- The Washington Times - Tuesday, September 18, 2007

LONDON —The European Union’s second-highest court dealt a severe blow to Microsoft Corp. yesterday by rejecting its appeal of an antitrust ruling that analysts say could stifle innovation.

The European Court of First Instance ordered the world’s largest software maker to comply with a 2004 European Commission ruling that the company was not justified in tying new applications to Windows in a way that limited the choices of consumers.

It also upheld a $689 million fine against Microsoft — the largest ever levied by the commission, which enforces EU competition laws.

Under the 2004 order, Microsoft must share technical information with rivals so they can more easily make products that work with Windows, the dominant operating system for personal computers. The ruling also ordered Microsoft to sell a version of Windows that does not include its Media Player software.

The computer giant had appealed the 2004 ruling and argued that the fine should be rescinded.

Neelie Kroes, the EU’s competitive commissioner, said the case sets a precedent on the obligations of “dominant companies” to allow competition, especially in high-tech industries.

Over the past two months, EU regulators have charged Intel Corp. and Rambus Inc. with antitrust abuse. This week, the commission will hold closed hearings in which Apple Inc. will defend itself against charges that it restricts customer choice with its ITunes stores. And Google Inc. will soon have to seek EU approval to take over DoubleClick Inc., a deal some rivals claim will give Google too much power over personal data and online ads.

In Washington, Assistant Attorney General Thomas O. Barnett said the European ruling “may have the unfortunate consequence of harming consumers by chilling innovation and discouraging competition.”

Microsoft attorney Brad Smith said “the decision very clearly gives the commission quite broad power and discretion,” adding that the 248-page ruling would actually affect “every other industry in the world.”

Mr. Smith said Microsoft would have to study the ruling before deciding whether to appeal it to the European Court of Justice, Europe’s highest court. But to win a reversal it would have to show that the appellate court made an error in procedure when reaching its decision — not that the facts in the case are wrong.

Thomas Vinje, part of the legal team for the European Committee for Interoperable Systems, a coalition that includes Microsoft rivals such as IBM Corp., said that the ruling marked “a great day” for European businesses and consumers.

“At long last this decision opens the prospect for dynamic competition in the software industry,” he said. “No more user lock-in and no more monopoly pricing.”

But David Hull, a lawyer from Atlanta who has been practicing EU antitrust law in Brussels for nearly 25 years, said the ruling holds dangers for innovation.

“Could forcing companies to license rights in order to create competition undermine their decision to innovate?” he said. “That’s the concern.”

Mr. Hull said that the broader issue arising out of yesterday’s ruling is that dominant companies will have to be more careful when they try to wrap innovative extras into their existing products.

“It will be tricky to figure out if a feature is a new product or is a part of the same product,” he said. “This ruling may make dominant players think twice about the features they come out with.”

Microsoft argued that the commission was trying to force it to give away valuable intellectual property for nothing.

And while the company has already sold a version of Windows in Europe that does not include Media Player, sales have been slow.

“It’s amazing that the court upheld a decision forcing a company to make available a stripped-down version of its product that no one wants,” Mr. Hull said. “I’m not sure how consumers benefit from that.”

“Today’s ruling illustrates how poorly the glacial decision-making process of antitrust law fits the fast-paced technology industry,” said Tim Lee, an adjunct scholar at the Cato Institute in Washington. “Since the commission made its initial ruling in 2004, Apple has come to dominate the online music market and YouTube has become the king of online video.

“If Microsoft was trying to monopolize the market for online media software it obviously failed, and it’s not clear why the EU needed to get involved in a market that plainly has plenty of competition,” Mr. Lee said.

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