On March 1, the European Commission ("EC") sent a Statement of Objections ("SO") to Microsoft for failing to comply with certain of its obligations under the March 2004 Commission Decision. 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 was required to disclose complete and accurate interface documentation on "reasonable and non-discriminatory terms" to allow non-Microsoft work group servers to interoperate with Windows PCs and servers. The SO indicates the EC’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.
EC Competition Commissioner, Ms Neelie Kroes, said, “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 license for patents which Microsoft claims necessary, a claim disputed by some third parties. The second (the "All IP Agreement") combines this first license with a license for these disputed patents. Companies, therefore, have a choice of agreement, depending on whether they consider they need a patent license. Both licenses 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 licenses, 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 is no royalty fee.
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. The EC took into account the advice of both the Monitoring Trustee, and its technical advisors, TAEUS, who both considered that there was 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 considered that of the total of 160 claims, only four, relating to relatively minor Bronze protocols, represented even a limited degree of innovation.
In relation to the "All IP Agreement", the Commission stated that it assumed that the existence of patents indicates some associated innovation. However, it noted that the Monitoring Trustee considered that most of the information in this agreement related only to solving problems specific to Windows, and it would not improve the functionalities of the licensee’s own operating systems. Comparable technologies are available on a royalty-free basis. I n the few cases in which the Trustee considered that patented technologies may go beyond merely solving interoperability problems specific to the Windows environment, again royalty-free comparable technologies exist. The Commission’s preliminary view is, therefore, that Microsoft’s current royalty rates for its "All IP Agreement" are also unreasonable.
The EC has given Microsoft four weeks to respond to the SO, and will give the company the opportunity to present its case before an oral hearing. If the EC is not satisfied that Microsoft’s submissions alter its provisional conclusion, then the Commission may issue another Decision under Article 24(1) of Regulation 1/2003, imposing a daily fine on Microsoft, and in the event of continued non-compliance, the daily fine could be extended.
Authored By: Neil Ray