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Let's Make a Deal - The MS-EU Settlement - Updated
Monday, October 22 2007 @ 11:47 AM EDT

Here's the press relase from the EU Commission announcing a settlement with Microsoft. As you will see, it's some good, some bad. The patent part is terrible. Worse than terrible. They are not blocked from offering patent deals, only constrained as to how much to charge for a license, which is not and never was the issue. So they'll beef up those initiatives, I'm sure. However, the good part is that they were compelled to separate the patent license offer out and make it optional. Thanks, but no thanks. Here's the FAQ. Here's the 2004 EU decision [PDF].

They are compelled now to let Open Source competitors have access to their interoperability information. That part of the settlement is in most respects very good for FOSS. The royalty on that is reduced to a flat fee of €10 000, which I'm sure Linus could have easily paid when he was a student and starting the Linux development. Not.

I'd call it a split decision, maybe not even that good. There is a need for greater understanding of how FOSS is developed, how the GPL, the most popular FOSS license, works and what it means in a patent context, unless folks just want to kill it off, of course. Why anyone but Microsoft would want that is a mystery to me. The EU Commission is calling it a great day for Open Source. I'm afraid I can't agree with respects to the patent part of the settlement. But this is one day in a long struggle. It's not the final chapter.

The media is calling it a great victory too, and to a point it is, but not with respects to the patent implications:

I'm guessing Microsoft lawyers are high fiving each other, having snatched an important victory from utter and total defeat. The rest is excellent, of course, and in no way do I mean to detract from the hard work and persistence that the EU Commission has shown. However, I don't think they understand how seriously broken the US patent system is currently, and how easy it is to abuse it, or they don't feel it's their job to fix the US problems, or how central patents are to Microsoft's current strategy against FOSS. Read this from the FAQ, and you'll see it's just not workable here:
Can open source software developers implement patented interoperability information?

Open source software developers use various “open source” licences to distribute their software. Some of these licences are incompatible with the patent licence offered by Microsoft. It is up to the commercial open source distributors to ensure that their software products do not infringe upon Microsoft’s patents. If they consider that one or more of Microsoft’s patents would apply to their software product, they can either design around these patents, challenge their validity or take a patent licence from Microsoft.

In the US, they let you patent HTML links and other super basic things, basic but essential. The GPL can't take a license for a patent, period. So that leaves work around the patent. If it's basic enough and necessary enough, you can't do so and still function normally. It's like trying to do math if you aren't allowed to use the 2 unless you pay Microsoft for it. So now what? Try to win in court? How do individual programmers or small projects do that? They can't. So what this part of the agreement is saying to me is that the GPL is not allowed to compete on an even playing field, and it will have to make do with less functionality.

You'll remember Thomas Vinje, and here's his statement: "Today‘s statement by European Commissioner for Competition Neelie Kroes marks an important milestone in the Commission‘s efforts to address Microsoft‘s continuing abuse of its dominant position and ensure competition on the merits in key software markets. ECIS commends the Commission and particularly Commissioner Kroes for their diligence in pursuing this issue over the last eight years." Of course the key is compliance, as is pointed out in the full ECIS statement [PDF], which includes this paragraph:

As always, it is essential that the Commission continues vigorously to monitor Microsoft's compliance particularly with respect to the completeness of the interoperability information for Vista and Windows Server 2008. The provisions allowing for private enforcement actions to complement the Commission's enforcement powers are key to ensuring the ultimate success of the Commission's 2004 Decision.

I see everyone has learned from the compliance difficulties in the US.

Here's Microsoft's statement:

At the time the Court of First Instance issued its judgment in September, Microsoft committed to taking any further steps necessary to achieve full compliance with the Commission's decision. We have undertaken a constructive discussion with the Commission and have now agreed on those additional steps. We will not appeal the CFI's decision to the European Court of Justice and will continue to work closely with the Commission and the industry to ensure a flourishing and competitive environment for information technology in Europe and around the world.

Update: Business Week has the most thorough coverage, including the first statement I've seen from FSFE:

The open-source software sector isn't popping open champagne bottles just yet. "There are so many things that could go wrong that we don't want to say anything until we have seen the actual documents and reviewed the actual conditions," says Carlo Piana, a partner at Milan law firm Tamos Piana & Partners, who represents the Free Software Foundation Europe, an industry group that champions open-source software.

