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Competition Law in the Computer Age: Examining Microsoft v Commission

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About The Author

Konstantina Michalopoulou (Guest Contributor)

Konstantina is a law graduate from Sussex University. After completing her LLB, she has worked as a legal trainee in a Greek civil law firm and as a legal secretary in a company related to International Business Affairs. Outside the law, Konstantina works as a volunteer with autistic children in her hometown of Kastoria, Greece.

New technology is not good or evil in and of itself. It's all about how people choose to use it.

David Wong

The goals of EU competition law include, among others, the protection of consumers and of the competitive process as well as the creation and maintenance of the Single Market. Since the beginning of the 21st century, the extent to which EU competition law has been able to achieve these goals has been challenged by the appearance and fast-paced development of the Information Technology (IT) market. This is, after all, a market characterised by rapid innovation, heavy reliance upon the rights of exclusivity granted by intellectual property law and intense competition between companies based more on product development than on prices.

Controlling the IT industry has proved a tough task for competition authorities worldwide: such dynamic markets place great strain on the legal tools at their disposal. Indeed, as this article examines, the high-profile and long-standing legal battle between the Commission and Microsoft – which culminated in the decision in Microsoft v Commission [2007] – emphasises how the armoury of the Commission and the European Court of Justice (ECJ) had to be adapted to meet these new challenges.

Microsoft v Commission

The legal dispute between Microsoft and the Commission lasted for more than a decade. It initially began in 1998, after the Commission received the first complaint against Microsoft’s activities, and culminated in the Court of First Instance (CFI) upholding the Commission’s decision to issue a fine in 2007. The complexity of the facts necessitates some explanation.

In 1998, one of Microsoft’s competitors on the networking products market – Sun Microsystems – complained that Microsoft was refusing to grant access to the information and technology it needed to ensure that its products could remain compatible with Microsoft’s widely-used Windows operating system. This meant that Sun Microsystem’s products were unable to run as effectively on many computers, such that it was driving away their customers.

Meanwhile, in 2000, the Commission launched a separate investigation into Microsoft’s integration of Windows Media Player – an application that supported streaming of music and films – into the Window’s operating system. This meant that it was impossible for consumers to buy one product without the other.

The Commission accused Microsoft of abusing its dominant position – contrary to Article 102 of the Treaty of the Functioning of the European Union (TFEU) – on the operating systems market by engaging in two anti-competitive practices: a refusal to supply and the tying of products. After Microsoft failed to rectify the abuse, the Commission issued a fine against Microsoft.

Microsoft appealed this decision, arguing that the Commission made errors in both fact and law. After years of proceedings and further appeals, the CFI handed down the final judgment in Microsoft v Commission [2007], in which it upheld the Commission’s initial decision to impose a fine, calculated at €860 million.

This decision was controversial; criticism focused in particular on the finding that Microsoft’s behaviour constituted an unlawful refusal to supply and whether this went too far in changing the interplay between intellectual property rights and competition law, as well as impinging on the concept of innovation. It is on this aspect of the decision that this article focuses.

The Refusal to Supply

A refusal to supply occurs when a dominant firm on an upstream market – in this case, Microsoft on the operating systems market – unlawfully refuses to supply to firms on a downstream market where it is also active – in this case, the market for networking products in which Microsoft and Sun Microsystems were competing.

Not all refusals to supply are unlawful. Indeed, the CFI in Microsoft v Commission [2007] confirmed that, generally, a firm in a dominant position is able to choose the identity of its business partners and refuse to supply to other parties without breaching Article 102 TFEU. This chimes in with the principle of freedom of contract. Furthermore, the CFI reaffirmed that a dominant firm with an intellectual property right is usually able to refuse to grant licenses to third parties without contravening Article 102 TFEU.

However, the CFI also observed that when assessing claims from the IT industry, it had to strike the right balance between, on the one hand, allowing firms to preserve their intellectual property rights and, on the other hand, competition law concerns like the need to prevent unlawful refusals to supply.

