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INTEROPERABILITY AND OTHER ISSUES AT THE IP-ANTITRUST INTERFACE: THE EU MICROSOFT CASE
by Dr Duncan Curley, Innovate Legal, London
 
This is a shortened version of an article featured in The Journal of World Intellectual Property
( see http://www.blackwellpublishing.com/journal.asp?ref=1422-2213 )
 
It was presented by the author at the IP Business Congress in Amsterdam, 25 June 2008.
 
Introduction
The decision of the Court of First Instance (the CFI) in Microsoft Corporation v Commission of the European Communities of 17 September 2007 effectively marked the beginning of the end for one of the biggest antitrust battles ever to have taken place in the European Union (the EU). Although the CFI upheld most aspects of the European Commission’s original decision of 2004 in which Microsoft Corp. (Microsoft) was fined €497 million for abusing its dominant position on the market for PC (personal computer) operating systems, contrary to Article 82 of the EU Treaty, the Microsoft case remains interesting at several levels. In particular, it addresses the question of when it is permissible, in the public interest, to encroach upon the exclusivity of owners of intellectual property (IP) rights, by requiring the grant of licences to third parties seeking to enter or remain on the market, with the CFI’s judgment providing the first application of the compulsory licensing criteria laid down in the European Court of Justice’s Magill and IMS Health decisions.
 
The IP-antitrust interface
The EU competition rules are intended to preserve the functioning of the free market economy. A specific policy objective within this overall framework is to preserve a competitive market structure for innovation, by ensuring that the number of players investing in a particular technological area is not restricted. IP rights such as patents, copyright and trade marks are monopoly rights conferred by the state as a reward for innovation and creativity. Patents in particular may be used to restrict access to superior technology so that an above-market premium can be earned by the patent-owning firm. Ownership of superior technology and associated IP rights may thus give certain firms (undertakings, in the language of the EU competition rules) the power to price products above the prevailing market rate. Yet when such companies possess significant shares of EU markets, their business decisions may engage the competition rules, specifically Article 82. One of the difficult questions facing IP and competition policy makers is how to balance the degree of monopoly protection given by IP rights to inventors and artists on the one hand against the desirability of maintaining open and competitive markets, on the other. The clash between the desire to reward creativity and inventive activity with copyright and patents and the EU policy imperative to foster innovation by means of open and dynamic markets is encapsulated in the battle between the various software industry protagonists in the Microsoft case.
 
The EU competition rules: Articles 81 and 82
The main European competition rules are laid down in Articles 81 and 82 of the EU Treaty. The two provisions can affect IP rights-holders in different ways. Article 81 is primarily aimed at cartels and other anti-competitive, joint behaviour, but it can catch all kinds of agreements and business transactions entered into by companies. Article 81(1)(b) expressly prohibits agreements between companies that limit or control “production, markets, technical development or investment”. Article 82 prohibits undertakings with a dominant position on a particular market from conducting themselves in a way that constitutes an abuse of their market power. It is aimed at unilateral conduct by dominant firms with substantial market shares. Article 82(b) specifically lists the limiting of production, markets or technical development to the detriment of consumers as ways in which a dominant position may be abused.
 
Article 82 - special responsibility
Underlying Article 82 is the assumption that the behaviour of monopolists should be subject to clear and strict competition rules, based on the premise that the mere presence of a dominant undertaking on the market has already weakened the competitive process and reduced the economic freedom of other undertakings, to the detriment of consumers. Where there is only one dominant undertaking on a market with several smaller, fragmented players, Article 82 imposes strictures on the way in which the dominant firm may conduct itself, with the aim of maintaining what little competition remains on a market that is dominated by one main player.
 
Commission v Microsoft
 
The decision of 24 March 2004
Central to the EU case (and the notorious US antitrust case) was Microsoft’s very strong position on the market for PC operating systems. These deal with routine computing tasks such as memory allocation and controlling the operations of peripherals. Microsoft had - and continues to have - a very large market share of new PC operating system licences, with over 90% of the market since 2000. The Windows operating system has of course become the de facto standard for most PCs. The fact that Windows is ubiquitous undoubtedly confers upon Microsoft significant market power, but arguably consumers also benefit, because they get access to many different kinds of application software that have been written by software designers specifically to interface with the Windows operating system.
 
