5 of that decision provides as follows:
(a) Microsoft … shall, within 120 days of the date of notification of [the contested decision], make the interoperability information available to any undertaking having an interest in developing and distributing work group server operating system products and shall, on reasonable and non-discriminatory terms, allow the use of the interoperability information by such undertakings for the purpose of developing and distributing work group server operating system products;

(b) Microsoft … shall ensure that the interoperability information made available is kept updated on an ongoing basis and in a timely manner;

(c) Microsoft … shall, within 120 days of the date of notification of [the contested decision], set up an evaluation mechanism that will give interested undertakings a workable possibility of informing themselves about the scope and terms of use of the interoperability information; as regards this evaluation mechanism, Microsoft … may impose reasonable and non-discriminatory conditions to ensure that access to the interoperability information is granted for evaluation purposes only;

In its press release, the Court of First Instance said this:

First, the Court confirms that the necessary degree of interoperability required by the Commission is well founded and that there is no inconsistency between that degree of interoperability and the remedy imposed by the Commission....

As regards the refusal to supply the interoperability information, the Court recalls that, according to the case-law, although undertakings are, as a rule, free to choose their business partners, in certain circumstances a refusal to supply on the part of a dominant undertaking may constitute an abuse of a dominant position. 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, three conditions must be satisfied: the refusal must relate to a product or service indispensable to the exercise of an activity on a neighbouring market; and the refusal must prevent the appearance of a new product for which there is potential consumer demand. Provided that such circumstances are satisfied, the refusal to grant a license may constitute an abuse of a dominant position unless it is objectively justified.

In the present case, the Court finds that the Commission did not err in considering that those conditions were indeed satisfied.

The Court considers that the Commission was correct to conclude that the work group server operating system of Microsoft's competitors must be able to interoperate with Windows domain architecture on an equal footing with Windows operating system if they are to be capable of being marketed viably.

The absence of such interoperability has the effect of reinforcing Microsoft's competitive position on the market and creates a risk that competition will be eliminated....

Lastly, the Court rejects Microsoft's arguments to the effect that the refusal is objectively justified because the technology concerned is covered by intellectual property rights. The Court notes that such justification would render ineffective the principles established in the case-law which are referred to above. The Court further considers that Microsoft has failed to show that if it were required to disclose the interoperability information that would have a significant negative effect on its incentives to innovate.

The Court therefore upholds the part of the decision concerning interoperability.

So, I guess Novell's partnership with Microsoft isn't such a great leg up after all. Everyone gets to interoperate and without having to agree to Microsoft's terms. It's a new day.

The only part of the ruling that will give Microsoft comfort was the court annulling certain parts of the decision relating to the appointment of a monitoring trustee, which have no legal basis in Community law.

THE COURT OF FIRST INSTANCE (Grand Chamber) hereby: 1. Annuls Article 7 of Commission Decision 2007/53/EC of 24 March 2004 relating to a proceeding pursuant to Article 82 [EC] and Article 54 of the EEA Agreement against Microsoft Corp. (Case COMP/C-3/37.792 – Microsoft), in so far as:

  • it orders Microsoft to submit a proposal for the establishment of a mechanism which is to include a monitoring trustee with the power to have access, independently of the Commission, to Microsoft’s assistance, information, documents, premises and employees and to the source code of the relevant Microsoft products;
  • it requires that the proposal for the establishment of that mechanism provide that all the costs associated with the appointment of the monitoring trustee, including his remuneration, be borne by Microsoft; and
  • it reserves to the Commission the right to impose by way of decision a mechanism such as that referred to in the first and second indents above;
2. Dismisses the remainder of the application; ....

Here is the part about Linux and interoperability:

34 Linux is an ‘open source’ operating system released under the ‘GNU GPL (General Public Licence)’. Strictly speaking, it is only a code base, called the ‘kernel’, which performs a limited number of services specific to an operating system. It may, however, be linked to other layers of software to form a ‘Linux operating system’ (recital 87 to the contested decision). Linux is used in particular as the basis for work group server operating systems (recital 101 to the contested decision) and is thus present on the work group server operating systems market in conjunction with Samba software, which is also released under the ‘GNU GPL’ licence (recitals 506 and 598 to the contested decision)....