A group representing a coalition of tech companies including IBM (IBM), Oracle (ORCL), and Nokia (NOK) was equally cautious. "We are more optimistic than we have been in the past, but the proof will be in the pudding," says Thomas Vinje, a partner in the Brussels office of Clifford Chance who represents the European Committee for Interoperable Systems.

Vinje says the group plans to remain vigilant and will continue to press its case with the EC to force Microsoft to reveal similar interoperability information for newer products, such as Vista and Windows Server 2008. "The number of instances in which Microsoft is engaging in similar conduct is escalating, not declining," he says.

We have also now the transcript of the press conference:

Neelie Kroes Press Conference Q&A Brussels, October 22, 2007

Jonathan Todd: First question, David Gow.

8:46 (David)

Q: Well, in view of all this, what's the likelihood that you will not enforce the outstanding payments which could be due? And the other question is, have they also indicated to you that they will not appeal the CFI ruling, as they have already, for example in Korea, they've already stayed their hand on the appeal in Korea?

Neelie Kroes: Expectations not to appeal are positive from my side. I expect that that will be the case, but I am sure that Microsoft will react themselves. We have to take into account that what is dealt with in the past and what is connected with that behavior still has to be seen in a complete package. So wait and see.

10:05 (Tom)

Q: Commissioner, could you tell us what this means now for other companies in other branches, are you preparing new cases?

Neelie Kroes: The shop is still open, I can assure you, and not only open because we are looking for activities. I can assure you that we are indeed highly involved in doing our job for the consumer and that there should be a fair level playing field and there are a couple of other cases still at our desks. If you will allow me just to add to David, perhaps that will even enlarge his awareness of our attitude. As from today, Microsoft has established compliance -- no doubt about that -- I have touched upon that -- there is therefore no reason to impose further penalties on Microsoft as of this day. That is a very clear, forward answer.

11:16 (Robert)

Q: Yes, Commissioner. You mentioned that the Decision had precedent from Microsoft in this and other cases, and do we see that the sort of agreement that you've reached here regarding flat fees and the sort of levels of royalty rates, do you see that as a platform for other IP or royalty disputes that exist, either for Microsoft or for other companies?

Neelie Kroes: This is a unique case and let's just stick to this case.

11:56 (Anne-Marie)

Q: A question in Dutch, if I can. Mrs. Kroes, what do you think about the fact that the problem has been this result and what does this mean in practice for consumers, how are consumers actually going to experience this result?

Neelie Kroes: Well, I have a good feeling about it, and I also feel a bit sad, because it took so long, it took so many years, and during those many years, the consumers suffered from the fact that Microsoft didn't go along with what the Commission asked it to do, the first time in the history of the EU and the Community that this happened. Having said that, I'd like to stress the positive side of today's events. From today, there will be more competition on the market which is open where there is such great interest for consumers, the IT market so from today, there will be as much competition as consumers should rightly expect from this market.

13:06

Q: Microsoft has been seen as a bit of a bad guy over the last few years. Does this decision mean that this status has been lifted?

Neelie Kroes: Anyhow, for today, I am counting the positive results that Mr. Ballmer and I myself reached upon this morning. And he and I are aware that that was the past, so let's look into the future and with this statement of Steve Ballmer, I sincerely hope that we can just close this dark chapter of our relationship and go on in absolutely constructive and positive ways.

14:01 (Matthew)

Q:Good morning, Commissioner. People have critized the Commission for over-regulating dominant companies. You said, quickly on intellectual property areas, here today we have a decision that sets a flat fee on valuable IP. Do you think there's a risk that the Commission could be viewed as setting prices for intellectual property? Because this is something that comes up in other cases like that, such as the Qualcomm case?

Neelie Kroes: Interesting question, Matthew, but I don't think so. This is a case in itself. And with this flat rate, and with such a low rate, I think that we can indeed say that we are protecting the consumer and stimulating competition and especially for those who are involved in open source development actions.

15:03 (Alain)

Q:Yes, Madame, two questions, please. If you could respond in French. The first question is very simple one, could you just remind me of how much Microsoft has already paid in fines, and what it still has to pay? Having to do with the past. And to pick up the question that has just been asked by my colleague. Generally speaking, the Commission is very much criticized, so do you think that this is a victory for the Commission, for consumers, will there be other cases? Does this strengthen you in your resolve to force giant multinationals to their knees, companies which feel that they have a free hand to do as they like in terms of their practices?

