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Thursday, March 25, 2004 - Page updated at 12:00 AM

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Microsoft legal maneuvers could offset EU sanctions

Seattle Times technology reporters

What's next in Microsoft's European case


Next week

Complete ruling, including specific details, issued by European Commission. Yesterday's announcement involved only an overview.

Within 70 days

Microsoft asks the European Court of First Instance for a stay, starting an appeal process. If the stay is granted, sanctions will be suspended while the appeal is pending.

Within 90 days

Barring a stay, Microsoft must begin offering a version of Windows in Europe that does not include a built-in digital media player.

Within 120 days

Barring a stay, Microsoft must provide technical details about how Windows interoperates with server computers, which connect PCs to a network such as the Internet or a company's internal network.

2008 or 2009

When Microsoft expects to conclude its appeal.

European antitrust regulators imposed a record fine on Microsoft yesterday and ordered the company to change the way it does business in Europe. But legal maneuvering could enable the company to avoid sanctions on the upcoming version of its most important product: the flagship Windows operating system.

Microsoft's chief lawyer said he's confident the company can win a stay in court, which would delay imposition of the penalties until an appeal is heard. That process could take until 2009, long after a crucial new version of Windows, code-named Longhorn, is shipped in 2005 or 2006.

Simultaneously, the company is rallying help from elected officials who may escalate the case into a global trade issue. Yesterday, several U.S. senators said the European regulators had overstepped their bounds and called on the Bush administration to intervene on Microsoft's behalf.

"I can tell you a number of Cabinet members have warned the Europeans of the implications of this action," said U.S. Sen. Patty Murray, D-Wash., noting that Microsoft had called her office Monday to "explain what their position is on this."

At the same time, competitors cheered the sanctions. "This decision is important for consumers not only in Europe, but also for increased innovation and competition worldwide," Lee Patch, vice president of legal affairs at Sun Microsystems, said in a statement.

The penalties came after the European Commission (EC), the executive arm of the European Union, found that the Redmond-based software giant had broken competition laws on the continent. The EC said Microsoft gained an unfair advantage by failing to give rivals necessary information and by packaging its media player with its Windows computer operating system.

"Dominant companies have a special responsibility to ensure that the way they do business doesn't prevent competition on the merits and does not harm consumers and innovation," Mario Monti, the EU's competition commissioner, said in a statement announcing the widely expected decision.

Less than maximum

The fine of 497 million euros — about $612 million — is the largest the EU has ever imposed in an antitrust case, although far less than the maximum possible penalty of about $3.5 billion.

The regulators also ordered Microsoft to share more details of the inner workings of Windows with rivals that make network server computer products, and to sell a version of Windows in Europe stripped of the digital media player. Barring a stay, the provisions take effect in 120 days and 90 days, respectively.

The media player is a cornerstone of Longhorn, a top priority of Microsoft Chairman Bill Gates since he stepped down as chief executive in 2000 to focus more on product development. Among its key advances are audio and video capabilities that change the experience of using a computer.

Longhorn is also the platform on which Microsoft plans to push into future digital music, movie, TV and phone services.

In appealing the EU case, Microsoft chief counsel Brad Smith said, the company is not trying specifically to protect Longhorn.

The appeal, which must be filed within 70 days, will address broad principles, including Microsoft's ability to decide what features to include in its products, protecting its intellectual property and preserving the reputation of the Windows trademark.

"We will ask the court to suspend or stay much or most of these remedies, including the code-removal piece, but that's not really based on anything with reference to Longhorn," he said.

Smith said the ruling runs afoul of international treaties, including intellectual-property protections under the World Trade Organization. "We do think that this decision today violates the European Commission's treaty obligations," he said. "That is obviously a matter of international diplomatic discussion and concern."

Nearly identical sanctions were pursued by the U.S. Department of Justice and 20 states in their landmark case against Microsoft, but the company avoided them in part by reaching a settlement in 2001.

Microsoft fought especially hard to avoid being told by the courts and regulators what it could or could not add to its products, an issue that will be central to its appeal to Europe's Court of First Instance.

Chief Executive Steve Ballmer emphasized the point during a conference call yesterday, while denying his company had abused its monopoly position.

"We believe that every company should have the ability to improve its products to meet the needs of consumers," he said. "We recognize the special position our company has, but nonetheless we think we should have that ability to improve our products, subject to the appropriate guidelines."

Several analysts said the sanctions should have little effect on Microsoft's stock, and some urged clients to increase their holdings. After dropping several dollars in the weeks leading up to the ruling, it closed up 26 cents at $24.41.

"Not to blow it off completely, but it's just not as bad as some people had feared," said analyst Jonathan Rudy at Standard & Poor's.

Parallels apparent

Throughout the European litigation and now into its resolution, parallels to the U.S. antitrust case have been evident.

Microsoft, for instance, shipped multiple versions of Windows during the U.S. case, despite efforts of regulators to block or alter the products. The current version, Windows XP, was launched a week before the company settled the U.S. case.

