The European Commission's Microsoft Decision

In its Decision of 24 March 2004, the European Commission found Microsoft guilty of abusing Article 82 of the EC Treaty by withholding from competitors information required to permit interoperability between the Windows PC and server operating systems and other operating systems, and by bundling Media Player with the PC operating system. By way of remedy, it ordered Microsoft to supply specified interface information to competitors, to offer a version of Windows without a media player as well as the version with it, and to pay a fine of EUR 497.2 million (approximately USD 610 million). This memorandum provides a brief analysis of the decision (the "Decision") and its implications.

In summary:

In one sense, the Decision can be seen as sui generis. The Commission has never before been confronted with such a position of "super-dominance" in a market occupying such a central position in the economy. The special characteristics of software add an additional layer of difficulty and challenge.

The Decision is clearly intended to establish a framework for the Commission's handling of a number of important and contentious issues, already the subject of pending complaints and proceedings, regarding (1) the role which Microsoft, will play in the information technology sector and (2) the standards for determining an abuse of a dominant position in the high-tech sector and generally, especially for "refusals to supply" intellectual property and bundling complementary technologies into an existing product. In effect, the Decision sets up a situation which, if left undisturbed by the appeals process, allots to the Commission a supervisory and regulatory role in relation to Microsoft's continuing operation in the various areas where it can bring to bear its existing market power - areas which include the internet, mobile telephony, digital rights management, etc.

The Commission must now run the gauntlet of the appeals process in the European courts - starting with the request which Microsoft will make to the President of the Court of First Instance ("CFI") for interim measures suspending the decision (a proceeding which could yield a decision in some number of months), and proceeding to the full decision on the merits by the CFI and, if necessary, the European Court of Justice ("ECJ") (a process which could last several years). Given the nature of the subject matter, and the speed of evolution in the IT sector, the outcome of the interim measures proceeding will be of primary importance. Not surprisingly given the novelty and complexity of the case, there are a large number of issues where the Commission may be at risk on appeal. Two which stand out in particular are (i) Microsoft's accusation that the Commission's infringement finding and remedy order with respect to interoperability are not consistent with the case law flowing from the Magill judgment of 19951 concerning the circumstances in which failure to license IPRs may be an abuse under Article 82 - a challenge which may have been strengthened by the judgment handed down by the ECJ on April 29 in the IMS case2 - and (ii) the Commission's assimilation of software bundling to tying under Article 82(d), the standard of harm to competition applied with respect to bundling, the novel unbundling remedy, and the implications for software producers when they incorporate new features in their products.

Haunted by the memory of a series of stinging defeats in 2002 in merger regulation cases, where the CFI castigated the Commission for sloppy fact finding as well as bad economics, the Commission has gone to exceptional lengths to try to put together a strong factual and legal case. In doing so, it has been aided by the peculiar character of the existing case law under Article 82. The new wave of economic analysis which has been so prominent in relation to Article 81 and to the Merger Regulation has so far only made limited and uncertain strides in relation to Article 82. The case law as it stands appears to afford the Commission a lot of latitude in unilateral infringement cases in crafting theories of infringement and remedies. The Decision exploits this latitude to the full, adducing a large number of different theories. The Commission seems to have used the Decision to attempt to articulate a more systematic analytical framework for dealing with cases involving interoperability and bundling, and more generally to unilateral infringement cases in the high technology sector. One major question is how this framework (with any changes to it which may emerge from the appeal process) will apply in the software sector to situations which may involve dominance but lack the "super-dominant" character of Microsoft's market position.

Finally, the Decision shines a spotlight on some real and deep divergences between the law and practice on the two sides of the Atlantic in relation to unilateral infringing behavior, which will presumably have to be addressed in the future, especially in relation to cases like this one, where the outcome of a proceeding by either the U.S. or the EU is intrinsically global in scope. A comparison of the Decision with the recent decision by the U.S. Supreme Court in Verizon Communications v. Trinko (Trinko) reveal that U.S. and EU law in this area have a substantially different structure and analytical framework. For example:

Under U.S. antitrust law, Section 2 of the Sherman Act prohibits unlawful "monopolization" and "attempts to monopolize." To establish a "monopolization" claim, proof of monopoly power alone is not sufficient. As the Court emphasized in Trinko, "[t]o safeguard the incentive to innovate, the possession of monopoly power will not be found unlawful unless it is accompanied by an element of anticompetitive conduct3 For the conduct to be anticompetitive, it must serve no legitimate purpose or be unprofitable and undertaken solely to exclude or weaken competitors in anticipation of later recouping supra-competitive profits.4

In Trinko, the...