legal processes in the us and eu: a comparison of the antitrust cases against microsoft

8/3/2019 Legal Processes in the US and EU: A Comparison of the Antitrust Cases Against Microsoft

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LEGAL PROCESSES IN THE US AND EU: A COMPARISON OF THE ANTITRUSTCASES AGAINST MICROSOFTHillary MusselmanDecember 17, 2008

Introduction

I. BackgroundA. The Company and the ProductsB. Relevant Laws

II. U.S. v. Microsoft

III. EC Decision

IV. Implications for Harmonization

V. Conclusion

Introduction

The recent international financial downturn has clearly demonstrated that the economies

of the world are no longer independent entities. In the last several decades they have become

deeply interwoven and dependent on one another as new technologies have developed that allow

people and information to circle the globe in hours or seconds. The global economy is here, and

it has brought with it great opportunities as well as great challenges. To promote international

transactions and maximize the efficiency of such an economy, the world needs standards to

guide nations, companies, and individuals in structuring their interactions.

Clearly the nations of the world will not be willing to make themselves entirely

subservient to a larger international body. Retaining autonomy and maintaining existing norms


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and traditions is important. But, in order to benefit from the new realities of the marketplace,

countries must be willing to work together to establish a basic framework for trade and

commerce. This begins with developing a clear set of legal principles upon which entities may

base their transactions. It is a formidable task to be sure. But, it seems likely that the legal

systems of the world have more in common than it may first appear.

The antitrust cases that were brought against Microsoft in both the EU and the United

States provide excellent examples. On the exterior it may seem that the two different systems

produced two drastically different results, but a closer look reveals that the decisions are really

more alike than they are different. Upon examining the two cases it becomes clear that the

methods of analysis used by the courts, though each rooted in its own legal traditions, are largely

the same. The divergent outcomes are attributable to procedure more than process.

I. Background

A. The Company and the Products

Microsoft was founded in 1975 by Bill Gates and Paul Allen. It was incorporated in 1981

and went public in 1986.1 The company focuses on developing products for individuals,

providing servers and networking solutions for businesses, providing online services, and

creating entertainment systems such as the X-box.2

In the years since its inception Microsoft has

grown into one of the most recognizable companies in the world. Today it has more than 94,000

employees globally,3 and its founders are two of the richest men in the world.

1 Microsoft.com,Fast Facts About Microsoftt, www.microsoft.com/presspass/ inside_ ms.mspx/#EDB (last visited Nov. 15, 2008)2Id.3Id.


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The cases that arose in the United States and the European Union in the 1990s and early

2000s were based on charges that certain of Microsofts products and practices violated antitrust

laws. Among the products at issue were the extremely popular Windows operating system,

Windows Media Player (WMP), and Internet Explorer (IE).

The Windows operating system is largely responsible for Microsofts dominance in the

personal computing market. Version 1.0 was released in 1985, and upgrades have been made

available at regular intervals ever since.4 The 1995 release was the first version to include built-

in internet capabilities, and the 1998 release, with enhanced multi-media functionality, was the

first made specifically for consumers.

5

WMP allows users to stream audio and video content

from the web, play audio and video from CDs and DVDs, and create CDs. Many versions are

available to download through Microsoft, but WMP v.8 is only available through Windows XP,

the 2001 version of the operating system.6 IE, Microsofts internet connectivity tool, was

released in 1995 and upgrades have been made available yearly. In 2001 IE v.6 was packaged

into Windows XP.7

B. Relevant Laws

The United States Department of Justice (DOJ) charged Microsoft with violating the

Sherman Antitrust Act, which is codified in Article 15 of the US Code. Specifically, the DOJ

4 Microsoft.com, Windows History: Windows Desktop Products History, www.microsoft.com/windows/WinHistory/Desktop.mspx (last accessed Nov. 15, 2008)5Id.

6 Cnet.com, Want Media Player 8? Buy Windows XP, www.news.cnet.com/2100-1040-256387.html (last accessed Nov. 15, 2008)7 Microsoft.com, Windows History: Internet Explorer History, www.microsoft.com/windows/WinHistoryIE.mspx (last accessed Nov. 15, 2008)


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alleged that certain licensing agreements and the bundling of Windows XP and IE v.6 violated

the 2 prohibition on monopolies, which provides in part that

[e]very person who shall monopolize, or attempt to monopolize, or combine or

conspire with any other person or persons, to monopolize any part of the trade orcommerce among the several States, or with foreign nations, shall be deemedguilty of a felony. . ..8

In the EU, Microsoft was charged under Article 81 of the Treaty establishing the

European Community, which prohibits arrangements that may affect trade between member

states9 and are intended to limit competition, particularly practices that

(a) directly or indirectly fix purchase or selling prices or any other tradingconditions;(b) limit or control production, markets, technical development, or investment;(c) share markets or sources of supply;(d) apply dissimilar conditions to equivalent transactions with other trading

parties, thereby placing them at a competitive disadvantage;(e) make the conclusion of contracts subject to acceptance by the other parties

of supplementary obligations which, by their nature or according to commercialusage, have no connection with the subject of such contracts.