Windows Media Player – the tying abuse
According to the Commission, Microsoft had abused its dominant position on the PC operating systems market by integrating (or bundling) its Windows Media Player into its Windows operating system. This was categorised (in legal terms) by the Commission as a “tying” abuse under Article 82(d), i.e. the allegation was that Microsoft was making the availability of the Windows PC operating system conditional upon the simultaneous acquisition of Windows Media Player. The Commission claimed that if this practice was allowed to continue, it would lead to the progressive elimination of rival media players, since producers of compatible software and content knew that if they based their products on Microsoft’s Windows Media Player technology - rather than on competing technology - they would be able to reach almost all PC users. This would eventually lead to all consumers preferring Windows Media Player to other media players.

The remedy ordered by the Commission in this part of the case was to force Microsoft to offer its Windows PC operating system without a media player. This remedy was in itself a source of considerable debate, but it will not be addressed further in this paper, save to note that by the time of its appeal, Microsoft had already complied with this part of the Commission’s original decision. Before the CFI, Microsoft alleged that the Commission was forcing it to offer to consumers what was essentially a “degraded” version of its Windows PC operating system, but the CFI rejected this argument and upheld the remedy.
 
Work group server operating systems – the leveraging abuse
The interoperability part of the case concerned servers. At issue in the case were smaller servers that carry out basic tasks such as the management of communication between a network of PC users. The Commission referred to these as work group servers in its decision. In 1998, Sun Microsystems Inc. (“Sun”) had asked Microsoft to disclose interoperability information to allow Sun to make work group server operating systems that were compatible with the Windows environment and that could compete effectively with Microsoft’s Windows work group server operating systems. Microsoft refused. Sun complained to the European Commission.

The Commission investigated. It found that the proper functioning of a work group of PC users using Windows relied upon a technical architecture of client-to-server and server-to-server interconnections and interactions. The prevalence of the Windows operating system on the PCs of many work group networks gave Microsoft an in-built advantage over its competitors in the market for work group server operating systems, because it was in the best position to engineer the most efficient server software that could interact with Windows operating system software installed on most PCs. The Commission concluded that interoperability information was needed by those competitors of Microsoft that wanted to develop work group server operating systems that could function effectively within a network of PCs running a Windows PC operating system.

The Commission found as a matter of fact that reverse engineering of Windows was not viable. It examined the public availability of interface information, such as the disclosures made by Microsoft pursuant to its obligations under the settlement of the US antitrust litigation. These disclosures were made by Microsoft pursuant to its Communications Protocols Licensing Program, which began in September 2002. However, as the Commission pointed out in its decision, the information licensed under this program was limited to client-to-server communication protocols and not server-to-server protocols. The terms of the license agreement offered by Microsoft specifically exclude any use of the communications protocols for server-to-server communications. Thus, the interoperability information that companies such as Sun needed was only available from only one source – Microsoft.

The Commission surmised that the close compatibility of PCs running a Windows operating system and work group servers also running a Windows operating system enabled Microsoft to lock the market into a homogenous, Microsoft solution. In addition, an important component of the Commission’s case was Microsoft’s previous conduct, in entering the market for group server operating systems, then building up its market share and altering its conduct viz. its competitors. Vendors of the UNIX operating system and Novell Inc. (Novell) were the first on the market for work group server operating systems in the 1980s, when computing networks were built with non-Microsoft work group servers. In the early 1990s, when Microsoft did not have an alternative work group server operating system, it therefore had incentives to have its Windows PC operating system interoperate with non-Microsoft work group server operating systems. Microsoft had disclosed interoperability information to enable it do so, licensing (for example) Digital Equipment Corporation in 1995. However, according to the Commission, once Microsoft’s work group server operating system had gained acceptance in the market, Microsoft’s policy changed. It began to withhold interoperability information, rather than share it.

By the time of the Commission’s decision, Microsoft’s share of the work group server operating systems market was at least 60%. Because of its dominant position on this market and its overwhelming dominance on the market for PC operating systems, the Commission had found that Microsoft’s refusal to supply interoperability information to Sun was an abrogation of its special responsibility under Article 82 not to endanger an already-fragile state of competition on the market for work group server operating systems. This meant that Microsoft had infringed Article 82. Furthermore, the Commission concluded that the only viable means for others to achieve interoperability with Windows required Microsoft to provide interoperability information directly to its competitors, under licence. By way of remedy, the Commission therefore ordered Microsoft to disclose complete and accurate specifications of the communication protocols necessary for Microsoft's competitors’ to be able to make work server operating systems that could interface properly with Windows-operated PCs.
 
