Abuse Of Dominance: The Microsoft Cases

By Aditi, WBNUJS

Editor’s Note:  ‘Microsoft’ has long been synonymous to dominant market position as far as the software market. And with dominance that long established, cases of abuse of the same become an inevitable part of the picture. As such, it is not a surprise that the number of cases filed against the software giant in the past few years have managed to form a jurisprudence of their own. The present paper presents a study on the subject of abuse of dominance with reference to the cases filed against Microsoft in the US as well as the European Union. It starts with a case study of Microsoft, illustrating the extent of its dominance and follows up with the subsequent litigations in this regard. It strives to map the issues raised by these cases, the significance they hold in the legal regime of abuse of dominance and the lessons that can be learnt from their experience, especially with regard to the remedies and execution thereof.

INTRODUCTION

Competition law strives to foster uniform conditions of growth for all the actors in the market. However, the market power of all the actors in a market may not always be on a similar level. Gradually, certain actors may gain a dominant position in the market. While having an upper hand is not per se detrimental to competition, the abuse of the said dominance might raise some issues for the Competition Regulation bodies. The present paper focuses on a series of cases regarding the Microsoft Corporation on the subject of the abuse of dominance. It strives to analyse the major issues raised therein, and the effects it had on the competition law regime thereafter.

The initial part would discuss the background of the case, mainly focusing upon the dominant position of Microsoft and the Microsoft Anti-Trust case in the United States. The paper would further proceed to discuss the two Microsoft cases before the European Union in 2004 and 2007 respectively. This would be followed by analysis of the cases and concluding remarks.

BACKGROUND OF THE MICROSOFT CASES

The Microsoft cases were primarily based on Article 82 of the European Commission Treaty (EC Treaty), which deals with abuse of dominance. Prosecution under this provision requires the twin requirements of a dominant position in the market as well as the abuse of that position to the detriment of consumers to be fulfilled.

In the case of Microsoft, a 90%+ market share on the world-wide market of PC operating systems was enjoyed by the company. As noted by the commission in the case, this extremely high market share had been stable over the last few years, with Microsoft’s closest competitor, Apple, only having a market share of 2.9%. On the market of work group server operating systems, Microsoft had a market share of 60-75%, which, following the Hilti case constituted a presumption of dominance.[1]

As for the second ingredient of abuse of this seemingly dominant position, the EC cases of 2004 and the appeal to CFI in 2007 weren’t the first instances of Microsoft being prosecuted for charges of abuse of dominance. In 1998, the US Department of Justice filed a set of civil suits[2] against the Microsoft Corporation, with the central issue of bundling up of its web browser, the Internet Explorer with its operating system, i.e. Windows. Microsoft was found guilty by the trial court, which ordered Microsoft broken into an operating systems business and an applications business, holding that such a structural remedy was necessary.

An appeal by Microsoft followed where this structural remedy was vacated. Eventually, the US Government reached a settlement which was approved by the Court with minor modifications. The approved settlement required Microsoft to disclose some sensitive technology to its rivals. The settlement would prevent Microsoft from participating in deals that could hurt competitors; require uniform contract terms for computer manufacturers; allow manufacturers and customers to remove icons for some Microsoft features; and require that the company release some technical data so software developers can write programmes for Windows that works as well as Microsoft products do.[3] However, nothing in the settlement prevented the Microsoft Corporation from tying any of its software products with Windows in the future. The remedies issued in this case were subjected to a lot of criticisms, as it was argued to be ineffective in regulating the anti competitive behaviour of Microsoft.[4]

THE FIRST EC MICROSOFT CASE: 2004

The investigation in this regard was triggered by a complaint filed by Sun Microsystems in 1998, alleging that Microsoft had refused to supply necessary interoperability information which is necessary for Sun to develop products that could operate in a compatible manner with the computers functioning on Windows operating system. As a result they were not able to compete on an equal footing in the market for Work Group Server Operating Systems.[5] Gradually, in the year 2000, the commission extended the scope of its investigation and included the issue of tying of Microsoft’s Windows Media Player (WMP) with the company’s windows 2000 PC operating system.

In case of the first issue, Microsoft’s justification for its refusal to supply information is that providing the said information and allowing competitors to use it in order to make compatible products would be tantamount to licensing intellectual property rights.[6] However, in view of the over whelming dominance, the commission opined that the veil of intellectual property needs to be pierced. It was held that,

“…an undertaking’s interest in exercising its intellectual property rights cannot in itself constitute an objective justification when exceptional circumstances such as the ones identified above are established”

The commission also noted that disclosure of information of the kind refused by Microsoft was commonplace in the industry, thus rejecting Microsoft’s contention.

In case of the second issue, Microsoft argued the interest of the consumers in having a media player pre-installed in the operating system. It was also argued that such tying does not offer any gain to the corporation, as the media player is available for a free online download. The commission rejected these contentions and observed that the tying of WMP rather shields Microsoft from effective competition from potentially more efficient media player vendors, which could challenge its position, thus reducing the talent and capital invested in innovation in respect of media players.

