Microsoft v Europe: round two for the bruiser from Washington state

A Danish judge decides this week on whether to uphold a European Commission ruling and loosen the software giant's grip on the market. But whatever happens, time is on the company's side

It will be the tech sector's most closely watched court ruling since US Federal Judge Thomas Jackson ordered the break-up of Microsoft in June, 2000. Judge Bo Vesterdorf, the president of the European Union's second-highest court, is expected to issue a decision this week in the long-running legal battle between Microsoft and the European Commission. The Danish judge must decide whether the remedies ordered by the EC in its landmark 24 March anti-trust decision against the US software giant should go into effect immediately or be postponed, potentially for years, pending Microsoft's appeal.

At first glance, this might seem like a mere turn of the screw in a protracted legal process. But Judge Vesterdorf's ruling will be the first time in the six-year history of Micro- soft's European anti-trust misadventure that anybody outside the Commission has passed judgment on the merits of the case. Under the stern guidance of Mario Monti, then the Competition Commissioner, Micro- soft was ordered to pay a €497m (£340m) fine, offer a version of Windows with its Media Player application stripped out, and disclose secret protocols used for communication among Windows servers and PCs. If some or all of these demands are put on hold by Judge Vesterdorf, the Commission's position could be badly weakened.

"It would be crazy for them to go full steam ahead," says Lars Liebeler, a partner at Washington law firm Thaler Liebeler and anti-trust counsel to CompTIA, a pro-Microsoft industry group.

If the Commission backs off as a result, Microsoft could once again wriggle free of a seemingly damning legal setback, just as it did when Judge Jackson's ruling was overturned.

To be sure, the software maker faces high hurdles to win a stay - a ruling to suspend the Commission's penalties pending an appeal. Microsoft must demonstrate either that the Commission's ruling is likely to be overturned by appeal courts or that implementing the remedies will cause irreparable harm to the company.

That's no easy feat. Judge Vesterdorf's European Court of First Instance has granted stays in only 17 per cent of the cases brought before it. "There's a great deal of deference given to the Commission by the court," says a source close to Microsoft.

Judge Vesterdorf gave no indication of his leanings during two days of hearings this autumn. But in 2001 he granted a stay in another case that involved mandatory disclosure of intellectual property, so legal experts think he may be sceptical of the Commission's demands that Microsoft reveal some of its software protocols.

Indeed, despite the odds against a stay, the betting in the Brussels legal community is that Microsoft could win partial or complete relief. Judge Vesterdorf can use different criteria to evaluate each proposed remedy. He might, for instance, hold off on unbundling Windows Media Player because he thinks the Commission's legal case is weak. In the 1 October hearing, the judge seemed doubtful of the market benefit of stripping out the software.

Alternatively, he could suspend the order to disclose server software protocols on the basis of irreparable harm, reasoning that Microsoft would have no way to reverse course if it eventually won an appeal.

Whichever way Judge Vesterdorf rules, Microsoft or the Commission can appeal against the decision at the European Court of Justice.

Almost as important as the decision is how Judge Vesterdorf frames his arguments. If his ruling casts doubt on the Commission's case, Microsoft will seize on it as an opportunity to go back to the bargaining table to craft a fresh settlement.

The chances of striking such a deal could be better now than during the tense days last March when Mr Monti and Microsoft's chief executive, Steven Ballmer, tried to hammer out a compromise before the Commission issued its decision. Microsoft has since negotiated private settlements with four of the major rivals who supported the European case: Time Warner, Sun Microsystems, Novell, and the Computer & Communications Industry Association. That leaves RealNetworks as the EC's only big backer from the IT industry.

There's another twist in this complicated tale. A new Competition Commissioner, Dutch businesswoman Neelie Kroes, was installed last month. The change in leadership may not affect the case because the Commission has a long tradition of sticking to its guns through changes in administration. Ms Kroes also could be reluctant to cut a deal with Microsoft because her brief tenure has been marked by controversy over her extensive corporate ties.

To assuage critics, Ms Kroes suggested in a recent speech that she will be no "pussycat" in pursuing tough cases. But she's clearly less interested in the Microsoft affair than was Mr Monti, and might want to clear the decks to focus on newer cases. The Commission wouldn't comment on the Microsoft case.

The software giant hopes that Judge Vesterdorf's ruling will give Ms Kroes a reason to reconsider. It won't give ground on key legal principles that it says the Commission trampled on in its 300-page decision. The company refuses to accept mandatory disclosure of intellectual property or restrictions on its ability to freely add features to Windows. Short of that, it's willing to deal.

Any indication from Judge Vesterdorf of problems with the case could also help Microsoft in its formal appeal, launched last June, which is separately wending its way through the Court of First Instance.

If all else fails, Microsoft has time on its side. "Every day that passes makes it harder for the market to benefit from the Commission's decision," says Carlo Piana, a partner at Milan law firm Tamos Piana & Partners, who represents one Microsoft adversary, the Free Software Foundation Europe, an industry group that champions open-source software.

Windows Media Player is already used by a majority of Europeans, while alternatives such as RealPlayer and QuickTime are in decline, according to figures from market tracker Nielsen/NetRatings. Microsoft's server software, built into Windows, has knocked Novell's alternative out of the ring.

If Microsoft gets some or all of the Commission's remedies stayed, its European anti-trust travails could draw to a rapid close. And even if they don't, the fast-moving tech sector could render the whole issue moot by the time the wheels of European justice have run their course.

TRACKING THE MICROSOFT CASE

December 1998: Sun Microsystems complains to the European Commission that Microsoft limits information about server software, and the EC begins an inquiry.

June 2000: US Judge Thomas Jackson orders Microsoft broken into two companies. His ruling is reversed a year later.

August 2001: The EC widens its probe to examine Media Player and its effect on the market for streaming media.

November 2002: Microsoft's US settlement is approved as serving the public interest by Judge Colleen Kollar-Kotelly.

March 2004: The European Competition Commissioner, Mario Monti, orders Microsoft to unbundle Media Player and disclose server interface protocols.

June 2004: Microsoft appeals against this to the Court of First Instance and asks it to suspend the ordered remedies.

December 2004: Judge Bo Vesterdorf expected to rule on request for suspension.

Data: BusinessWeek