The CFI therefore held that a refusal to grant a license by an owner of an intellectual property right could constitute an abuse of a dominant position under Article 102 TFEU in some exceptional circumstances. It drew upon – but loosened the standards of – the tests that had been applied in Magill [1995] and IMS Health v NDS Health [2001] to outline four criteria that must be met for the circumstances of a case to be sufficiently exceptional for a violation of Article 102 TFEU to occur.

First Element - Indispensable

The tests from Magill [1995] and IMS Health v NDS Health [2001] require that the product or service concerned – in this case, the information about Microsoft’s operating systems that Sun Microsystems had requested – be indispensable for the carrying on of a particular activity on a downstream market.

This concept was a heavily debated element of the proceedings before the CFI. However, in its judgment, the CFI expressed reluctance to scrutinise this aspect of the case: it noted that, given the Commission had undertaken ‘complex economic assessments’ on the issue, it would subject this aspect of its decision ‘to only limited review’. This resulted in the CFI upholding the Commission’s approach to the concept of ‘indispensability’, describing it as ‘not open to dispute’. The CFI therefore confirmed that the degree of indispensability needed was that the requested information had to be ‘necessary to enable [Microsoft’s rivals] to remain viably on the market.’

This approach can be taken as helping to protect competition by ensuring plurality in the market. After all, without access to the information held by Microsoft, its competitors would not be able to ensure that their products could maintain their compatibility with the Windows operating system. They would therefore struggle to survive on the market.

Microsoft rejected this approach, arguing that this placed too much emphasis on protecting competitors rather than protecting competition. This argument has some weight: though the CFI wanted to protect competition, it seemed not to consider some other important factors, including how imposing an obligation to license its competitors greatly reduces Microsoft’s incentive to innovate.

Certainly, the bar for determining indispensability that the CFI set in Microsoft v Commission [2007] is relatively low. A closer look at its conclusion shows that the CFI – in effect – held that the requested information was indispensable because it was necessary for Microsoft’s competitors to have in order for them to achieve the same level of interoperability with Microsoft’s products as Microsoft itself could achieve. Indeed, the CFI went so far as to suggest that a limitation on the ‘technical development’ of a competitor’s existing product was sufficient for indispensability to be proved.

This seems problematic: where information like this is of any competitive significance, it is difficult to imagine a set of circumstances where this standard of indispensability would not be satisfied. And the ease of overcoming this hurdle seems to be particularly crucial, in light of the CFI’s indication that a dominant firm will have little room to establish that a refusal to supply is objectively justified once it has been determined that the information is indispensable.

Second Element – Excluding Competition on the Neighbouring Market

The tests from Magill [1995] and IMS Health v NDS Health [2001] further require that the refusal to supply could exclude any effective competition on the neighbouring markets. There is a close connection between the first two elements of the tests: indeed, the CFI in Microsoft v Commission [2007] observed that operability information was indispensable because access to it prevented Microsoft’s competitors from being excluded from the market.

Again, there are problems with CFI’s approach here. From a factual standpoint, the CFI overlooked that – notwithstanding Sun Microsystems and the other complainants – there remained a significant amount of competitors still present in the market. In fact, providers of Linux – a rival operating system – had just appeared in the market. This meant it should have been clear that Microsoft’s refusal to supply would not cause an absolute elimination of competition from the market.

Third Element – Appearance of a New Product

The third part of the Magill [1995] and IMS Health v NDS Health [2001] test requires the refusal to supply to prevent the appearance of a new product for which there is potential consumer demand. This element was epitomised by the decision in Magill [1995], where the ECJ held that a refusal to supply basic information about TV schedules that prevented the emergence of a comprehensive TV programme guide, which the appellants did not offer and for which there was only potential consumer demand, was an abuse. In that case, the ECJ had carefully struck a balance between the protection of intellectual property rights – especially the freedom of the holder to choose whether and to whom to grant a license – and the need to safeguard and encourage genuine competition.

In Microsoft v Commission [2007], however, the CFI disrupted this balance. If anything, the Court appeared to be trying to prove that the case satisfied this element of the test rather than applying it. Indeed, prior to Microsoft v Commission [2007], the law was understood as requiring the blocking of an entirely new product to be shown in order to satisfy this requirement. However, in Microsoft v Commission [2007], the CFI took a somewhat benign approach to the ‘new product’ rule by focusing on the concept of technical development that does not balance well with Microsoft’s incentive to innovate it and pursue ‘breakthrough innovations’.

