Microsoft bows to the EU system

There was no mistaking the winners and losers.

Minutes after the judges of the European Court of First Instance delivered their ruling on the Microsoft case, the officials of the European Commission and the team of lawyers that supported them throughout their epic antitrust battle with the US software giant were still hugging, back-slapping and posing for the photographers with broad grins.

The Microsoft team, in contrast, sped out of the room almost immediately. Not only had they just lost what is widely described as the most important antitrust case in European history but they also knew that the Commission, their most implacable regulatory foe to date, had just won judicial backing to continue its nine-year campaign against Microsoft with even greater vigour than before.

Many had expected the Luxembourg-based court to come up with a ruling that would give something to both sides. But the lawyers and antitrust experts who delved into more than 150 pages of legal reasoning looking for arguments that backed Microsoft’s stance emerged empty-handed.

Time and time again, the court dismissed the software group’s attacks on the March 2004 Commission ruling – occasionally flicking aside its arguments as “scarcely credible,” “purely semantic” or “wholly unsubstantiated”. Yes, the Commission had forced Microsoft to disclose sensitive information covered by intellectual property rights.

But the court made clear that Brussels had convincingly met the high standard required under European law and previous court rulings for such a move.

As a super-dominant company with a market share of more than 90 per cent, Microsoft must ensure that rival products can function smoothly with its own software, the court stressed.

The second major leg of the Commission’s 2004 decision also won broad support from the court. The judges found the regulator had acted correctly when finding Microsoft guilty of illegally bundling its Media Player into Windows – a move that fatally undermined the chances of competing media player providers.

In a sentence that may come back to haunt Microsoft in future cases about bundling, the court declared: “It is clear that, owing to the bundling, Windows Media Player enjoyed an unparalleled presence on client PCs throughout the world because it thereby automatically achieved a level of market penetration corresponding to that of the Windows client PC operating system and did so without having to compete on the merits with competing products.”

Indeed, both the question of interoperability and the issue of bundling are hugely important to Microsoft’s business model. Bolstered by Monday’s ruling, the Commission is all but certain to open new cases against Microsoft – with most insiders expecting the regulator to focus on the interoperability (or lack thereof) between Microsoft’s suite of Office applications such as Word, Excel and PowerPoint and competing products.

In addition, the Commission is likely to take a very close look at Vista, the new Microsoft operating system, to see whether the additional programs and functions bundled into that software must be taken out. Altogether, the group looks certain to face a head-on assault on its business practices by a regulator that now appears to be holding all the cards.

As Michael Reynolds, a partner at Allen & Overy and the lawyer who submitted the original complaint against Microsoft, pointed out on Monday: “I think the judgment has greatly enhanced the Commission’s reputation worldwide and given it confidence and legal backing in its dealings with Microsoft and other dominant companies.”

For Brad Smith, Microsoft’s general counsel and a veteran of the group’s legal travails in Brussels, the conclusion was a bleak one. “This decision gives the Commission quite broad powers and quite broad discretion,” he said.

That Monday’s ruling came as a surprise to many had a lot to do with the Court of First Instance’s past record. Over the past five years, the court annulled a whole series of Commission antitrust decisions, mainly relating to controversial merger prohibitions, proving that it has no qualms about inflicting serious embarrassment on the Commission.

On Monday, however, the court used its judgment on the Microsoft case to deliver a clear message: as long as the Commission gets its facts right, does not commit any procedural mistakes and produces a carefully drafted, scrupulously checked and counter-checked decision, the Luxembourg judges will not stand in its way.