Microsoft Still Trying Evade the Rule of Law (EU Antitrust Edtion)

Posted on by

Someone needs to tell Microsoft to behave.

By way of background, in December 2004, Microsoft lost its final appeal on an EU antitrust case in which it was found guilty of tying its operating system to its media player, undermining competition and hurting consumer choice, and for failing to give rivals the information they needed to compete fairly in the market for server software, The Redmond company was fined a record $613 million.

To address the server complaint, Microsoft was ordered to license technical information to enable outside companies to design products that would run well on Windows (called API, the application program interface). Note that this isn’t a particularly onerous request. Microsoft makes that sort of information available for free except in areas where it is trying to leverage its monopoly.

Microsoft acted in less than good faith through this entire exercise. It appeared to be delaying rather than complying. For example, Microsoft was asked to propose royalties for its API. Now consider Microsoft’s response: up to 5.95% of revenues. The EU’s technical expert, Neil Barrett, who was recommended by Microsoft, calculated that it would take software companies 7 years to recover their development costs. Now how many products last 7 years? And in particular, how many software products last for 7 years? Cost recovery looks like a fantasy. Barrett determined that even a 1% royalty would be too high, and 0% would be more appropriate.

In September 2007, the European Court of First Instance, in a starkly worded summary read to a courtroom of about 150 journalists and lawyers here, ordered Microsoft to obey a March 2004 commission order and upheld the €497.2 million, or $689.4 million, fine against the company.

In October, Microsoft negotiated a settlement of open items, giving every indication that it would submit to the court’s ruling. As the Financial Times reported:

Microsoft finally admitted defeat in its three-year battle with the European Commission on Monday, as the US software giant agreed to comply with the regulator’s landmark finding that it was abusing its dominance of the market.

“I welcome the fact that Microsoft has finally undertaken concrete steps to ensure full compliance with the 2004 decision,” Neelie Kroes, competition commissioner, told a press conference in Brussels. “It is regrettable that Microsoft has only complied after a considerable delay, two court decisions and the imposition of daily penalty payments,” she said.

Under the deal reached between Ms Kroes and Steve Ballmer, the chief executive of Microsoft, early on Monday morning, the company will make it much easier for rivals to use its technology to develop their own programmes.

Microsoft also said it would not appeal the decisive September ruling by the European Court of First Instance, which upheld the Commission’s finding that Microsoft had broken EU competition rules. It ends three years of resistance that has cost €777.5m in fines.

Yet in February, the EU competition commission fined Microsoft $1.4 billion (€899m) for failing to adhere to the court decision:

The fine comes days after the world’s biggest software group announced it would open parts of its software to rival companies in an attempt to assuage competition authorities.

But that move received a lukewarm reception in Brussels, where regulators have expressed scepticism about Microsoft’s promise to make its Windows operating system and other big-selling software more open and transparent….

“The Commission has stuck to its guns,” said John Pheasant, partner at Hogan & Hartson, an international law firm. “It also appears that the [European] Commission has not been swayed or deflected by the recent announcements by Microsoft.”….

The Commission required Microsoft to offer such information on “reasonable terms,” but subsequently complained that the royalty rates demanded by Microsoft over the next three years amounted to “unreasonable pricing”. Microsoft fought the decision for several years but dropped its appeal after a top EU court ruled in favour of regulators last September

Now at the eleventh hour, right before the deadline for appeals is about to expire, Microsoft effectively repudiates the settlement and files an appeal. Yet incredibly, the press, even the usually reliable Financial Times, fails to note that this is a 180 degree change in its pretenses of being compliant. Again, from the Financial Times:

Microsoft said on Friday it would appeal against the record-breaking $1.4bn (€899m) fine imposed by Brussels two months ago because of the software group’s failure to comply with demands that it end anticompetitive business practices.

In a statement, the world’s biggest software group said that it was asking the European Court of First Instance to annul the European Commission’s February decision in which it imposed the penalty.

“We are filing this appeal in a constructive effort to seek clarity from the court,” Microsoft said in a statement….

Some independent competition specialists said openly that they believed there were grounds for an appeal – particularly since the Commission had never spelt out what it considered to be a reasonable charge for the patent licences. For example, Denis Waelbroeck, a partner at Ashurst, on Friday welcomed the move because he believed that there were “procedural inadequacies” in the approach taken by the Commission.

The Commission, however, responded on Friday by saying that it was “confident that the decision to impose the penalty was legally sound”.

The decision to file an appeal will also do nothing to ease the strained relations between the Commission and the company – which appear to have deteriorated again after failed efforts to reach some kind of “global settlement” late last year.

In January, the Commission announced that it was opening a fresh investigation into suspicions that Microsoft had abused market dominance of its Office software, and also whether it had illegally linked its Internet Explorer system to Windows. According to lawyers in Brussels, this probe is actively moving forward with information requests circulating.

It’s too bad appeals courts can’t increase fines. The one imposed on Microsoft was 60% of the maximum permitted; if I were a judge, I’d want to throw the book at them.

Why? The discussion about royalties is spurious; the Commission’s expert said 1% was too high and zero might be appropriate. If Microsoft had had any good faith interest in putting this matter behind them, it would have proposed a royalty and put the onus on the EU to object.