As such, Microsoft was held to have abused its dominant position by refusing to supply competitors with certain interoperability information for the purpose of developing and distributing competing products on the market for work group server operating systems. Microsoft was also held to have infringed Article102 of the Treaty on the Functioning of the European Union (TFEU) by making the supply of its client PC operating system Windows conditional on the simultaneous acquisition of its Windows Media Player.[7] The broad remedies issued by the commission in this case were directing Microsoft to disclose within 120 days complete and accurate documentation so as to allow non-Microsoft Group Servers to achieve full interoperability. It has also been directed to develop PC Operating System without WMP within 90 days. Additionally, a fine of about EUR 497,196,304 was also imposed.[8]

THE SECOND EC MICROSOFT CASE BEFORE CFI: 2007

The second EU Microsoft case was in pursuance of the application to annul the 2004 decision filed by Microsoft. The appeal was heard by the Grand Chamber of the Court of First Instance (CFI). The court highlighted the limited nature of its review and observed that its role is limited to check “whether the facts have been accurately stated and whether there has been any manifest error of assessment or a misuse of power.”[9] This observation is reflected throughout the judgment as the court rejects Microsoft’s criticisms, holding that it had failed to demonstrate any manifest error on part of the commission.

In case of the issue of refusal to supply, the CFI referred to the four pronged test to check if the refusal to licence can amount to an abuse. Formulated in the IMS Health judgment, this test defines four conditions, which, if met, may lead to infer that the refusal to licence amounts to an abuse. These four conditions are:

1. The product or service protected by copyright must be indispensable for carrying on a particular business.

2. The refusal prevents the emergence of a new product for which there is potential consumer demand.

3. The refusal is not objectively justified.

4. The refusal is such as to exclude all competition on the secondary market.

Applying this standard, the court proceeded to see if these conditions hold well on the present facts. The court found all the four conditions to be applicable in the present case. The interpretation of the courts was a little different than that of the commission. However, the court reached the same conclusion. On the tying case, the court observed that the bundling of WMP with Windows gave Microsoft a competitive advantage which prevented competition between Microsoft’s WMP and RealPlayer to take place on the basis of the intrinsic merits of the two products.[10]It was held that showing independent demand for the tied product is enough. Separate availability of media players including WMP showed that Windows and Windows Media Player were two separate products.

Microsoft’s argument was that it was necessary to assess whether there was significant demand for the unbundled version of the tying product. It did not dispute that media players were separate products. But it claimed that operating systems generally came with media players and that consumers did not want operating systems that lacked media player features. Thus Windows was a single product and not a bundle of two separate products.[11] Further, the court observed that consumers might want to obtain their PC operating systems and applications together but from different sources. The CFI found that the Commission’s position was supported by Hilti and Tetra Pak II cases. It rejected Microsoft’s position because it “amounts to contending that complementary products cannot constitute separate products” for the purposes of Article 82 of the EC Treaty.[12]

As such, the application was rejected as to annulment or a reduction in the amount of the fine.

COMPLAINTS BY OPERA BROWSER IN 2008

Even after the 2007 judgment by the CFI, the troubles for Microsoft don’t seem to end. In December 2007, the Norwegian Internet browser lodged complaints before the commission regarding the tying of internet explorer, the default browser of Microsoft, to Windows. In pursuance of these complaints, the commission began investigation and sent a statement of objection in 2009.[13] The remarkable part of this matter was the remedy which was eventually reached. A choice of browser screen was proposed which opened a page which facilitates the download of any of the top browsers according to the user’s choice. This has the effect of eliminating the unfair advantage to Internet Explorer and effectively places the competitors on a level play field. By the end of 2009, this proposal was approved by the commission.[14] However, recently in March 2013, The European Union has fined Microsoft Corp 561 million Euros for failing to offer consumers a choice of web browser. According to the news reports in this regard, it said the U.S. Company had broken a legally binding commitment made in 2009 to ensure consumers had a choice of browser, rather than defaulting to Microsoft’s Internet Explorer.[15]

SIGNIFICANCE OF THE MICROSOFT CASES

The Microsoft cases have been described as important milestones in the competition law regime, for multiple reasons.

Firstly, the CFI ruling had an effect on enhancing the scope of operation of the commission. Before the decision, the Commission could step in only if a company eliminated all competition, he said. With the decision, the Commission can act if a company merely eliminates “effective competition” i.e. if it mitigates competition in the market without actually getting rid of all its competitors.[16] Further, while applying the IMS Health test of refusal to supply, the court adopted an elastic and widening approach, while also showing a broad allegiance to the existing case laws in this regard.[17]  More so, the European trial, when compared to the US case which ended up in a settlement, has been applauded by the economists as being a step forward. Regarding the tying remedy of formulating a WMP free version of Windows, it has been argued that the logical conclusion of this approach is a kind of ‘a la carte’ Windows, in which PC makers and their users are free to choose which bits of Windows they want to buy, and which they don’t.