10

The company was also charged with violating Article 82 which prohibits companies from

abusing dominant market positions and provides sections (a)-(e) of Article 81 as potential

examples of abuse.11 These charges were based on Microsofts refusal to provide interoperability

information to Sun Microsystems and on the allegedly illegal tying of WMP v.8 to Windows XP.

Although the language in Article 82 indicates that sections (a)-(e) are not intended to be

exhaustive,12 the EU statutes are still far more explicit than US laws in spelling out what conduct

may be deemed a violation. The meaning and effect of the laws in the US and the Europe are,

however, substantially the same.

815 USC 2

9 Treaty establishing the European Community Article 8110Id.11 Treaty establishing the European Community Article 8212Id.


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II. U.S. v. Microsoft

In 1998 the United States brought charges against Microsoft for violations of the

Sherman Antitrust Act. The DC District Court found the company liable on the charges that the

licensing restrictions on the Windows operating system constituted illegitimate market uses, that

preventing removal of Internet Explorer from the Windows operating system amounted to

exclusionary conduct, and that contracts with internet providers and internet content providers

were also exclusionary.13 The court entered judgment requiring inter alia that the company be

divided into separate application and operating system businesses.

14

Microsoft appealed the

decision to the DC Court of Appeals, which, after lengthy analysis, upheld in part, reversed in

part, and remanded to the District Court for a re-determination of the judgment.15

In hearing the case, Chief Judge Edwards, writing for the DC Court of Appeals, applied a

clear process to first determine if Microsoft did in fact have a monopoly. He began by defining

the relevant market and then considering the effects of the companys practices on that market

and then evaluated the defenses justifications for said practices. He applied this process to each

of the charges.

In defining the relevant market Edwards applied prior case law and determined that it

should be defined in terms of all reasonably interchangeable16

products. Upon this basis,

Macintosh operating systems, handheld devices, and middleware were excluded because they

were not yet sufficiently competitive and not felt to be capable of becoming competitive in the

13U.S. v. Microsoft, 253 F.3d 34, 45 (2001)14Id.15Id. at 4616Id. at 52, citing du Pont, 351 U.S. at 395


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near future.17 Having thus defined the operating system market, he then determined that

Microsofts system constituted 95% of it and turned his attention to the impact that this had on

the other 5%.

Because most personal computer users work on Windows, most applications are written

to work on the Windowss platform. The impact of this is circular. The more users Windows has,

the more applications are written for it, and the more people use Windows in order to use the

applications. This creates a significant barrier to entry to the operating system market.18 Edwards

rejected the defenses argument that the barrier was simply a reflection of the popularity of the

Windows system that affected all potential competitors equally and found it significant that

Microsoft faced no such barrier when it began and continued to be unaffected by it.19 After

making these initial determinations, the Court considered the anti-competitive effects of

Microsofts actions in light of these barriers.

The U.S. government based its illegal tying charges on requirements Microsoft made

related to Internet Explorer. In order to use Windows, users had to agree to license IE as well.20

In considering whether this action constituted a violation of the Antitrust Act, the Court first had

to determine whether the applicable standard of review should be the rule of reason or a per se

analysis.21 It ultimately decided that the rule of reason analysis standard was preferable

because there was little precedent in the area of technological monopolies and the Supreme Court

has stated the per se standard should only be applied in business situations where the court has

17Id. at 53

18Id. at 5619Id.20U.S. v. Microsoft, 253 F.3d 34, 84 (2001)21Id.


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significant prior experience.22 Under this analysis the court considers the net benefits and

potential harms of the conduct in order to determine if it unduly burdens commerce and an

individuals freedom to contract.23 Applying this standard, the Court determined that there was

not sufficient evidence to reach a determination and remanded the issue to the DC District

Court.24

The decisions the court reached regarding the charges related to contracts with internet

providers and attempted monopolization ultimately turned on the ability of the opposing parties

to sufficiently bear their respective burdens of proof. Precedent has established that the

complaining party must provide evidence of the violations they allege. This means that a

plaintiff must prove (1) that the defendant has engaged in predatory or anticompetitive conduct

with (2) a specific intent to monopolize and (3) a dangerous probability of achieving monopoly

power.25 Once they do this, it is upon the defendant to refute such evidence. With regard to the

allegations of attempted monopolization, the court found that the U.S. did not provide sufficient

evidence and the charges were therefore dismissed.26 The converse was true with the charges

relating to exclusivity contracts. There, Microsoft failed to present evidence to rebut the proof

offered by the prosecution, and therefore, the charges were upheld as violations of the Sherman

Act.27

The case was ultimately remanded to the District Court for further determinations of fact

as well as a re-determination of penalties. Before the court reached a decision on these issues,

Microsoft settled the case with the Department of Justice.