Neelie Kroes: I'm happy with your question, for it gives me the opportunity to underline again that the size of a company, that a sector, and that the nationality, but also that the shareholdership, is not important for me. of course, I could have a preference, it's not making sense in our decision-making. The only point is, and rightly mentioned by you, it is a victory day for the consumer, and nothing to do with the Commission or whatever. We are doing our job, and we are paid for it, and that's it. We have to take into account that there should be a fair level playing field whatever the size, whatever the nationality those companies are. And in this case it is indeed highly important that we take into account that this makes sense to every consumer -- by the way, not only in Europe, we are talking about worldwide, and we are discussing that level. So all in all, a positive day for the consumer.

17:10 (Christian)

Q: Commissioner, good morning. You said that you talked with Mr. Ballmer now for two or three weeks. The ruling of the EU court was four weeks ago. So apparently, the only way to deal with Microsoft is by EU court rulings. Is this impression true?

Neelie Kroes: When the court ruling was published, we got in touch, and Mr. Ballmer and I found each other in a small restaurant, so to say, there it all started, nobody could find out where, or whatever, and there we were indeed promising each other that there should be a compliance of what has to be done much earlier.

18:13 (Antonio)

Q: I hope Microsoft paid the bill in the restaurant (laughter), but my question is on the fine. You may not have decided yet on the amount you may impose, if any, to Microsoft but please try to help us just avoid any present misinterpretation,miscalculation. What is, as of yesterday, the highest level of amount you can impose on Microsoft?

Neelie Kroes: I will be back with the news when we have taken that decision. Absolutely. I mentioned already today that anyhow -- and that is a certainty, and there are not that many certainties in life, as you aware --that from today on, there is no reason to impose further penalties on Microsoft as of this Monday, the 22nd.

19:19 (Maria)

Q: Commissioner, you mentioned that there was this sort of groundbreaking contact this morning, so maybe could you explain to us a little bit what was the content of this conversation? And also, secondly, do you see any progress regarding the Vista issue? Thank you.

Neelie Kroes: We are dealing with the past. And we are dealing with the compliance that was asked for already a long time ago and that wasn't fulfilled. And after that meeting in the restaurant there are a couple of very interesting discussions to be mentioned, but that is between him and myself. And the result of that total discussion during those weeks is indeed compliance and what I have mentioned. So I think the result counts and that makes sense for all of us.

20:36 (Ingrid)

Q: To follow up on the previous question, maybe because I'm not too familiar with the case, up until now on this case, what has Microsoft had to pay or has paid or is this a decision you have to take?

Neelie Kroes: I will be back when that is dealt with and when we have taken that decision.

21:04 (Charles)

Q: Hi Commissioner, Charles Ferrell from the Wall Street Journal. Unless I am misunderstanding, it seems that patents are not included in the interoperability licenses for developers. Do you worry that Microsoft could simply continue its behavior by saying "Patents are an issue here and you won't be able to license the patents", in other words make it difficult for developers to license patents from them? And what remedies might companies have if they felt like patents were a problem? The second question is, what was the restaurant? (laughter)

Neelie Kroes: out of the 154 individual protocols that can be licensed according to Microsoft's claims at that time, only 31 are covered by patents. And furthermore, a patent does not necessarily cover all aspects of the protocol in question. So I think that could be one of the answers. And developers would have to ask whether they would need to take a patent license from Microsoft or whether they could design around the patents. So those opportunities are up those who are using that -- the developers.

Q: Who paid for the dinner?

Neelie Kroes: I paid for the dinner, for I didn't want to have problems about that, for I was sure that you were interested in that.

Q: Which restaurant?

Neelie Kroes: Oh, which restaurant? Close to my hometown, in Holland, yes. (laughter)

22:59

Q: This agreement you have with Mr. Ballmer covers also Vista? Does this mean that the Commission is not engaging the procedure on Vista now?

Neelie Kroes: Vista, and that is also a part of the work now, so that is the future.

Jonathan Todd: David, you had another question?

22:31 (David)

Q:Sorry, yeah. Why is this enforceable before the High Court in London? Why in a country which is halfway out of the EU, if you see what I mean? (laughter) Especially after the events of last week? And now that -- just on a sort of personal basis, well, not personal, no, corporate basis -- was this sort of love at 10th sight? And will it lead to further developments in the tryst between the Commission and Microsoft?

Neelie Kroes: By the way, just to make one remark outside this issue I think that they anyhow offered one of their best politicians to be involved in the process in this house so we can't neglect those great gestures. Having said that, why the court in London? Anyhow, I want to get rid of this type of activities and with our arrangement, we can. It's much better in this case when parties are having a misunderstanding, so to say, that they go to court and find out how things are going on. I got the information that the court in London is the most sophisticated in these issues -- nothing to say about other courts, but in this case that's already done by the way so let's keep the line.