III – Abuse of a dominant position

A – Refusal to supply and authorise the use of interoperability information

36 The first abusive conduct in which Microsoft is found to have engaged consists in its refusal to supply its competitors with ‘interoperability information’ and to authorise the use of that information for the purpose of developing and distributing products competing with Microsoft’s own products on the work group server operating systems market, between October 1998 and the date of notification of the contested decision (Article 2(a) of the contested decision). That conduct is described at recitals 546 to 791 to the contested decision.

37 For the purposes of the contested decision, ‘interoperability information’ is the ‘complete and accurate specifications for all the protocols [implemented] in Windows work group server operating systems and … used by Windows work group servers to deliver file and print services and group and user administrative services, including the Windows domain controller services, Active Directory services and “group Policy” services to Windows work group networks’ (Article 1(1) of the contested decision).

38 ‘Windows work group network’ is defined as ‘any group of Windows client PCs and Windows work group servers linked together via a computer network’ (Article 1(7) of the contested decision).

39 A ‘protocol’ is defined as ‘a set of rules of interconnection and interaction between various instances of Windows work group server operating systems and Windows client PC operating systems running on different computers in a Windows work group network’ (Article 1(2) of the contested decision).

40 In the contested decision, the Commission emphasises that the refusal in question does not relate to Microsoft’s ‘source code’, but only to specifications of the protocols concerned, that is to say, to a detailed description of what the software in question must achieve, in contrast to the implementations, consisting in the implementation of the code on the computer (recitals 24 and 569 to the contested decision). It states, in particular, that it ‘does not contemplate ordering Microsoft to allow copying of Windows by third parties’ (recital 572 to the contested decision).

41 The Commission further considers that Microsoft’s refusal to Sun is part of a general pattern of conduct (recitals 573 to 577 to the contested decision). It also asserts that Microsoft’s conduct involves a disruption of previous, higher levels of supply (recitals 578 to 584 to the contested decision), causes a risk of elimination of competition on the work group server operating systems (recitals 585 to 692 to the contested decision) and has a negative effect on technical development and on consumer welfare (recitals 693 to 708 to the contested decision).

42 Last, the Commission rejects Microsoft’s arguments that its refusal is objectively justified (recitals 709 to 778 to the contested decision).

The discussion then focuses on how to define interoperability:

228 In the second place, the Court observes that the Commission assessed the degree of interoperability by reference to what, in its view, was necessary in order to enable developers of non-Microsoft work group server operating systems to remain viably on the market (see, in particular, footnote 712 and recital 779 to the contested decision).

229 The correctness of that approach is not open to dispute. Article 82 EC deals with the conduct of one or more economic operators involving the abuse of a position of economic strength which enables the operator concerned to hinder the maintenance of effective competition on the relevant market by allowing it to behave to an appreciable extent independently of its competitors, its customers and, ultimately, consumers (Joined Cases C‑359/96 P and C‑396/96 P Compagnie maritime belge transports and Others v Commission [2000] ECR I‑1365, paragraph 34). Furthermore, whilst the finding of a dominant position does not in itself imply any criticism of the undertaking concerned, that undertaking has a special responsibility, irrespective of the causes of that position, not to allow its conduct to impair genuine undistorted competition on the common market (Case 322/81 Michelin v Commission [1983] ECR 3461, paragraph 57, and Case T‑228/97 Irish Sugar v Commission [1999] ECR II‑2969, paragraph 112). Should it be established in the present case that the existing degree of interoperability does not enable developers of non-Microsoft work group server operating systems to remain viably on the market for those operating systems, it follows that the maintenance of effective competition on that market is being hindered.

230 It follows from the contested decision that, by adopting that approach and taking as its basis a factual and technical analysis of the products and technologies concerned and also of the way in which interoperability is achieved in Windows work group networks, the Commission concluded that, in order to be capable of competing viably with Windows work group server operating systems, competing operating systems had to be able to interoperate with Windows domain architecture on an equal footing with Windows work group server operating systems (see to that effect, in particular, recitals 182 and 282 to the contested decision).

231 The interoperability thus required by the Commission has two indissociable components, namely client/server interoperability and server/server interoperability (recitals 177 to 182 and 689 to the contested decision).