22Id. at 9023

Standard Oil Company of New Jersey et. al. v. The United States, 221 U.S. 1, 55 (1911)24U.S. v. Microsoft, 253 F.3d 34, 94 (2001)25Id. at 80, quoting Spectrum Sports,Inc. v. McQuillan, 506 U.S. 447, 456 (1993)26Id. at 8327Id. at 74


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The decisions reached by the DC Court of Appeals are related more to the procedural

requirements of the common law adversarial system than they are to the merits of the claims

brought against Microsoft. The outcome was further impacted by the structure of the U.S. court

system, which limits appellate courts to reviews of procedure and leaves questions of fact largely

to the trial court. This case is, for better or worse, a relatively clear example of how the

American judicial system functions.

III. EC Decision

The EC Commissions case stemmed from charges brought by Sun Microsystems (Sun)

against Microsoft for their refusal to provide interoperability information. It was also based on

the Commissions own investigation into Microsofts incorporation of its Windows Media Player

(WMP) into Windows.28 Sun based its demand for the information on a claim that Microsofts

refusal prevented Sun making from their Solaris operating system sufficiently compatible with

Windows to be enable a Solaris user to work in a network with Windows users. They claimed

this amounted to a violation of Article 82.29 The Commissions investigation centered around

whether or not the integration of WMP into Windows XP amounted to product tying that

violated Article 81.

After a thorough explanation of the technology, the companies at issue, and the other

companies in the industry, which served to establish background and to provide insight into

relevant industry practices, the EC began a process very similar to the process followed by the

US Court. In order to determine whether Microsoft had in fact abused a dominant market

28 2004 E.C.R. Case COMP/C-3/37.792 Microsoft, 629Id.


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position, as Sun alleged, the EC first sought to define the relevant market.30 In making this

determination it considered both demand-side substitutes that would allow consumers to change

from a Microsoft product to another product in response to price changes and supply-side

substitutes that would allow producers to respond by increasing supply.31 After considering

potential substitutes that could exert sufficient competitive pressure on the work-group server

(networking) market, the EU determined that there were none and, therefore, there were no

demand-side substitutes for Microsoft products.32 It then determined that other operating systems

were the only relevant products to be considered for the supply-side, but that because WMP was

only available on Windows there were no sufficient substitutes there either.

33

The EC then sought to determine if Microsoft enjoyed a dominant position in the market

that prevented competition from emerging.34 They found that since 2000 Microsoft had a 90%

share of the market, allowing only fringe competition, and that significant barriers to entry

existed.35

These barriers included extremely expensive research and development and the fact

that most computer programmers write their programs to function on the Windows platform.36

This being determined, the EC considered whether Microsofts actions constituted an

abuse of their position, abuse defined as conduct aimed at influencing the market so as to weaken

competition and hinder growth.37 The commission focused on several factors in order to reach

30Id. at 8831 Atilano Jorge Padilla, The Role of Supply-Side Substitution in the Definition of the RelevantMarket in Merger Control, June 2001, http://ec.europa.eu/enterprise/library/lib-competition/doc/supply-side_substitution.pdf32 2004 E.C.R. Case COMP/C-3/37.792 Microsoft, 9133

Id. at 11234Id. at 11935Id. at 12136Id. at13037Id. at 147


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a conclusion, including licensing history,38 the importance of interoperability,39 market data,40

industry practices,41 consumer responses,42 programmer and developer surveys,43 the impact on

technological development and consumer welfare,44 and the impact on innovation.45 Upon these

bases, the EC determined that Microsoft had in fact abused its dominant market position in

violation of Article 82 and assessed a fine based on the gravity and nature of the infraction and

the impact on member states and citizens.46

IV. Implications for Harmonization

The ultimate outcome in the two cases is clearly different. The EC assessed $1.3 billion

in fines against the corporation, whereas the US reached a settlement deal, agreeing to end

litigation in exchange for Microsofts agreement to provide competitors with more information

regarding their operating system protocols.47 The disparity, however, is primarily attributable to

the differences in the processes used by the two court systems, not differences in their methods

of analysis.

