Note: Microsoft vs. Commission Law - Case Study Example

CASE NOTE ON C-T-201/04 Microsoft v Commission (2007) ECR II-3601. Introduction EC competition law is one of the fundamental policies of the Community and is mentioned in general terms in the preambles and Article 2 and 3 of the EC Treaty1. The principal provisions of EC competition policy are enshrined in Articles 81 and 82 of the EC Treaty2. Article 81 governs prohibited agreements and practices and in particular prohibits: agreements between undertakings, decisions by associations if undertakings and concerted practices which have as their object or effect the prevention, restriction or distortion of competition with the Common market”. Additionally, Article 81(2) provides that “any agreements or decisions prohibited pursuant to this Article shall be automatically void”. Article 82 prohibits abuse of dominant position however the evolution of the internet business paradigm and new technologies has created novel legal issues relating to the application of Article 82 in respect of intellectual property rights, which highlight the competing ideologies at the centre of the debate pertaining to competition law and the interpretation of Article 82 in relation to the contemporary business marketplace3. In particular, the need to protect consumers through effective competition on the one hand, whilst facilitating the development of innovation and new markets has brought the debate regarding Article 82 and the need for reformulation and categorisation of existing EC competition rules in order to address business realities. Indeed, it is submitted that the problematic application of Article 82 to intellectual property law rights (IPR) symbolises the inherent conflict between innovation and protection against abuse of monopolies, which is the overriding purpose of Article 82. The inherently monopolistic nature of intellectual property rights have proved particularly problematic in EC competition cases, particularly in context of the essential facilities doctrine4. Moreover, Shah highlights the point that on the one hand the protective nature of IPR inherently undermines competition law’s purpose to eliminate abuse of monopolies and that “the increasing importance of intellectual property protection in international trade evinced by the Preamble to the Agreement on Trade Related Aspects on Intellectual Property Rights (“TRIPS”) and the increasing prominence of IPR in emerging markets and businesses have intensified the battle between IPR and competition law5. In turn the competing ideologies at the centre of the battle between competition law and a free market has fuelled legal uncertainty, which has further created problems in implementation in light of Article 82 on the one hand and Article 295 of the EC Treaty on the other, which provides that “the Treaty shall in no way prejudice the rules in Member States governing the system of property ownership”. However, this legal reward for innovation has proved problematic for the EU and the ECJ decisions have been significantly influenced by territorial considerations of national economies in addressing the traditional dichotomy between competition policies and exercise of and trade in IPRs6. This is further evidenced by the debate regarding the judicial approach to the essential facilities doctrine in consider abuse of dominant position under Article 82. The case of Microsoft v Commission 2007 brought renewed attention to the essential facilities doctrine and Rabini comments that as a result of the Microsoft decision “the exact threshold for indispensability is uncertain, particularly after the shadowy arrival of the essential facilities doctrine”7. 2. Facts of the Case The background to the case against Microsoft was triggered by an initial complaint by Novell in 1993 in respect of Microsoft’s licensing requirements. Novell argued that Microsoft’s licensing practices regarding tying and bundling were anti-competitive in preventing competitor access to the market. Furthermore, Novell argued that the licensing practices and royalty requirements resulted in a royalty payment for every computer that was sold by a Microsoft operating system supplier, irrespective of whether the computer included the Windows operating system. Microsoft negotiated a settlement in 1994, which led to a change in some licensing practices. However, in 1998 the spotlight was back on Microsoft again as Sun Microsystems complained about Microsoft’s restricted disclosure in respect of the Windows NT interfaces. This triggered increased exposure to Microsoft’s use of its position as market leader and the EU began to investigate Microsoft’s integration of streaming media technologies with Windows8. The Decision After investigation, the EU determined that Microsoft had abused its dominant position and in the 2003 preliminary decision imposed an order requiring Microsoft to offer Windows without Windows Media Player and disclose all information to enabling competitors to ensure that their software was compatible with Windows servers and desktops. 