I can’t fathom what Microsoft thinks it will gain from this exercise, save delaying compliance with the EU’s demands and annoying the regulator, which has issues far more important to Microsoft still before it. I am not a lawyer, but the issue of the level of royalties is not a basis for overturning the decision. The fine will stand and the interest will accrue. The most Microsoft can gain is to be able to charge a higher level within the 0% to 1% range. And this may be simply an artifact of the EU’s drafting (the parameters were discussed in the trial, but the ruling itself indeed did not specify a level. Thus Microsoft at best will score a Phyrric victory.

Before readers assume Microsoft must have some advantage it can gain from this, consider: the coverage of Microsoft’s antitrust trial in the US revealed that the company had an inept legal strategy. Some believed that Gates must have refused to listen to his advisors. Worse, the Redmond firm repeatedly showed its contempt for the court, repeatedly making statements that strained credulity.

Microsoft escaped tough penalties in the US only by a fluke. Judge Thomas Penfield Jackson was clearly disgusted by the Redmond’s company’s dissembling and was prepared to throw the book at them, but because he made the mistake of talking to the press substantively before the penalty phase was concluded, he was replaced by a cautious and clueless jurist, Colleen Kollar-Kotelly.

Microsoft just does not get it. The company seems not to understand that it is subject to the rule of law and has to comply when ordered to. Yes, Steve, there really are organizations out there that are bigger, tougher, and more determined than you are.

Print Friendly, PDF & Email


  1. Jesse

    The arrogance of Microsoft is symptomatic of what is wrong with croney and monopoly capitalism.

    Microsoft ceased long ago to be a growing, technologically proficient company.

    It is going the way of all in-bred bureaucratic monopolies, but oh so slowly.

  2. Anonymous

    “Yes, Steve, there really are organizations out there that are bigger, tougher, and more determined than you are.

    He’ll just swear and throw a chair. It’s his standard modus operandi.

    These are ruthless, classless guys and the only tactic they understand is bare knuckles. Always have been.

    They don’t have the brains to understand what a perilous position they’re in. The ‘X family of OS’s is eating their lunch. The formats used by their Office product are pretty much understood now and the day is coming soon when Google will provide a web based product synchronized with the local hard drive so work can continue when net access is not available. That will be the end of Microsoft.

  3. Richard Kline

    Microsoft has broken every rule; ripped off and backstabbed every major ally; thumbed it’s nose at the US government and received obsequious toe-kissing in return; been caught dead in US court and hung on until the knowing judge got canned and a pliant nonentity effectively gutted court-mandated compliance here. Everytime, they won AND NEVER PAID A SINGLE, REAL PENALTY—-and their Top Two just can’t believe that they have lost, are even capable of losing in court in the EU. They’re Microsoft: they’re bigger than God and on every computer that counts, “We’re Standard Oil of the 21st century, we don’t lose” (if you ask them, that is). What we see is simply self-definitional thinking at Mt. Everest altitudes.

  4. Ryan

    It’s encouraging to see Microsoft stand up for itself. Yes, it is subject to the rule of law–but the rule of law is subject to basic rights. When laws are designed by corrupt bureaucrats to endanger, restrict, or abrogate rights, then one has every right to resist those laws through the legal process. Microsoft has every right to its market share and profits–it earned both by creating a superior product that Europeans willfully and freely purchased. The EU is not concerned with “competition”–it is intentionally attacking a successful American corporation for the benefit of less efficient European companies and padding its own pockets with money that Microsoft alone earned. That is legalized theft. Is this the rule of law you stand for? Microsoft has every right to keep its profits, its intellectual property, and its appeal. Microsoft is right and it deserves to win.

  5. ThatLeftTurnInABQ

    Microsoft just does not get it. The company seems not to understand that it is subject to the rule of law and has to comply when ordered to. Yes, Steve, there really are organizations out there that are bigger, tougher, and more determined than you are.

    I’m going to go out on a highly speculative limb and point out that part of the problem here for Microsoft may be that there is an additional political undertone present in the legal disputes between it and the EU which is missing from comparable US court cases (where in the past they have succeeded in wriggling off the hook).

    Microsoft is a US based company. Some of their products can and do play important roles in IT systems upon which information-centric warfare is based, not just cyber-warfare but command-and-control and targeting aspects of actual weapons systems. This means that they (and the software industry more broadly as well) have a potential military and geopolitical significance beyond just their contribution to the GDP.

    From a national security standpoint the EU can no more afford to allow software development to be dominated by the US than Great Britain could afford to allow Germany to pull ahead in optics, chemical engineering, and other cutting edge industries in the years before 1914, without paying a heavy price for such negligence in a future conflict pitting European interests against those of the US.

    I do not think the sponsorship of the open-source movement by the EU public sector, and other efforts to undercut US based software companies (such as the EU’s attempts to reign in Microsoft in this case) are an accident. I see them as part of a slow, subtle and persistent attempt by the EU to reduce their dependence on a strategically important US dominated industry in anticipation of a future where their geopolitical interests and those of the US are likely to diverge.

    I’m not saying that this is part of a sinister conspiracy – if our positions were reversed then US policy makers would be exceedingly foolish and negligent in their duties not to do the same thing. Also, although this trend started before 2001, this is IMHO another aspect of the erosion of US power and influence which the Bush Admin has done nothing to check and may be responsible for accelerating, by encouraging Europeans to think more critically about US policy and leadership.

Comments are closed.