The EC applied civil law procedure and considered the charges made against Microsoft

in an inquisitorial process, employing a scientific approach to reach a determination. The court

conducted its own investigation whereby it gathered information about the relevant industries,

38Id. at 15839Id. at15940Id. at 16041 EC Case, 19542Id. at 17443Id. at 23644

Id. at 18745Id. at 20846Id. at 29647Microsoft and US refine settlement, BBC, Feb. 28, 2002, http://news.bbc.co.uk/1/hi/ business/1847348.stm


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consulted with industry experts, and used its findings to come to the conclusion that Microsoft

had in fact violated the law. Microsoft had the opportunity to challenge these findings and

provide justifications for its behavior, which the court then weighed against the impact that the

behavior had on member states and citizens.48

The US, on the other hand, applied its common law adversarial process. Each side

presented evidence to support its point of view and was required to rebut the opposing

arguments. When one of the parties failed to meet their burden of proof, they lost, regardless of

how apparent it seemed the outcome should be. In addition, case law played an extremely

important role in shaping how the Court considered the claims. Each issue was decided based on

a set of rules that had been established as standards in earlier cases. The Court of Appeals finally

remanded the case based on US procedure, which mandates that only trial courts should be

finders of fact. Where there was insufficient evidence in the record, the Court of Appeals had

their hands tied. This is why Microsoft was finally able to settle the case.

Despite these differences, the courts actually employed very similar processes in order to

reach a conclusion. The steps they went through are strikingly similar: first, they considered the

relevant market; then, they determined if Microsoft was dominant within that market by

examining factors such as market share and barriers to entry; then, they determined if Microsoft

abused its dominant position in order to prevent competition to the detriment of the free market;

and finally, they considered the impact of this behavior and determined what the appropriate

remedies should be (if this stage was reached).

That the disparate decisions have such a similar foundation, is a good indication that the

two legal systems are really more alike than they are different, and that there is a strong

48 2004 E.C.R. Case COMP/C-3/37.792 Microsoft, 274


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foundation for developing a set of global guidelines (international laws?) to govern cases where

the effects of the outcome may be felt globally and the consequences of divergent decisions may

be great. The greatest area of contention in developing such guidelines will likely be over the

procedure of deciding cases, not the fundamentals of analysis, and these differences may be

easier to resolve. Those attempting harmonization will need to consider issues such as the value

of precedent and the more predictable outcomes the common law system provides versus the

benefits of the straightforward, efficient, reason-based approach employed by the civil system.

While neither side is likely to abandon their methods wholesale in favor of the others, it seems

that there is enough room to maintain traditions while still adopting new methods.

That the areas of technology and global business are modern developments may be of

additional benefit. The laws regarding these issues are not well established in either system. In

the US, many of the cases that arise are cases of first impression or cases with limited precedent.

The rules that are applied are gleaned from older cases that bare some similarities to the ones

before the court, but there is not yet well developed case law in these areas. This may be of

significant benefit to the process of developing new guidelines, as neither party will be required

to make great sacrifices of traditions.

V. Conclusion

The development of a common set of guidelines is a daunting task, to say the least. But, it

seems necessary in order to help ensure the sound functioning of a global economy. Companies

that function across many nations need clear standards that they can count on being held to.

Questions about liability and the uncertainties presented by varying decisions in different court

systems create significant negative externalities that ultimately create barriers to innovation and


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economic development. If a clear set of rules can be established that carefully balances and

harmonizes the differences between the systems but is based on their many commonalities, the

end product will be a system that promotes international business and is ultimately beneficial not

just for businesses, but for consumers around the world. The similarities exist. They just need to

be further developed.

Works Cited

15 USC 2

Treaty establishing the European Community Article 81

Treaty establishing the European Community Article 82

2004 E.C.R. Case COMP/C-3/37.792 Microsoft

Standard Oil Company of New Jersey et. al. v. The United States, 221 U.S. 1, 55 (1911)

U.S. v. Microsoft, 253 F.3d 34, 45 (2001)

Atilano Jorge Padilla, The Role of Supply-Side Substitution in the Definition of the RelevantMarket in Merger Control, June 2001, http://ec.europa.eu/enterprise/library/lib-competition/doc/supply-side_substitution.pdf

Cnet.com, Want Media Player 8? Buy Windows XP, www.news.cnet.com/2100-1040-256387.html (last accessed Nov. 15, 2008)

Microsoft.com,Fast Facts About Microsoftt, www.microsoft.com/presspass/ inside_ ms.mspx/#EDB (last visited Nov. 15, 2008)

Microsoft.com, Windows History: Internet Explorer History, www.microsoft.com/windows/WinHistoryIE.mspx (last accessed Nov. 15, 2008)

Microsoft.com, Windows History: Windows Desktop Products History, www.microsoft.com/windows/WinHistory/Desktop.mspx (last accessed Nov. 15, 2008)

Microsoft and US refine settlement, BBC, Feb. 28, 2002, http://news.bbc.co.uk/1/hi/ business/1847348.stm

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