9 Furthermore, in 2004 the EU imposed a fine on Microsoft for the sum of $794 million, which in addition to existing penalties also imposed an obligation on Microsoft to disclose server information and produce a Windows version without Media Player within 120 days10. Microsoft’s reaction to the fine was scathing of the Commission’s interpretation of Article 82 and they released a comment on the ruling asserting that “The Commission is seeking to make new law that will have an adverse impact on intellectual property rights and the ability of dominant firms to innovate”11. As a result of the 2003 Judgment, Microsoft released Windows XP, which was an operating system without the Media Player. Additionally, Microsoft released the source code to the Windows Server 2003 to comply with the server requirements of the ruling and appealed the case. The Commission felt that Microsoft hadn’t complied with its disclosure obligations under the 2003 ruling and imposed a further fun of $448.58 million with a threat to increase the fine to $4.81 million per day if failure to comply continued. Furthermore, Microsoft lost the appeal in 2007 and in addition to the fine, was required to pay 80% of the European Commission’s legal costs. As a result of the decision Microsoft reduced its patent licensing royalties. Analysis The approach of the Commission in Microsoft was not only significant in terms of the amount of the fine that was imposed, but it also led to increased concerns about the application of pre-existing competition law principles to emerging markets and new technologies12. For example, Article 82 provides that abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market insofar as it may affect trade between Member States. Individual Member States and substantial parts of larger Member States are likely to constitute a substantial part of the common market for this purpose13. Although the prohibition only applies to firms with a dominant position in a relevant market, the relevant product market and geographic market for this purpose is often narrowly defined in practice14. Accordingly, the definition of “relevant market” is vital to determining the legality of conduct under Article 82 and is often dependent on the essential facilities doctrine. For example, Article 82 does not actually define dominant position however established case law has defined dominance as the position of economic strength that one undertaking may have, enabling it to prevent effective competition being maintained on the relevant market by giving it the power to behave to a significant extent independently of its competitors15. However, if this is applied to the realities of contemporary business, then the creation of new markets will intrinsically lead to dominance in the “relevant” market. This conflict between the strict interpretation of Article 82 and innovation in emerging technology markets is highlighted by Microsoft’s criticisms of the Commission’s approach on the one hand and the Commission’s view. For example, in 2008 the Commission fined Microsoft an additional $1.44 billion for failure to comply with the 2004 ruling. As a result, the Microsoft commented in its annual report that “the Commission’s impact on product design may limit our ability to innovate in Windows or other products in the future.”16 Furthermore, the conflict between innovation and the application of Article 82 is highlighted by the relevant market definition. In practice the identification of the product market remains inherently difficult when considering whether goods are interchangeable and substitutability. Indeed, Whish comments that the consideration of the relevant product market “should be simply the beginning of the inquiry, having identified it, is then necessary to consider the extent of the competitive measures upon the firms in that market”17. Additionally, it is evident from the approach in the Microsoft case that the interchangeable and substitutable test in the Continental Can case18 has played a vital role in shaping judicial approach to the product market when considering “relevant market” under Article 82. On the one hand, it could be argued that the inherently complex nature of competition law arguably requires such a flexible approach to the consideration of “product” on the individual facts of each case. However, on the other hand, it has been argued that the flexibility of the interchangeable approach has lent itself to “substantial leeway to the Commission and the Courts to flex the meaning of “product market” based on the facts of each case” which undermines the relevance of intellectual property rights to the essential facilities doctrine19. For example, in Hugin v. Commission,20the ECJ implemented a restrictive approach to the definition of product market and on grounds that there was a special demand for spare parts. Moreover, in Hilti v European Commission21 a narrow view was taken of product market in considering Hilti’s patented cartridges to tie in nails. To this end, the precedence of the interchangeable test clearly walks a fine line between free commerce and competition law protection, with judicial flexibility being paramount in practice and ignoring the purpose of IPR protection. The approach of the ECJ in case law involving IPRs and the essential facilities doctrine clearly begs the question as to whether an objective and clear test would be more desirable in serving the overriding purpose of EC competition law. For example, the Microsoft decision suggests that the hopeful declaration of a legal compromise between competition and copyright law22 as a result of