Sanctions under that settlement expire in 2006, although the pursuit by one state — Massachusetts — of additional remedies in the courts is pending.

"If they get a stay, then nothing much is going to happen, and Longhorn may ship without any restrictions other than the DOJ settlement and anything the D.C. Circuit (court) might order," said Andy Gavil, a Howard University law professor who has consulted on a pending antitrust lawsuit by Sun Microsystem against Microsoft.

Smith said Longhorn is being developed with the U.S. settlement in mind, noting that company lawyers are involved in the product's development to ensure it complies with the settlement.

One expert suggested that despite its "extraordinary success" appealing its U.S. case, Microsoft may not win a stay and could lose its appeal. Mark Schechter, a former Justice Department deputy director who heads the government antitrust practice at the law firm Howrey Simon Arnold & White in Washington, D.C., said Europe has a broader antitrust statute than the United States and the European Commission represents the consensus of its member states.

"I think it's a much more difficult appeal to win," he said. "There's no reason for them to feel confident."

Schechter also questioned whether the commission sanctions are harsh enough to get the U.S. to intervene aggressively on Microsoft's behalf.

"The requirement to provide some interoperability and unbundle: It's just not extraordinary enough to get the government all ginned up," he said.

The company did find an ally in Senate Majority Leader Bill Frist, R-Tenn., who called for federal intervention and said the commission ruling "is the first shot" in a U.S.-Europe trade war.

"It is critical that the Departments of State and Justice to stand up not only for an important American company, but also for U.S. industry, U.S. shareholders, and American workers," he said.

The White House referred queries to the Justice Department, which issued a statement critical of the European sanctions. R. Hewitt Pate, the department's antitrust chief, said the U.S. settlement "provides clear and effective protection for competition and consumers" and that sanctions such as removing portions of Windows "may have unintended consequences."

Sun starter

The European case started five years ago after Santa Clara, Calif.-based Sun Microsystems complained to the EU that Microsoft refused to give enough information for Sun to develop products that work with Windows-based computers.

The EC's investigation found Sun wasn't the only company that couldn't get this data and that Microsoft's strategy was designed to shut rivals out of the market.

As a result, the commission said, an overwhelming majority of customers said they preferred to buy Microsoft's server products instead of those of its rivals.

In 2000, the commission expanded its investigation to include Microsoft's bundling of its media player with Windows.

Monti, the European antitrust commissioner, said yesterday that in crafting the penalties, the EU was ensuring that software companies have a fair opportunity to compete in the marketplace.

Additionally, he said, consumers and computer makers ought to be able to decide which media player they want. "They ought to choose, not Microsoft," he said.

Regulators will appoint a "monitoring trustee" who will oversee that Microsoft gives complete and accurate information about Windows to server makers, the commission said. The trustee will also ensure that the two versions of Windows perform equally as well.

The commission did not order Microsoft to offer the stripped-down Windows at a price that's lower than one with the media player. That could lead some to question why computer makers would choose the altered version if they could pay the same amount for one with the extra feature.

No special treatment

But in an unusually worded twist, the commission said Microsoft couldn't do anything that would make the version without the player less attractive to computer makers. In particular, Microsoft must not give computer makers a discount for buying Windows together with the media player.

Smith said removing the media player would break other features in Windows, including access to Web sites with video designed to work with the player. Those Web sites include that of the Italian parliament and a Swedish broadcasting service.

The commission's decision will effectively freeze technology, hobble the Windows operating system and give customers less value for their money, Smith said.

A frequent critic of Microsoft said those problems aren't as dire as Smith described and could easily be fixed by software engineers.

"We think that's a very unwelcome part of their response; to put so much emphasis on that aspect," said Ed Black, chief executive of the Computer & Communications Industry Association. The trade group has lodged its own antitrust complaint against Microsoft, alleging to the European Commission that Windows XP violates competition laws.

Black said the commission's decision could facilitate future cases in Europe against Microsoft, possibly private lawsuits brought by other companies in specific countries.

Seattle's RealNetworks said the decision confirms the merit of its $1 billion private antitrust case filed in California in December against Microsoft.

"Building on the commission's factual findings establishing Microsoft's illegal conduct, we intend to vigorously pursue our case in the U.S.," Bob Kimball, the company's general counsel, said in a statement.

Sun is not planning to use the decision to pursue a private case in Europe in addition to the U.S. case against Microsoft it filed in a Baltimore court, said Sun's Patch. "There's no reason to do that — we've already done that," he said.

Microsoft's Smith remains optimistic that his company may still be able to settle the European case after it is appealed.

"At the end of the day, the European Commission has the first word, but the European courts have the final word, and the final word will carry the day," he said.

Brier Dudley: 206-515-5687 or bdudley@seattletimes.com. Kim Peterson: 206-464-2360 or kpeterson@seattletimes.com

Copyright © 2004 The Seattle Times Company

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