Microsoft faces crucial ruling over record fine imposed by EU

Microsoft faces a crucial court decision today in Luxembourg that will define its future as the world's biggest software group as well as that of the European commission as a global antitrust authority.

The verdict of Europe's second highest court on an appeal by Microsoft against Brussels' ruling that it had abused its dominance of the PC market, marks the culmination of a nine-year dispute that could reshape EU competition law.

Bo Vesterdorf, the court's Danish president, will this morning deliver the ruling on Microsoft's appeal against the commission's March 2004 decision to find it guilty of abusing its dominance of the PC market through its Windows operating system. Brussels imposed a record €497m (£344m) fine and a further €280.5m in July last year for failing to comply.

Lawyers say the judgment is a watershed for EU competition law and the commission's remit. Brussels sees the case as a David versus Goliath battle, pitting its relatively small team of economists and lawyers against the software empire which has earnings of $1.5bn (£750m) a month and margins of 85% on its products.

"It's their entire super-dominant business model that's at stake here: the ability to milk monopoly profits in a market in which they have held 95% share for 15 years," an insider said. "Its about a company deliberately excluding competitors from the software market, imposing products and services on consumers rather than allowing them to choose more innovative products and keener prices. It's about encouraging Microsoft to be even more innovative by allowing others to compete."

Microsoft turns the EU argument on its head. For its founder, Bill Gates, and his hundreds of engineers and lawyers, the court battle revolves around the ability of a creative hi-tech firm not only to innovate but also to protect its innovations through intellectual property rights such as patents. Microsoft believes the case is an attempt by an overweening regulator to "reconfigure how the marketplace works by handicapping the leading player". Ian Forrester QC at White & Case, part of Microsoft's legal team, said a ruling in favour of the company being forced to divulge sophisticated technology, would be a first in global competition law.

Last night, the outcome was still seen as a cliffhanger, with most lawyers pointing to a score draw on the two "remedies" imposed on the software group by the 2004 decision - and a possible reduction in the original fine. Lawyers believe the commission could "lose" one of its demands - trying to stop Microsoft tying or bundling Media Player, used for viewing multimedia files online, into Windows OS to the detriment of rivals such as Real Player. It could "win" one - the demand that Microsoft ensure inter-operability that enables rivals such as Sun or Linux to interface seamlessly with Windows-based servers.

Rony Gerrits, managing partner at lawyers Morrison & Foerster in Brussels, is not involved in the legal battle, but said: "The court is both legal and political, and to come out and shoot down the commission's high-profile work over a decade would be a serious step politically and very damaging ... The inter-operability case may even be so complex it's impossible to solve, and the EU will take comfort from the fact that Microsoft today is not what it was nine years ago."

But Mr Vesterdorf and his colleagues could award the entire game to the commission or Microsoft. If the EU wins, there would be a rash of new legal cases in Europe and the US brought mainly by American companies. It would give the commission more clout than any other antitrust authority in the world.

But if it loses it will be a blow to Brussels and officials will think twice about taking on more cases of the Microsoft scale.

Becket McGrath, competition lawyer at Berwin Leighton Paisner, said of the original decision: "[It] arguably represents the commission's best work and a loss would severely damage its reputation."

Microsoft would be free to devote even more resources to tackling its innovative and often smarter rivals in new markets - and conclude even more deals with its original complainants such as Sun, Novell and AOL who it has already bought off with $4bn compensation.

"Remedies" imposed by the EU:

· Microsoft was forced to sell a version of Windows without its Media Player - the video and audio streaming software - after being accused of significantly weakening competition by including it in Windows operating system packages for free. The European commission said this discouraged consumers from buying rival programmes such as Real Player. But the "unbundled" version has sold fewer than 2,000 copies.

· Microsoft was required to provide "complete and accurate" information to rivals so they could develop competing programmes for workgroup servers (such as banks of printers) that would work with the Windows software. Microsoft lawyers argued that involved the expropriation of valuable intellectual property.
David Gow

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