the decision in IMS Health v NDC Health23were short lived. The Commission’s view in Microsoft was that in order to protect consumers “the Commission must do its part...it must not rely on one vendor, it must not accept closed standards, and it must refuse to become locked into a particular technology”24. However, on the other side of the spectrum this dictum arguably undermines the purpose of copyright and Jones et al25 highlight the changes in the telecommunications sector and the multimedia market as a prime example of this and they comment that this market comprises part of a “new economy”, which “now encompasses high technology industries.... However, the inherent nature of these new market spaces is the rapid pace of technological change, the creation and exploitation of intellectual property rights, the need for complementary products to work together, and a high degree of technical complexity”26. Moreover, Jones et al further argue that these new economy industries have created problems for pre-existing EC competition law principles. For example, “competition between undertakings is not so much on price as on innovation; the usual ways of defining markets may not work well”27. If we consider this contextually in light of the judicial rationale in the Microsoft case, the judicial rationale appears to have led to the conclusion that the central issue is whether the structure of is indispensable for competitors to market products in the same market28. As such, the essential facilities doctrine comes to fore: “Whether there are technical, legal or economic obstacles capable of making it impossible or at least unreasonably difficult for any undertaking seeking to operate in the market to create, possibly in co-operation with other operators, the alternative products or services”29. Therefore, whilst the decision in the IMS case was clearly welcome in attempting to introduce a compromise between competition law and IPR protection, ultimately the Commission’s approach has been to focus on the consumer interest approach. In turn, this has created distinct problems of achieving a meaningful compromise between competition and copyright law in practice. 4. Conclusion The changing nature of the contemporary market place particularly in light of the digital revolution has highlighted the importance of appropriate IPR protection for businesses. At the same time this clearly raises additional IPR issues and therefore, whilst a degree of regulation can be applied, these competing ideologies have fuelled debate as to how ordinary competition law can be satisfactorily applied to the new economy, which is exemplified by the Commission’s approach in Microsoft30. As such, Ahlborn et al propose that there is a pressing need for the application of competition rules to be revised to facilitate dynamic competition needed in these emerging markets31. To this end, copyright protection in new markets and new products is paramount for business, however, the danger in failing to address the “new product” issue in the IMS Health case has clearly perpetuated legal uncertainty in this complex area of dominance and essential facilities. The Microsoft decision exemplifies this conundrum at the heart of contemporary intellectual property issues and risks undermining innovation if the Commission fails to address the realities of creation in new technology markets32 TABLE OF CASES Continental Can Case [1973] ECR 215 United Brands v Commission [1978] ECR 207 Hugin v. Commission (1979) ECR 1869 Hilti v European Commission (1994) 4 C.M. L.R 614 IMS Health v NDC Health [2004] 4 CMLR 1543 Commission Decision of 24 March 2004 relating to proceeding under Article 82 of the EC Treaty (Case COMP/C-3/37.792 Microsoft C-T-201/04 Microsoft v Commission (2007) ECR II-3601 Bibliography Ahlborn, C., Bailey, D., (2006). Discounts, Rebates and Selective Pricing by Dominant Firms: A Trans-Atlantic Comparison Competition Journal 101. Craig & De Burca (2007). EU Law: Text, Cases and Materials. 4th Edition Oxford University Press Derclaye, E. (2004). The IMS Health Decision and the reconciliation of copyright and competition law. E. L. Review 687. Fried, I (2003). EU closes in on Microsoft Penalty. 6 August 2003, at http://news.cnt.com Retrieved and accessed November 2010. Fried, I. (2004). Microsoft Commentary slams EU ruling. 21 April 2004 at http://new.cnet.com Retrieved and accessed November 2010. Glader, M. (2006). Innovation markets and competition analysis: EU Competition law. Edward Elgar Publishing. Jones, A. & B. Sufrin (2010). EC Competition Law: Text, Cases and Materials. Oxford University Press. Lockett, N (2005). “Competition Law”, 1st Edition Financial World Publishing McCullagh, D. (2002). EU looks to wrap up Microsoft Probe, 1 July 2002 at http://news.cent.com Retrieved and accessed November 2010. Nguyen, T. T. (2010). Competition Law, Technology Transfers and the TRIPS Agreement. Edward Elgar Publishing. L. Rabini (2010). Microsoft on Trial: Legal and Economic Analysis of a Transatlantic Anti-Trust. Edward Elgar Publishing Shah (2004). The Abuse of Dominant Position under Article 82 of the Treaty of the European Community: Impact on Licensing of Intellectual Property Rights. Available at www.jip.kentlaw.edu/art/volume3 accessed November 2010. Whish, (2003) “Competition Law”, 5th Edition Butterworths Read More