232 The Commission also maintains that when a non-Microsoft work group server operating system is installed on a Windows work group server network, it must be capable not only of delivering all its functionalities to Windows client PCs but also of using all the functionalities offered by those client PCs.

233 In the light of those various factors, the Commission maintains, in particular, that a server running a non-Microsoft work group server operating system must be capable of acting as a domain controller, and not merely as a member server, within a Windows domain using Active Directory and, accordingly, be capable of participating in the multimaster replication mechanism with the other domain controllers.

234 The Court finds that, contrary to Microsoft’s claim, it cannot be inferred from the degree of interoperability thus required by the Commission that the Commission intends in reality that non-Microsoft server operating systems must function in every respect like a Windows server operating system and, accordingly, that Microsoft’s competitors must be in a position to ‘clone’ or ‘reproduce’ its products or certain features of those products.

235 The assertions thus made by Microsoft are founded on a misreading of the contested decision.

236 The Court observes, in that regard, that, according to recital 1003 to the contested decision, the objective of the decision is to ‘ensure that Microsoft’s competitors can develop products that interoperate with the Windows domain architecture natively supported in the dominant Windows client PC operating system and hence viably compete with Microsoft’s work group server operating system’.

237 As the Commission explained in greater detail at the hearing, the attainment of that objective assumes that non-Microsoft work group server operating systems are capable of receiving a specific message from a Windows client PC or work group server operating system and giving the required response to that message on the same conditions as a Windows work group server operating system and also of enabling Windows client PC or work group server operating systems to react to that response just as though it came from a Windows work group server operating system.

238 In order for such operations to be practicable, it is not necessary that non-Microsoft work group server operating systems should function internally in exactly the same way as Windows work group server operating systems.

239 Those various considerations are not vitiated by the passages from recitals 669 and 679 to the contested decision cited by Microsoft (see paragraph 126 above). In the first passage, the Commission merely states that the degree of interoperability with the Windows domain architecture that may be achieved by non-Microsoft work group server operating systems using standard protocols is lower than that achieved by Windows work group server operating systems. In the second passage, the Commission states only that non-Microsoft work group server operating systems are capable of using the functionalities of Windows client PC and work group server operating systems only to a lesser degree than Windows work group server operating systems.

240 In the same way Microsoft’s assertion that the contested decision intends that its competitors should develop exactly the same products as Windows work group server operating systems must be rejected. As the Court will explain in greater detail at paragraphs 653 to 658 below, in its examination of the circumstance relating to the appearance of a new product, the aim pursued by the Commission is to remove the obstacle for Microsoft’s competitors represented by the insufficient degree of interoperability with the Windows domain architecture, in order to enable those competitors to offer work group server operating systems which differ from Microsoft’s on important parameters such as, in particular, security, reliability, processing speed or the innovative nature of certain functionalities.

241 The Court also notes that, as Microsoft itself expressly acknowledges in its written submissions (see, for example, paragraphs 14 and 48 of the reply), its competitors will not be in a position to develop products which are ‘clones’ or reproductions of Windows work group server operating systems by having access to the interoperability information at which the contested decision is aimed. As stated at paragraphs 192 to 206 above, that information does not relate to Microsoft’s source code. In particular, Article 5 of the contested decision does not require Microsoft to disclose implementation details to its competitors.

242 Furthermore, as will also be explained in greater detail at paragraph 658 below, when the Court examines the circumstance relating to the new product, Microsoft’s competitors would have no interest in developing exactly the same work group server operating systems as Microsoft’s.

243 Nor can the Court accept Microsoft’s claim that it follows from the undertakings’ statements which it produced during the administrative procedure that there is already a high degree of interoperability between Windows client PC and server operating systems and non-Microsoft server operating systems, owing to the use of methods already available on the market.

So, Novell chose to ride the wrong pony. And I think the MSOOXML process will be directly impacted by this decision as well. The Wall St. Journal reminds us that there is another antitrust matter before the EU Commission yet to be decided:

In Europe, the Microsoft result could embolden regulators to pursue the software giant further. There is an outstanding investigation of a separate complaint involving Microsoft's dominant Office productivity software. In that case, a group backed by companies including International Business Machines Corp. alleges that Microsoft shut rivals out of the market with its tight control over the file formats used by Word, Excel and PowerPoint to encode documents.