The CFI’s decision on interoperability
One of the main issues in the case was the question of the scope of the Commission’s order and what was actually meant by interoperability. Before the CFI, the Commission maintained that it had not fixed the interoperability that was required for effective competition at a given level. It said that it had established as a matter of fact that the degree of interoperability with Windows that Microsoft’s competitors could achieve (using reverse engineering, for example) was simply too low to enable them to remain viably on the market. The purpose of its remedy was therefore to make available information that would allow Microsoft’s competitors to engineer an equivalent degree of interoperability to that achieved by Microsoft, but by means of their own innovative efforts, so that when a server running a non-Microsoft work group server operating system is installed on a Windows-based work group server network, it would be capable (inter alia) of delivering all of its functionalities to client PCs running Windows. The remedy was not intended to allow Microsoft’s competitors to produce “clones” (as alleged by Microsoft); it was intended to enable competing products with “added value” to be created that would function differently to Windows.

In short, the CFI agreed with the Commission’s assessment. The question for the CFI was whether the Commission had correctly determined the degree of interoperability that should be attainable in light of the objectives of Article 82. The CFI concluded that it had.
 
Microsoft’s intellectual property
Microsoft claimed that it had invested many years of research and development in designing communications protocols that were useful in terms of functionality and which enhanced the speed, reliability, security and efficiency of interactions between Windows operating systems. The communications protocols and the specifications describing them were protected by various IP rights, including copyright and patents. In addition, they constituted valuable confidential information that could be protected against unauthorised disclosure by the law of trade secrets in various Member States.

One of Microsoft’s arguments against the Commission’s disclosure order was to point out that the remedy rode roughshod over Microsoft’s IP rights, a serious matter in relation to which there is existing EU caselaw. Microsoft claimed that the Commission had not satisfied the requirements set down in the existing cases on Article 82 and the compulsory licensing of IP rights. It accused the Commission publicly of "the biggest encroachment on intellectual property in European competition law history" and likened the Commission's disclosure remedy to "opening the vaults of a bank" and “handing out money to passers-by”.

The CFI was content to proceed on the assumption that the “high water mark” of Microsoft’s case on IP rights had been proved, i.e. that the communication protocols (or the specifications of those protocols) were protected by IP rights and/or could be treated as trade secrets. The CFI observed that the real question to be resolved in the case was whether the legal conditions upon which a dominant undertaking may be required to grant a licence of its IP rights had been made out.
 
The legal conditions for compulsory licensing
Decisions ordering the compulsory licensing of IP rights as a remedy for breach of competition law have been few and far between in the EU. The first case in which IP rights were the subject of a compulsory licence ordered under the competition rules was the Magill decision. Mr Magill wished to publish a composite TV programme guide for Irish viewers. Up until that point, consumers had had to buy separate guides for each TV channel. The Irish broadcasters sued Mr Magill for infringement of copyright subsisting in the list of TV programmes contained in their individual guides. On appeal, the Court of Justice confirmed that each broadcaster was dominant in the market for TV scheduling information and the refusal of the broadcasters to license Mr Magill infringed Article 82. In particular, the Court of Justice held that the exercise of an exclusive right such as copyright may in exceptional circumstances infringe Article 82. The exceptional circumstances in this case included the fact, first, that the refusal concerned a product (the weekly TV listings) the supply of which was indispensable to the proposed activity by Mr Magill, namely, the publication of a composite TV guide. Second, the TV companies’ refusal prevented the launch of a new product, which the TV companies did not offer and for which there was proven consumer demand. Third, the refusal was not objectively justified. Fourth, the TV companies had effectively reserved to themselves a secondary market – the market for TV guides – by excluding all competition on that market.

