Microsoft Still Not In Compliance With 2004 Decision, EC Reveals

by Ulrika Lomas, for LawAndTax-News.com, Brussels

06 March 2007

The European Commission has sent a Statement of Objections to Microsoft for failing to comply with certain of its obligations under the March 2004 Commission decision which accused the software giant of anti-competitive behaviour.

Commenting on the long-running dispute last week, the EC explained that:

"Part of that decision found Microsoft to have infringed the EC Treaty rules on abuse of a dominant position (Article 82) by leveraging its near monopoly in the market for PC operating systems onto the market for work group server operating systems. Microsoft therefore had to disclose complete and accurate interface documentation on "reasonable and non-discriminatory terms", allowing non-Microsoft work group servers to interoperate with Windows PCs and servers."

"The SO (Statement of Objections) indicates the Commission’s preliminary view that there is no significant innovation in the interoperability information, rejecting as unfounded 1500 pages of submissions by Microsoft from December 2005 onwards, and hence that the prices proposed by Microsoft are unreasonable."

"Microsoft has four weeks to reply to the SO, after which the Commission may impose a daily penalty for failure to comply with the March 2004 decision. The issue of whether the interoperability information is complete and accurate is still under consideration by the Commission."

Competition Commissioner Neelie Kroes observed that:

“Microsoft has agreed that the main basis for pricing should be whether its protocols are innovative. The Commission's current view is that there is no significant innovation in these protocols. I am therefore again obliged to take formal measures to ensure that Microsoft complies with its obligations.”

Microsoft provides two separate licensing arrangements to companies wishing to obtain the interoperability information as foreseen by the 2004 Decision's remedy.

The first is a 'No Patent Agreement', allowing licensees to use the protocols which together comprise the interoperability information, but without taking a licence for patents which Microsoft claims necessary, a claim disputed by some third parties.

The second (the 'All IP Agreement') combines this first licence with a licence for these disputed patents. Companies therefore have a choice of agreement, depending on whether they consider they need a patent licence.

Both licences confirm that an assessment of the reasonableness of Microsoft's prices depends on whether there is innovation in the protocols, and, if there is, what is charged for comparable technologies in the market.

For both licences, Microsoft divided the protocols into Gold, Silver and Bronze price categories based on the claimed degree of innovation. Microsoft has already agreed that there is a fourth category of protocols, not necessarily innovative, for which there will be no royalty.

The Commission's preliminary view is that there is virtually no innovation in the 51 protocols in the 'No Patent Agreement' where Microsoft has claimed non-patented innovation, and that Microsoft's current royalty rates for this agreement are therefore unreasonable.

It revealed that:

"This takes into account the advice of both the Monitoring Trustee and the Commission's technical advisors, TAEUS, who both consider that there is no innovation in any protocol in the Gold and Silver categories. These protocols represent more than 95% of the price of the total Technical Documentation. The Trustee considers that of the total of 160 claims, only four, relating to relatively minor Bronze protocols, represent even a limited degree of innovation."

Responding last week to the Commission's Statement of Objections, Microsoft General Counsel and Senior Vice President, Brad Smith announced that:

“Microsoft has spent three years and many millions of dollars to comply with the European Commission’s decision. We submitted a pricing proposal to the Commission last August and have been asking for feedback on it since that time. We’re disappointed that this feedback is coming six months later and in its present form, but we’re committed to working hard to address the Commission’s Statement of Objections as soon as we receive it."

“We do have a different perspective on the underlying facts and the proposed findings."

“First, we believe we have been fair in setting proposed protocol prices, and an analysis by PricewaterhouseCoopers found that our proposed prices were at least 30 percent below the market rate for comparable technology."

“Second, other government agencies in both the United States and Europe have already found considerable innovation in Microsoft’s protocol technology. US and European patent offices have awarded Microsoft more than 36 patents for the technology in these protocols, which took millions of dollars to develop, and another 37 patents are pending, so it’s hard to see how the Commission can argue that even patented innovation must be made available for free."

“Third, the proposed findings suggest that unless our intellectual property is innovative and patentable, it has to be made available royalty free. That has never been the standard for software or other intellectual property, and it misstates the test agreed to by the Commission and Microsoft in June 2005, which has been available on Microsoft’s website since that time."

“Fourth, the findings appear to attempt to regulate the pricing of our intellectual property on a global basis and not just within the EU. We believe it’s unwise for governments to regulate pricing beyond their borders and that if other authorities all took similar views of their power, companies would be unable to comply with contradictory rulings."

“And fifth, we’ve always said we are willing to entertain any reasonable price offer from any potential licensee, and that we are willing to be flexible to meet any unique business needs of potential licensees. Currently, we’re in negotiations with a number of potential licensees.”

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