However, a room for improvement in this regard cannot be negated. While the remedies offered by the court in the tying case might be a step forward than the US settlement, its practical utility has been under question since its inception. The WMP free version of Windows, known as Windows XP N, though sold at the same price, has hardly drawn any customers. Many have inferred failure of this remedy from the fact that it did not have much effect on the market as well as on the behavior of the Company. At this point, one may go back to Microsoft’s proposal of inclusion of rival media players within Windows. This remedy would have had an effect of mitigating any distributional advantage to WMP and would have empowered the consumers to make the final power. It provides consumers the best of both worlds—the benefits of standalone media players and the benefits of an integrated solution.[18]

It seems that the commission has had a similar realization, as is evident from its innovative remedy of a choice of browsers screen in the current Internet Explorer tying matter. As such, further innovations in this respect to balance out the interest of the consumers as well as the market can be expected to surface in the future.

CONCLUSION

The various instances of Microsoft being under trial for anti-competitive practices traces a transitional period in the case of Abuse of Dominance. While it portrays a strengthened role of the EC in controlling the abuse of dominance by gigantic firms like Microsoft, it also brings out certain execution flaws with respect to the remedies. However, the eventual developments have also succeeded in exploring more efficient and innovative remedies to answer the concerns of the competition authority as well as the consumers. The Opera case is an example. As such, we may witness further evolved approaches in better implementing the legal standards with respect to abuse of dominance.

 Edited by Hariharan Kumar

[1] Case T-30/89, Hilti v Commission, 1991 E.C.R. p. II-1439, at §89, confirmed by the Court of Justice in Case-53/92 P, 1994 E.C.R. I-667.

[2] United States of America, Plaintiff, v. Microsoft Corporation, Defendant, Final Judgement, Civil Action No. 98-1232, November 12, 2002. Available online at http://www.justice.gov/atr/cases/f200400/200457.pdf  last visited 3rd October, 2013

[3]Competition Commission of India, Abuse of Dominance in the Indian Competition Law, available online at http://cci.gov.in/images/media/articles/abuse_20080409115506.pdf last visited 3rd October 2013

[4] Jenkins, Gregory T.; Robert W. Bing (January 2007). Microsoft’s Monopoly: Anti-Competitive Behavior, Predatory Tactics, And The Failure Of Governmental Will, Journal of Business & Economic Research 5 (1): 11–16

[5]Supra note 3

[6]  Commission Decision of 24.03.2004 relating to a proceeding under Article 82 of the EC Treaty against Microsoft Corporation (Case COMP/C-3/37.792 Microsoft), available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2007:032:0023:0028:EN:PDF  (last visited 2nd October 2013)

[7] Nicholas Economides, Ioannis Lianos; A Critical Appraisal Of Remedies In The E.U. Microsoft Cases, Columbia Business Law Review Vol 2010, No.2, 346

[8]Supra note 6

[9]Microsoft v. Commission, The Judgment of Court of First Instance, para 88, available at: http://curia.europa.eu/juris/showPdf.jsf;jsessionid=9ea7d2dc30db2a6a7a871f17416eb243b7395a95eeab.e34KaxiLc3qMb40Rch0SaxuLa3z0?text=&docid=62940&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=615058 last visited 3rd October 2013

[10] Id. paragraphs 971, 1034, and 1040. See also Christian Ahlborn, David S. Evans, The Microsoft Judgment and its Implications for Competition Policy towards Dominant Firms in Europe, available at http://ssrn.com/abstract=1115867

[11] Id. Para 1055.

[12] Id. Para 921

[13] See Press Release, Eur. Commission, Antitrust: Commission Confirms Sending a Statement of Objections to Microsoft on the Tying of Internet Explorer to Windows (Jan. 17, 2009)

[14] See Case COMP/C-3/39.530 Microsoft, Commission Decision of 16Dec. 2009, See also, Georgi Tsonchev, Latest Development In The Microsoft Case In The European Union: Microsoft Officially Allows Browser Choice To Customers, 16 Colum. J. Eur. L. F. 85 (2010)

[15]Reuters, Microsoft slapped with $733M fine by EU for breaching browser pact, NBC News, March 8, 2013, available at http://www.nbcnews.com/business/microsoft-slapped-733m-fine-eu-breaching-browser-pact-1C8709827  last visited 3rd October 2013

[16] David Lawsky, “EU Microsoft judge fears decision may hurt investment,” Reuters, March 12, 2008. See

http://www.reuters.com/article/reutersEdge/idUSL1254538020080312?pageNumber=1&virtualBrandChannel=0&sp=true, last visited 3rd October 2013

[17] Supra note 9, Para 369-436

[18]Supra note 7

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