In the IMS Health case, the issue was whether, in the circumstances of the case, an abuse had been committed when a dominant undertaking (IMS Health) had refused a licence to its weaker competitor (NDC) to use a database in which copyright subsisted. IMS Health sued NDC, then a new entrant on to the market for German pharmaceutical sales data, for copyright infringement. NDC asked IMS to grant it a copyright licence, in exchange for payment, but IMS refused. The German court decided to refer the question of whether IMS had the right to final injunctive relief under German copyright law, if the refusal by IMS to enter into a licence with NDC on reasonable terms was abusive conduct within the meaning of Article 82. The ECJ stated that in order for the refusal of a copyright owner to give access to a product or service that was indispensable for carrying on a particular business to be abusive under Article 82, three conditions must be satisfied:
  • the refusal must prevent the emergence of a new product for which there is potential consumer demand;
  • the refusal to licence by the copyright owner must be unjustified, when examined objectively;
  • the refusal must be such as to exclude any competition on a secondary market.
Application to Microsoft v Commission
Before the CFI, Microsoft maintained (inter alia) that none of the criteria set out in the IMS Health case were satisfied. The Commission argued that it did not follow from IMS Health that the circumstances in which compulsory licensing of interoperability information could be ordered should be assessed solely against the conditions laid down in that case. The Commission maintained that in order to determine whether a refusal to deal is abusive, it is necessary to take into consideration all the particular circumstances surrounding that refusal, which need not necessarily be the same as those identified in the previous cases.

The CFI confirmed that it is only in exceptional circumstances that the exercise of an exclusive IP right may give rise to an abuse under Article 82. The CFI also confirmed that the IMS Health conditions are cumulative so that, when found together, they meet the exceptional circumstances criterion, as required by Magill. It noted that the circumstance whereby a refusal by a dominant undertaking prevents the appearance of a new product for which there is potential consumer demand is unique to the Article 82 caselaw on the exercise of IP rights. The CFI came up with the following refinement of the requirements in Magill and IMS Health:
 
Once it is established that the following set of circumstances prevail, the refusal by the holder of a dominant position to grant a licence may infringe Article 82, unless the refusal is objectively justified:
  • he refusal must relate to a product or service indispensable to the exercise of a particular activity on a neighbouring market;
  • the refusal is of such a kind as to exclude any effective competition on that neighbouring market;
  • the refusal must prevent the appearance of a new product for which there is potential consumer demand.
 
The CFI then proceeded to consider whether each of these circumstances was present in the Microsoft case.
 
The indispensable nature of the interoperability information
Microsoft challenged the Commission’s finding of fact that interoperability with the client PC operating system was of significant competitive importance in the market for work group server operating systems. Noting that such factual questions were only subject to limited review by the Community Courts, the CFI refuted this challenge. The Court confirmed the Commission’s finding that interoperability considerations play a key role in consumers’ decisions about whether to purchase work group server operating systems. It found that, in light of the privileged, technical links that Microsoft had established between its Windows client PC and work group server operating systems and the fact that Windows is present on virtually all client PCs installed within organisations, Microsoft was able to impose the Windows domain architecture as the de facto standard for work group computing. The consequence of this was that interoperability with Windows was key to other work group server operating systems, if they were to remain viably on the market.
 
The risk of elimination of competition
Microsoft argued that the refusal to disclose interoperability information was not such as to exclude all competition on a secondary market, in this case, the market for work group server operating systems. It noted that the Commission had based its finding of a breach of Article 82 on the mere “risk” of elimination of competition. Microsoft claimed that in the cases dealing with compulsory licensing of IP rights, the Community Courts had adopted a more stringent test, requiring a “high probability” of effective competition being eliminated. Microsoft also claimed that the perceived risk to competition elaborated by the Commission was contradicted by the state of the market in the real world, since the refusal by Microsoft of Sun’s request in 1998. Although six years had elapsed, there were still numerous competitors on the market for work group server operating systems, including IBM, Novell and Sun, not to mention the emergence of Linux.

The CFI was robust in its dismissal of Microsoft’s arguments, particularly the complaint about the alleged higher standard of proof for the elimination of competition, which the Court found to be “purely one of terminology and wholly irrelevant”. Having considered the factual evidence assembled by the Commission during the investigative procedure, the CFI confirmed the Commission’s finding that Microsoft’s refusal to disclose interoperability information meant that its competitors’ products were confined to marginal market positions. The CFI concluded that the fact that there was still marginal competition between operators on the market did not vitiate the Commission’s finding that all effective competition was at risk of being eliminated.
 
The new product criterion
Arguably, one of the weaknesses in the Commission's initial decision was that it did not find that Microsoft was suppressing a "new product" (as required by Magill) by refusing to supply interoperability information. The fact was that there were other work group server operating systems available on the market from other vendors, such as Linux. Microsoft latched on to this omission. Citing in particular the first IMS Health criterion, which states that a refusal must prevent the emergence of a new product for which there is a potential consumer demand, Microsoft criticised the Commission’s decision. It said that the Commission had failed to identify any new product that Microsoft’s competitors would develop using the communications protocols, nor had the decision identified any demand on the part of consumers for such a product.