Instead of holding that it needs to be shown that a specific new product must result from the provision of the information, the CFI in Microsoft v Commission [2007] said that the new product criterion should be read to include a restriction of technical development. To justify this approach, it held that consumers were increasingly locked into Microsoft’s operating platform, such that competitors could not develop rival platforms.

Fourth Element – Is there an Objective Justification for the Refusal to Supply?

The fourth and last element of the Magill [1995] and IMS Health v NDS Health [2001] test offers dominant firms like Microsoft the opportunity to prove that the refusal to supply can be objectively justified. In Microsoft v Commission [2007], Microsoft argued that its refusal to grant a license could be justified by its need to protect its intellectual property rights and to safeguard their incentive to innovate.

The CFI, however, concluded that the existence of an intellectual property right does not in and of itself constitute an objective justification for the dominant firm's refusal to supply. It considered such an argument as ‘vague, general and theoretical’.

Arguably, the CFI should have placed greater weight on Microsoft’s concerns that disclosure of the information would negatively impact its incentive to innovate. More problematic, however, was the CFI’s failure to state what more would be needed alongside the existence of an intellectual property right in order for an objective justification to be found. Now, it is not clear how the EU law will balance the underlying goals of intellectual property law – the encouragement of invention and innovation – against the risk of harm to competition. More specifically, it is unclear whether an objective measure will be used, or whether it will fall upon the Commission to determine the "value" of a given intellectual property right. The latter, in particular, not only raises concerns of uncertainty but also raises questions as to whether the drafters of the TFEU really intended such discretion to be invested in the Commission.

Comment

By requiring Microsoft to disclose the interoperability information for its operating system, it was clear that the CFI in Microsoft v Commission [2007] had placed its focus on the need to uphold competition law rules. This is certainly a laudable aim. However, the legal approach it adopted seems to give more significance to the structure of the market and the competitors than to what actually constitutes anti-competitive behaviour that harms consumer welfare.

Undoubtedly, the CFI’s approach could be justified on grounds of public policy and the need to restrict the anti-competitive effect of refusals to supply. But such justifications overlook how little weight the CFI seemed to place on the need to protect Microsoft’s incentive to innovate. This could be harmful for future technical developments: an innovator now runs the risk of not being fully rewarded for sharing their knowledge.

Indeed, although the opinion never makes this point explicitly, the CFI’s reasoning in Microsoft v Commission [2007] – particularly in relation to when information will be considered indispensable – can be taken as showing a scepticism on the part of the Commission and the ECJ concerning the innovative value of the intellectual property rights asserted by Microsoft. In the future, it will be interesting to see whether the Commission and the ECJ will apply the same standards articulated in Microsoft v Commission [2007] to cases where there is less apparent scepticism about the innovation embodied in the intellectual property rights at issue.

Conclusion

The legal approach followed by the Commission and the CFI in Microsoft v Commission [2007] certainly stoked controversy. Though the CFI was trying to promote competition and benefit the society as a whole, it seems clear that they risk drastically undermining the incentive to innovate.

Indeed, firms with a dominant position who rely on intellectual property rights as a means of creating or preserving their competitive advantage in a market will be concerned: the decision appears to give wide latitude to the Commission to mandate compulsory licensing of intellectual property – and interface information in particular – as a remedy, where a competitor to a dominant firm can make the case that it will be unable to compete in an adjacent marketplace without it.

It is also concerning that the law is currently in a state of uncertainty. For one thing, the wide deference that the CFI gave to the Commission's determinations in Microsoft v Commission [2007] suggests that the Commission may start pursuing refusal to supply cases where it would previously have not. Furthermore, there is a lack of clarity concerning some aspects of the test adopted by the CFI, such that much remains unanswered: more cases in the coming years will be needed to examine what exactly the limits are for ‘new products’ and ‘indispensability’. Furthermore, firms may have to be more guarded in their actions until some of this ambiguity is rectified.

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Tagged: Commercial Law, Competition, European Union, Technology

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