Jonathan Todd: I can't see any further questions. There is of course a press statement available, a set of frequently asked questions. Some gentlemen from DG Competition if you have any more technical questions. It just remains for me to say thank you for coming, thank you to the interpreters, thank you to the Commissioner.

**********************************

Antitrust: Commission ensures compliance with 2004 Decision against Microsoft

Competition Commissioner Neelie Kroes stated: “I welcome that Microsoft has finally undertaken concrete steps to ensure full compliance with the 2004 Decision. It is regrettable that Microsoft has only complied after a considerable delay, two court decisions, and the imposition of daily penalty payments. However, the measures that the Commission has insisted upon will benefit computer users by bringing competition and innovation back to the server market. The Commission will remain vigilant to ensure that Microsoft continues to respect its compliance obligations and does not engage in other anti-competitive behaviour. I have always said that open source software developers must be able to take advantage of this remedy: now they can.”

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. Open source work group server products are virtually the only alternative for users and are thus the main surviving competitive constraint on Microsoft. More competition on this market should offer consumers more innovative products, with improved functionality at better prices. For that reason, it is vital to the effectiveness of the 2004 Decision that Microsoft also complies by giving access open source developers access to the interoperability information.

Microsoft provides two separate licensing arrangements to companies wishing to obtain the interoperability information as foreseen by the 2004 Decision's remedy. The first is a “No Patent Agreement” allowing licensees access to the interoperability information, but without taking a licence for patents which Microsoft claims necessary, a claim disputed by some third parties. Microsoft has now made three changes to this licence:

* altering the terms of the licence so that it is compatible with the open source business model
* reducing the royalty to a flat fee of €10 000
* allowing effective private enforcement of warranties regarding the completeness and accuracy of the information provided.

The second licence (the “Patent Agreement”) is for the patents which Microsoft considers relevant. Microsoft will now offer a worldwide patent licence for a reduced royalty of 0.4 % of licensees’ product revenues.

Companies therefore continue to have a choice of agreement, depending on whether they consider they need a patent licence.

Initially, Microsoft had demanded a royalty rate of 5.95 % of revenues for a combination of access to the secret interoperability information and for a patent licence and had refused to make the licence compatible with the open source business model.

In a statement of objections of 1 March 2007 the Commission warned Microsoft of penalty payments over its unreasonable pricing (IP/07/269). The Commission also stated that it would ensure that open source developers could have access to the non-innovative parts of the interoperability information (IP/05/673).

In addition to the two licences Microsoft will publish an irrevocable pledge not to assert any patents it may have over the interoperability information against non-commercial open source software development projects.

These measures will ensure that Microsoft’s competitors in the work group server market, including those following the open source business model, will have access to the interoperability information on reasonable terms which will in turn lead to more competition and innovation in this market.

As of today, the interoperability information appears to be substantially complete. Licensees may raise additional issues and Microsoft has an ongoing obligation to update the information as its products evolve. Both the Commission and the licensees will have the means to ensure that Microsoft keeps the interoperability information updated.

Background

Work group server operating systems are operating systems running on central network computers that provide services to office workers around the world in their day-to-day work such as file and printer sharing, security and user identity management. The Commission decision ordered Microsoft to disclose to competitors interoperability information which would allow non-Microsoft work group servers to achieve full interoperability with Windows PCs and servers - that is to say for their servers to be able to seamlessly 'communicate' with the ubiquitous Windows operating system.

In the 2004 decision, Microsoft was fined €497 million for infringing the EC Treaty rules on abuse of a dominant market position (Article 82) by leveraging its near monopoly in the market for PC operating systems onto the market for work group server operating systems (see IP/04/382 and MEMO/04/70). To put an end to this abusive behaviour, the Commission ordered Microsoft to disclose on reasonable and non-discriminatory terms interoperability information which would allow non-Microsoft work group servers to achieve full interoperability with Windows PCs and servers. The 2004 decision was recently upheld by the Court of First Instance (see CJE/07/63 and MEMO/07/359).

The open source (business) model is based on the freedom of every recipient of a computer programme to copy, modify and redistribute it. Revenues are derived from services offered with the software. Open source vendors are Microsoft’s main competitors in the work group server operating system market. See also http://ec.europa.eu/comm/competition/ antitrust/cases/microsoft/ for a complete chronology of the case.


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