In an important section of its judgment, the CFI emphasized that whether Microsoft’s conduct prevented the appearance of a new product fell to be assessed under Article 82(b), which prohibits abusive practices which consist of “limiting production, markets or technical developments to the…prejudice of consumers”. It stated that:
“The circumstance relating to the appearance of a new product [as prefaced in Magill and IMS Health] cannot be the only parameter which determines whether a refusal to license an intellectual property right is capable of causing prejudice to consumers within the meaning of Article 82(b). As that provision states, such prejudice may arise where there is a limitation not only of production or markets, but also of technical development”.
The Commission had found that Microsoft’s refusal to disclose interoperability information put its competitors’ products at a disadvantage, particularly with regard to properties such as security, reliability, ease of use or operating performance speed. The CFI approved the Commission’s finding that if Microsoft’s competitors had access to the interoperability information, they could use that information to make advanced features of their own products available within a Windows domain, thus facilitating technical development:
“…the contested decision rests on the concept that, once the obstacle represented for Microsoft’s competitors by the insufficient degree of interoperability with the Windows domain architecture has been removed, those competitors will be able to offer work group server operating systems which, far from merely reproducing the Windows systems already on the market, will be distinguished from those systems with respect to parameters which consumers consider important…”.
The CFI was not persuaded by Microsoft’s argument that no consumers had actually complained that they had been forced to adopt a Windows work group server operating system because of a lack of choice. The CFI made the point that when customers were confronted with a choice as to whether to put up with interoperability problems rendering their business processes cumbersome and inefficient, they were bound to opt for an alternative, homogenous Windows–based solution for their work group network instead. The CFI noted that it was settled law that Article 82 covered not only practices that affect consumers directly, but also those that indirectly affect consumers by impairing an effective competitive structure.
 
In conclusion, the CFI affirmed the Commission's finding that Microsoft's refusal to disclose interoperability information limited technical development to the prejudice of consumers, contrary to Article 82(b). Although the Commission had not expressly dealt in its decision with the "new product" criterion in IMS Health, on the basis that Microsoft's refusal limited the technical development of new products by its competitors, the CFI was content to find that this criterion was indeed satisfied.
 
Objective justification
The negative effect on Microsoft’s incentives to innovate
Microsoft argued that its conduct in refusing to supply interoperability information was objectively justifiable. It held IP rights over the technology concerned and it had made significant investments in designing its communication protocols. If Microsoft was forced to license out this interface information, it would take away Microsoft’s own incentives to continue with further innovations in this area.
 
Mandating access: the public interest
The CFI ruled that the mere fact that Microsoft’s communication protocols (or the specifications for those protocols) were covered by IP rights could not be an objective justification within the meaning of IMS Health. The Court pointed out that Microsoft’s argument was “inconsistent with the raison d’être of the exception” recognised in EU caselaw in favour of free competition. In a highly pertinent section of the judgment, the CFI explained the rationale for this exception:
“....the Community judicature considers that the fact that the holder of an intellectual property right can exploit that right solely for his own benefit constitutes the very substance of his exclusive right. Accordingly, a simple refusal, even on the part of an undertaking in a dominant position, to grant a licence to a third party cannot in itself constitute an abuse of a dominant position within the meaning of Article 82. It is only when it is accompanied by exceptional circumstances such as those hereto envisaged in the caselaw that such a refusal can be characterised as abusive and that, accordingly, it is permissible, in the public interest in maintaining effective competition on the market, to encroach upon the exclusive right of the holder of the intellectual property right by requiring him to grant licences to third parties seeking to enter or remain on that market”.
Conclusion
The public interest exception referred to by the CFI corresponds to a similar exception in the US, where the courts have confirmed that IP rights are essentially no different to other property rights in terms of their lack of immunity from the antitrust rules. However, US antitrust regulators have said publicly that the compulsory licensing remedy must be kept strictly within bounds, bearing in mind the potential for regulators to get it wrong, which carries the risk of a chilling effect on innovation. The sweeping nature of the CFI’s judgment in the Microsoft case represents a potentially significant shift in the EU caselaw. It dilutes the apparently stringent test for compulsory licensing previously set out in cases such as Magill. The CFI has confirmed that the IP rights of companies - including patents - are no more immune from competition law than any other kinds of assets, if the regulator can articulate clear concerns about market structure and future effects on innovation.
 
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