CFI’s Microsoft verdict highlights differing US and EU stances

The implications of the long-awaited judgment by the Court of First Instance (CFI) in the Microsoft case last week are far-reaching, both for business and for competition policy.

The impact on business will be felt not only by Microsoft, but by all companies that have built up dominant market positions on the back of IP in which they may have invested significant amounts of money over many years.

That is why the case involved a large number of interveners, who supported either the Competition Commission or Microsoft.

The impact on competition policy may be even more far-reaching, as the ruling will have given the commission a huge morale boost that will give it the confidence to tackle anticompetitive behaviour by allegedly dominant companies with renewed vigour.

The CFI upheld both elements of abuse set out in the commission’s 2004 decision – the bundling of Windows Media Player with its Windows PC operating system and the refusal to supply communications protocol to competitors wishing to develop group server software that could interoperate with Microsoft’s operating systems.

The CFI’s ruling on bundling is not surprising, being based on EU jurisprudence in this area. However, the timing of the judgement is important given the commission’s ongoing review of Article 82 of the Treaty of Rome, one of the aims of which is to “develop practical and workable rules” for applying sound economic principles to cases in which abuse of dominance is alleged.

The conservative, if unsurprising, ruling from the CFI in this regard will certainly feed into the Article 82 review and is likely to affect the way the commission approaches other cases in which dominant companies are accused of abusing their market positions.

The CFI’s ruling on supplying interoperability information to competitors is, on the other hand, likely to have a much greater impact on business and is arguably of much more importance.

Although the requirement to license certain information to third parties of course only applies to dominant companies, in technology markets a number of companies may compete at the outset, yet often only one technology emerges as the winner and quickly becomes dominant due to network effects, such as VHS triumphing over Betamax in video technology in the 1980s.

So while companies may still have the incentive to innovate to gain first-mover advantage and reap the rewards of early success, their longer-term strategies may need to change if they become so successful that they are effectively forced to license parts of their technology to third parties.

An important strand of Microsoft’s argument was that forcing it to license certain information to third parties would reduce, or even eliminate, its incentives to innovate.

The CFI dismissed that argument, stating that “Microsoft, which bore the initial burden of proof, did not sufficiently establish that if it were required to disclose the interoperability information, that would have a significant negative impact on its incentives to innovate”.

Reminiscent of the mood after the General Electric and Honeywell case, in which a merger was cleared by the US authorities but blocked by the commission, the CFI’s judgment led Thomas Barnett, chief of the antitrust division at the Department of Justice, to say that antitrust laws should be used “to protect consumers by protecting competition, not competitors”.

He was concerned that applying the CFI’s ruling to unilateral conduct by a dominant company could ultimately harm consumers, chill innovation and discourage competition, thereby highlighting the very different approach the US and European authorities sometimes take to tackling a particular antitrust problem.

Whether you are in the camp that believes the judgment will stifle innovation and future competition, or stimulate it by enabling more products to come to market for the benefit of consumers, perhaps the most important impact of the CFI’s judgment is that the commission’s reputation has remained intact.

Had the commission suffered another blow after the string of rulings against it over the past few years, the damage would have been immeasurable and could seriously have undermined the commission’s ability to enforce competition law in an effective manner.

However, with its renewed confidence to go after companies accused of infringing Article 82, the commission should be careful not to abuse its own power.

Not all dominant technology companies will necessarily need to license aspects of their IP, tempting as it may be to some to try to force them to do so following the Microsoft judgment.

Marc Israel, competition partner, Macfarlanes