Wall Street Journal (9.18.07).

Microsoft Loss In Europe Raises American Fears.

By CHARLES FORELLE

BRUSSELS -- Microsoft Corp.'s stinging defeat in a European courtroom rewrites the rules for competition in Europe, promising tighter scrutiny for dominant companies including several American giants.

The Luxembourg-based Court of First Instance said the European Commission acted properly in 2004 when it found that Microsoft had abused its near-monopoly position. The commission, taking a significantly tougher line than U.S. antitrust authorities have done recently, said Microsoft improperly bundled a media player with its Windows operating system and denied competitors information needed to make their computers work with Microsoft's software.

Microsoft's total bill in fines and penalties could reach €2 billion, or $2.77 billion. The company said it will quickly hand over the information to its rivals as the commission wanted.

In Europe, the case was followed with the attention normally paid to the travails of royals or the fate of national soccer teams. Lawyers for Microsoft, the European Commission and groups supporting both sides went to Luxembourg to hear it read from the bench. Reporters thronged the courtroom. EU officials praised the decision -- which asserted broad powers for the EU to regulate industry-dominating companies -- for protecting consumers.

Microsoft's backers said the ruling will stifle innovation by making it tougher to design products with new features. Some lawyers raised the specter of a regulatory nightmare as technology companies struggle to adapt to differing standards across the globe.

"If I were a leading company in any sector, I'd be really concerned about this," said Ted Henneberry, an antitrust lawyer at Heller Ehrman LLP in London who wasn't involved in the Microsoft case.

Chip makers Intel Corp. and Rambus Inc. are among the U.S. companies that may be affected as antitrust regulators in Brussels are emboldened by the ruling. The European Union brought a case against Intel in July, accusing it of using marketing incentives to deter customers from dealing with rival Advanced Micro Devices Inc. The EU is investigating Rambus over alleged manipulation of standard-setting bodies to assure itself of patent royalties.

Rep. Robert Wexler, a Florida Democrat who is chairman of the House Foreign Affairs Subcommittee on Europe, called yesterday's ruling a "dangerous precedent." He said he intends to call a hearing to review what he described as a "new form of protectionism" by the EU.

The U.S. Justice Department's chief, Thomas Barnett, contrasted Europe's approach with America's. He said that in the U.S., even dominant firms "are encouraged to compete vigorously," while Europe's stance may end up "harming consumers by chilling innovation."

European regulators hailed the court decision as a victory for consumers, who, in the words of Competition Commissioner Neelie Kroes, are "suffering at the hands of Microsoft." Ms. Kroes said she would like to see a "significant drop" in Microsoft's nearly 95% market share in operating-system software.

In the last big Europe antitrust case, the Luxembourg court found the commission employed shoddy legal reasoning when it blocked the planned merger of General Electric Co. and Honeywell International Inc. The two companies never did merge.

This time, the court seized the opportunity to outline a broad interpretation of the EU's power to regulate dominant companies. It brushed aside Microsoft's argument that traditional antitrust tools aren't appropriate for fast-moving technology industries.

The EU said Microsoft illegally bundled Windows Media Player inside its Windows operating system, hurting independent makers of media-player software. RealNetworks Inc., the maker of an alternative player, joined the case but settled with Microsoft in 2005 for $761 million. The bundling allegation resembled the crux of the U.S. antitrust case against Microsoft, settled in 2001, which was built around complaints about Microsoft's bundled Web browser.

The second part of the EU's case involved protocols, or procedures for transferring data between computers. The EU alleged that Microsoft, by not disclosing its protocols, was making it too hard for servers running different software to communicate with certain Microsoft-based machines. These machines are used for tasks such as maintaining a directory of users and controlling their access to a network.

The ruling could hurt Microsoft's profitable business of software for servers, or big corporate computers, by forcing it to disclose the protocols at little or no cost. The information could help "open source" competitors such as the Linux operating system. Separately, the EU is reviewing complaints about Microsoft's Office software and concerns over how Microsoft bundled encryption and other features in its new Vista operating system.

The court's president, Bo Vesterdorf, first announced that the court had rejected the EU's appointment of a trustee to monitor Microsoft -- a minor aspect of the case. Then he said the court "dismisses the remainder of the application" -- Microsoft's appeal.

Brad Smith, Microsoft's general counsel, said Microsoft is weighing whether to appeal to Europe's highest tribunal, the Court of Justice. He said Microsoft has licenses to its protocols available to competitors, but it charges for them. The EU has suggested the information should be free.

The EU's case dates to 1998, when Sun Microsystems Inc. complained that Microsoft wasn't sharing some computer code needed to make computers running Sun's Solaris operating system talk to machines running Windows. The European Commission's investigation snowballed, and the commission rebuffed Microsoft chief Steve Ballmer when he flew to Brussels for settlement talks. Europe's competition commissioner at the time, Mario Monti, said he wanted a clear precedent defining the EU's powers in dealing with dominant high-tech companies.

In 2004, the commission called for a €497 million fine against Microsoft and ordered the company to disclose its server-protocol information. With additional fines including a €3 million-a-day penalty, the bill grew to about €2 billion. Microsoft, which has plenty of cash, has put much of the money in an escrow account, and it will be released to the EU once the case is concluded, unless the company wins an appeal. The EU would then distribute the money among member states.

Mrs. Kroes, who succeeded Mr. Monti, had close ties to the business community in her home country, the Netherlands, and was expected to be gentler on companies. But Microsoft stuck in her craw. Her staff expressed frustration that the company was snowing it under with documents instead of complying with the order -- even though Microsoft had lost a court bid to stay its implementation.

Microsoft did eventually remove Media Player from Windows in one version, but few people bought it because it was the same price as the version with Media Player. Emotions flared again last year when Microsoft said the commission's objections to Windows Vista would delay its release -- a tactic meant to bring customer pressure to bear on Mrs. Kroes's office.

In the months leading up to yesterday's ruling, the situation had mellowed some as the two sides came closer on the issue of the protocol disclosures.

Also, Microsoft gave ground to Google Inc. In a new version of its Internet Explorer software, Microsoft included a small window that directed computer users to Microsoft's Internet search service. Prior to the software's debut late last year, Google argued to regulators in the U.S. and Europe that the "toolbar" was anticompetitive. Before introducing the new browser, Microsoft made it easier to set the window to other search engines, including Google.

In advance of Monday's ruling, Court of Justice precedents suggested that a refusal to license copyrighted material is abusive if a dominant company seeks without justification to eliminate competition and if the competitor wants to make a new product, not just a copy.

Microsoft argued that Sun and other vendors wanted to make a replica of a Windows server to drop it into a network, and weren't developing anything novel. Microsoft presented the case as a battle over the sanctity of intellectual property and the right to profit from inventions. The commission said its expert determined the protocols were of such minor value that they would be given away free of charge in a normal market.

Marleen Van Kerckhove, a lawyer in Brussels for Arnold & Porter LLP, which has done work for Microsoft in other matters, said the court had taken a "big leap" by agreeing that the commission could order a compulsory license when a competitor had merely the "possibility of a new product." She added, "We are moving further away from the U.S."

"The refusal to deal and the refusal to supply is larger than the high-tech world," said David Anderson of law firm Berwin Leighton Paisner LLP. Dominant companies across the spectrum "need to be very careful," he said.