Ken Wasch, President of the Software & Information Industry Association (SIIA), issued the following statement: "Today's judgment by the European appeals court is a victory for innovators and consumers everywhere. With this action, the only option left for Microsoft is to immediately cooperate and fulfill the requirements of the March 2004 Decision."

The joint statement from Samba and FSFE:


"Microsoft can consider itself above the law no longer," says Georg Greve, president of the Free Software Foundation Europe (FSFE).

"Through tactics that successfully derailed antitrust processes in other parts of the world, including the United States, Microsoft has managed to postpone this day for almost a decade. But thanks to the perseverance and excellent work of the European Commission, these tactics have now failed in Europe," Greve continues.

Carlo Piana, FSFE's legal counsel: "FSFE and the Samba Team welcome the decision of the court. This is a milestone for competition. It puts an end to the notion that deliberate obfuscation of standards and designed lock-in is an acceptable business model and forces Microsoft back into competing on the grounds of software technology."

"The Samba Team would like to thank the European Commission for its outstanding job over the past years. Millions of users around the world will reap the rewards of their work," comments Jeremy Allison, co-author of the Samba project. "This is a very important day for the Samba Team: we hope to finally compete on a level playing field, without being denied access to interoperability information. Samba would then be able to offer consumers real choice, with the benefits of software freedom."

Volker Lendecke of the Samba Team: "Now that the court has decided, we will be watching closely what the exact licensing terms for the interoperability information are. It will be very important to make sure that the information is usable in Free Software, otherwise the great success the Commission has achieved here is severely harmed. Samba is one of the most important players in the workgroup server market, the market in which the comission wanted to restore competition."

"This is a very good day for Europe, but it is only a step along the way. The recurrent theme for Microsoft's behaviour over the past years is an apparent perception of interoperability as a threat to overcome," summarises FSFE counsel Carlo Piana. "The most recent example was provided by MS-OOXML, which Doug Mahugh of Microsoft described as a commercially motivated response to the threat provided by the ODF ISO standard and the interoperability and choice it offers. Tactical, not technical considerations were the driving force behind Microsoft's global efforts to manipulate national standardisation bodies into blind acceptance of MS-OOXML."

FSFE president Greve concludes: "Today's decision has set a very important precedent for the future. Secret manipulation of open formats and protocols has clearly been marked as unacceptable conduct. We now encourage the European Commission take up the recent antitrust complaint brought forward by ECIS. In a joint effort with the Samba Team and, the FSFE gladly offers its expertise to the European Commission for that investigation."

On the bundling issue, Erik Simon, President of VideoBanner, one of the four Interveners in support of the European Antitrust Commission, released the following statement regarding today’s decision in the Microsoft Antitrust case:

Today’s decision is significant in that it starts to restrain Microsoft’s use of bundling, which has been one of their central tactics for market expansion. This has implications not only for the video streaming industry, but potentially, for other industries as well.

VideoBanner hopes the Court’s ruling initiates a process of restoring competition to the video steaming market. Nonetheless, additional steps may still be required to ensure that today’s ruling has the teeth necessary to be fully effective.

The real news is that a legal precedent has now been established to prevent Microsoft from leveraging their operating system monopoly in order to dominate the video streaming industry – and potentially, other markets as well. In that sense, today’s ruling is not an end but rather the start of an ongoing business and legal process to protect competition by preventing Microsoft from bundling its way into various markets.

The New York Times' Steve Lohr addresses why the bundling issue matters:

"This is sort of a license to go after Windows' tying of secondary products," said Herbert Hovenkamp, a leading antitrust scholar at the University of Iowa College of Law. "We haven’t heard the last of the legal challenges to Microsoft’s bundling practices by any means."

So when Microsoft wants to put handwriting and speech recognition features or stronger anti-virus and other security software into the Windows operating system, competitors can complain to European authorities...

"It's clear why Microsoft needs to add functionality, and that's fine if Microsoft is the innovator and comes out with new features and adds them to its operating system," said Michael A. Cusumano, a professor at the Massachusetts Institute of Technology’s Sloan School of Management. "But when Microsoft is the second or third-mover in a market, as they were with the browser and the media player, I think the bundling is a problem."

I think that means Microsoft now will have to actually start to innovate.

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