The European Commission v. Microsoft:
Overview of the Issues
The EU competition case against Microsoft presents 3 “clusters” of issues that are of great importance to European industry. If DG Comp’s theory of the case in these 3 areas is upheld, it will create a new body of law that empowers regulators to second guess product designs, expropriate valuable research, weaken IP protection, and undermine incentives to innovate. Because DG Comp is purporting to interpret provisions of the Treaty that apply to all companies, this new body of law will spell trouble for the future of European innovation and competitiveness. It will also mean a reduction in the due process rights of regulated companies. Given the importance of these issues for Europe, it is essential that all stakeholders be given the opportunity to voice their concerns.
1. The Basic Issues:
DG Comp Allegation: Microsoft violated EU competition law by improving media technology in its Windows operating system to support “streaming” media. Microsoft is “dominant” in the market for PC operating systems, and hence may not “tie” a streaming media player to Windows.
Microsoft Response: DG Comp has misunderstood the market, the technology, consumer demand, and controlling principles of law.
• In the market today, there is no consumer demand for PC operating systems without media technology.
• The inclusion of media-player technology is simply a natural evolution of computer operating systems in the internet, multimedia age. All other operating systems include such technology.
• Forcing Microsoft to develop a version of Windows without this technology provides absolutely no consumer benefit.
• Not surprisingly, when Microsoft developed a version of Windows without media technology, as DG Comp insisted, there was no demand for that version.
• This shows conclusively that consumers were not “forced” to use Microsoft’s media technology as a result of its inclusion in Windows.
• In fact, consumers can and often do download media players for free from the internet. That is why the market is so robust.
• Media technology in Windows also benefits other companies, who can rely on the support for media files in Windows to make their own products more dynamic, attractive, and efficient.
• Software should be designed by the private sector in response to consumer demand, not government regulators.
• More broadly, any rule that prohibits leading firms from improving their products in ways that benefit customers – as DG Comp proposes – will harm consumers and undermine efforts to make the EU an attractive environment for R&D and investment.
DG Comp Allegation: Microsoft violated EU completion law by withholding information that other companies need to make their products interoperable with Windows server operating systems.
Microsoft Response: The market for operating systems is intensely competitive and interoperability is prevalent, as market studies and the other facts in the case consistently show. For years, Microsoft has disclosed abundant interoperability information because it is in Microsoft’s interest to do so – the market demands heterogeneous, interoperable systems.
• Microsoft, unlike some operating system vendors, already supplies tremendous amounts of technical information to help other companies build products that interoperate seamlessly with Windows. Indeed, this is a major reason why Windows is so popular.
• DG Comp, however, is seeking much more than interoperability information. It wants Microsoft to turn over intellectual property that will enable competitors to replicate Windows.
• This is not what EU or international law envisions or permits. Compulsory licenses of IP are allowed only in “exceptional circumstances”, and only to the extent and under conditions necessary to redress a particular violation. DG Comp has not come close to meeting these tests in this case.
• Moreover, European courts have established, most notably in the Magill and IMS Health cases, that compulsory licences of IP can only be imposed where needed to enable other companies to offer a new product, not the same product.
DG Comp Allegation: Microsoft has failed to supply the scope and quality of interoperability information required by the 2004 Decision.
Microsoft Response: Microsoft has in fact already supplied all of the interoperability information required by the 2004 Decision. To this end, Microsoft has expended some 30,000 hours of engineering time to assemble over 12,000 pages of technical documentation. Indeed, Microsoft has offered to go well beyond the scope of the Decision by allowing licensees to review its proprietary source code – the very DNA of Windows.
• Microsoft is fully committed to complying with every aspect of the 2004 Decision, and indeed has done so.
• Microsoft has worked very hard to understand DG Comp’s interpretation of the Decision and to meet its disclosure demands, but these keep changing.
• We consider it deeply regrettable that our efforts to reach a common understanding have proven unsuccessful. We have asked DG Comp to state its requirements in writing but it refuses to do so, apparently out of concern for review by the Court of First Instance (CFI).
• In the course of these efforts, it has become clear that DG Comp wants to broaden the scope of the 2004 Decision far beyond the disclosure of interoperability information.
• DG Comp now insists that Microsoft provide enough information so that competitors can sell products that will simply replace Microsoft’s own products. Compelled licensing of this scope has no basis in EU law and is inconsistent with representations previously made to the CFI.
