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European Commission Imposes $1.3 Billion Penalty on Microsoft

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The (European Union's) European Commission today imposed a penalty payment of  $1.3 billion (€899 million) on Microsoft for non-compliance with its obligations under the Commission's March 2004 decision prior to October 22, 2007.

Today's decision, adopted under Article 24(2) of Regulation 1/2003, finds that, prior to 22 October 2007, Microsoft had charged unreasonable prices for access to interface documentation for work group servers. The 2004 decision, which was upheld by the Court of First Instance in September 2007, found that Microsoft had abused its dominant position under Article 82 of the EC Treaty and required Microsoft to disclose interface documentation, which would allow non-Microsoft work group servers to achieve full interoperability with Windows PCs and servers at a reasonable price. (The Commission imposed a fine at that time of €497,196,304, or $740 million at today's conversion rates.)

"Microsoft was the first company in 50 years of EU competition policy that the Commission has had to fine for failure to comply with an antitrust decision," said European Competition Commissioner Neelie Kroes. "I hope that today's decision closes a dark chapter in Microsoft's record of non-compliance with the Commission's March 2004 decision and that the principles confirmed by the Court of First Instance ruling of September 2007 will govern Microsoft's future conduct."

The Commission's decision of March 2004 requires Microsoft to disclose complete and accurate interoperability information to developers of work group server operating systems on reasonable terms.

Initially, Microsoft had demanded a royalty rate of 3.87 percent of a licensee's product revenues for a patent license (the "patent license") and of 2.98 percent for a license giving access to the secret interoperability information (the "information license"). In a statement of objections of 1 March 2007, the Commission set out its concerns regarding Microsoft's unreasonable pricing. On May 21, 2007, Microsoft reduced its royalty rates to 0.7 percent for a patent license and 0.5 percent for an information license, as regards sales within the EEA, while leaving the worldwide rates unchanged.

Only as from October 22, 2007 did Microsoft provide a license giving access to the interoperability information for a flat fee of $14,888 (€10 000) and an optional worldwide patent license for a reduced royalty of 0.4 percent of licensees' product revenues.

Today's decision concludes that the royalties that Microsoft charged for the information license-i.e. access to the interoperability information-prior to October 22, 2007 were unreasonable. Microsoft therefore failed to comply with the March 2004 decision for three years, thereby continuing the behavior confirmed as illegal by the Court of First Instance. Today's decision concerns a period of non-compliance not covered by the penalty payment decision of 12 July 2006 starting on June 21, 2006 and ending on October 21, 2007. The decision does not cover the royalties for a distinct patent license.

The Commission has based its conclusions as to the unreasonableness of Microsoft's royalties prior to October 22, 2007 on the lack of innovation in a very large proportion of the unpatented interoperability information and a comparison with the pricing of similar interoperability technology.

For further information and background on this case see MEMO/08/125 and the Europa Web site: http://ec.europa.eu/comm/competition/antitrust/cases/microsoft/index.html.

 

Following is a list of frequently asked questions provided by the European Commission.

 

Q. Why has the Commission taken this decision after Microsoft has complied with the 2004 decision in October 2007?

A. Microsoft failed to comply with its obligation under the 2004 decision for nearly three years after its application for interim measures was rejected by the president of the Court of First Instance on December 22, 2004. During this period Microsoft was able to continue to reap the benefits of its illegal refusal to disclose interoperability information to the detriment of innovation and consumers.

Q. Is Microsoft now in full compliance with the 2004 decision?

A. In line with the 2004 decision, since October 22, 2007 Microsoft provides the interoperability information on reasonable and non-discriminatory terms. Microsoft recently posted the interoperability information on its Web site. The interoperability information made available by Microsoft also appears to be complete and accurate to an extent that a software development project can be based on it. Therefore, on the basis of the information currently at its disposal, the Commission considers that Microsoft is now, more than three years later, complying with its obligations under the 2004 decision. However, licensees may raise additional issues when they obtain access to the information and Microsoft must keep the interoperability information updated and fix errors on an ongoing basis.

Q. Why did the Commission consider Microsoft's royalty rates prior to 22 October 2007 unreasonable?

A. The Commission examined the interoperability information provided by Microsoft with the help of technical experts (and in particular the Monitoring Trustee, Mr. Barret, a UK computer specialist chosen by the Commission from a short list proposed by Microsoft). The Commission concluded that a very large part of the unpatented interoperability information lacked innovation. Furthermore, a comparison with the pricing of similar interoperability technology, including other technology made available by Microsoft itself, shows that royalties demanded by Microsoft for this kind of unpatented information prior to 22 October were unreasonable.

Q. Why is the imposed penalty payment higher than the fine imposed on Microsoft in the 2004 decision?

A. Fines and penalty payments are different in character. While fines sanction past infringements, penalty payments are intended to induce a speedy end to non-compliance with a previous Commission decision. A maximum daily amount is fixed in advance in order to create a sufficient deterrent from further non-compliance and the total potential liability is based on the application of this daily amount to the subsequent period of non-compliance.

The maximum amount for fines under Regulation 1/2003 is 10 percent of the yearly turnover of the concerned undertaking whilst the maximum amount for daily penalty payments is 5 percent of the average daily turnover per day.

Q. Why is the interoperability information so important?

A. As recently confirmed by the Court of First Instance in its Microsoft judgment the interoperability information, i.e. the interface information of how to "communicate" with Microsoft's PC and server operating systems that Microsoft refused to disclose to its competitors, is vital for them to viably compete in the market for work group server operating systems and to be able to bring innovative products to that market.

Q. Where does the money go?

A. The penalty payment is paid into the EU budget. It does not increase the budget, but reduces the contribution from member states and so from taxpayers.

The European Commission represents the general interest of the EU and is the driving force in proposing legislation (to Parliament and the Council), administering and implementing EU policies, enforcing EU law (jointly with the Court of Justice) and negotiating in the international arena.

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