2. Trade Secret and Royalty Issues:
In late 2004, the CFI ruled that Microsoft should implement DG Comp’s remedies pending the outcome of the Court’s review of the case on its merits. Microsoft promptly made available a version of Windows stripped of media technology, and marketed it as “Windows XP-N” as instructed by DG Comp. There was no demand for the product. In parallel, Microsoft proceeded to implement its technology licensing program and drafted and submitted to DG Comp for review standard licenses to make the information available to competitors. DG Comp took months to review this information, and in the second half of 2005, accused Microsoft of proposing license terms that are not “reasonable and non discriminatory”.
DG Comp Allegation: Microsoft is not allowed to protect the confidentiality of trade secrets contained in the information it licenses unless they are inventions that are “novel” and “involve an inventive step”, in other words, only if they are patentable.
Microsoft Response: DG Comp’s position is not now, and never has been, the law in Europe. Product formulas and manufacturing processes, for example, are valuable, closely guarded trade secrets for many companies, yet often they cannot be patented. DG Comp’s position spells trouble for every European sector that relies on trade secrets, from automobiles and cosmetics to medical devices and processed foods.
• Trade secrets often represent years of effort and millions of euros of expenditure – investments that DG Comp effectively wants to expropriate without justification.
• DG Comp’s confusion of trade secrets and patents is inconsistent with the laws of every Member State and all the EU’s major trading partners, from the U.S. to Japan.
• DG Comp’s position is untenable. It says it wants to help the open source community of software developers, but OSS developers can and do use hybrid licenses that respect IP rights.
DG Comp Allegation: Under the interoperability licensing program, Microsoft can only charge meaningful royalties for technology that is “innovative”.
Microsoft Response: Again, DG Comp is going far beyond the terms of the 2004 Decision to impose restrictions that have no basis in EU law or industry practice. The Decision explicitly allows Microsoft to use “reasonable and non discriminatory terms”, which are universally understood to include reasonable royalties. That is all that Microsoft intends to charge.
• DG Comp’s innovation test is unworkable. It does not clearly state what criteria should be used to gauge innovation, and DG Comp does not have the technical expertise to do so.
• There is no basis in law for this standard, and elsewhere DG Comp has acknowledged the validity of other factors in setting royalty rates, such as recouping the costs of unsuccessful R&D.
• The value of technology is a subjective determination that must consider the whole of what the licensee receives in light of its expertise, needs, and business model.
• Microsoft has submitted extensive information and market data on the novelty of its technology and reasonableness of its royalties.
• Innovative companies in Europe will be ill-served if DG Comp succeeds in treating intellectual property as a utility subject to government-imposed pricing controls.
3. Due Process and Transparency Issues:
A final issue has arisen that presents deeply troubling issues of due process and transparency at DG Comp. In December, DG Comp formally alleged that Microsoft failed to provide the scope of interoperability information in useable form that the 2004 Decision requires. DG Comp did so even though it had repeatedly changed the “goal posts” defining what information it wanted, refused to put its requests in writing (apparently fearing possible court review), and issued its accusations without even reviewing all the information Microsoft provided.
Most recently, Microsoft offered to license for reference relevant portions of its Windows source code, the very DNA of Windows, but DG Comp remains dissatisfied. It is hard to resist the conclusion that DG Comp is trying to paint Microsoft into a non compliance corner, especially when there is circumstantial evidence that DG Comp may have tried to influence the findings of the independent Trustee that form the principal basis of DG Comp’s accusations. DG Comp, however, refuses to give Microsoft access to the file to enable it to defend itself.
• It is imperative that Microsoft have full access to the case file to understand the scope and nature of interaction among DG Comp, its consultants, the Trustee, and Microsoft’s competitors.
• DG Comp’s refusal violates basic due process, Microsoft’s right to defend itself, and DG Comp’s own rules and its professed commitment to transparency.
• DG Comp’s behaviour is especially troubling because it flaunts clear principles established by the courts.
• The absence of due process at DG Comp should concern all industry, especially if DG Comp acquires the sweeping new powers it seeks to establish in this case.
Conclusion: If the European Parliament were considering legislation to establish new legal principles of the kind that DG Comp seeks to establish in the Microsoft case, the lobbying from consumers, industry, IP experts, and others would rightly be intense, widespread, and sustained. Yet the simple reality is that DG Comp can, through the single precedent of this case, set in stone principles that will be just as powerful and lasting in their impact as any Directive or Regulation. For that reason alone, it is essential that all stakeholders be heard on the important issues at stake.
