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For the sake of global consistency in antitrust regulation, Europe should handle Microsoft’s pending appeal as the United States did: by focusing on the lack of harm to consumers. The stakes are high. Four months ago, the European Commission issued a landmark order compelling Microsoft to strip the Windows Media Player out of its Windows operating system, turn over a wide swath of its confidential technical information to other companies in the computer server market, and pay a record $614 million fine. Microsoft had not been hit so hard since U.S. District Judge Thomas Penfield Jackson issued his order to break up the company in June 2000. Now Microsoft is appealing the European decision, which is essentially the work of Mario Monti, Europe’s top competition official. On Sept. 30, the European Court of First Instance will hold a hearing to decide whether to stay enforcement of the European Commission’s remedial order pending final decision, which may take a year or more. Microsoft � indeed, all companies that compete globally � can only hope that the court does not uphold Monti’s ruling. Judge Jackson’s 2000 breakup order was, fortunately, reversed a year after it was issued. In doing so, the U.S. Court of Appeals for the D.C. Circuit refocused the U.S. antitrust inquiry on the fundamental question of whether Microsoft’s conduct caused any consumer harm. The same question arises across the Atlantic: Have European consumers, who buy millions of copies of Microsoft’s software each year, been harmed by Microsoft’s conduct? A widely held axiom states that U.S. law protects consumers while European Union law protects companies from the practices of dominant competitors in their market. Indeed, the European Commission used this claim that different rules apply in Europe to justify its decision to ignore the fact that many issues in the Microsoft case had already been extensively litigated in the United States and resolved in Microsoft’s favor. The commission’s order of 300-plus pages makes reference to “consumer welfare” in only two of the 1,078 paragraphs. The commission’s April 21 order thus glosses over what should be the fundamental issue in any antitrust case � an economic analysis of the consumer welfare effects of the challenged conduct. As for the Court of First Instance, it should not ignore the issue of harm to consumers � or rather, the actual lack of harm to consumers � when it considers the Microsoft case. AMERICAN EXAMPLE The effects of focusing on consumer welfare were evident in the D.C. Circuit’s 2001 decision addressing the tying claim � that Microsoft “tied” a new application to its dominant Windows operating system � brought first by the U.S. Justice Department and then, in substantially the same form, by the European Commission. In the U.S. case, the Justice Department argued that Microsoft’s inclusion of its Internet Explorer Web browser in the Windows system was per se unlawful. The District Court agreed. The D.C. Circuit, however, rejected this per se treatment, finding that software integration is likely to create efficiencies and therefore such integration must be analyzed under a “rule of reason” that requires a measured weighing of anti-competitive and pro-competitive effects. The D.C. Circuit observed that bundling saves distribution and consumer transaction costs. Bundling also may capitalize on “certain economies of scope.” Even more important, the court found that even companies without market power bundled a browser with their operating systems and that such evidence “implied strong net efficiencies.” In the end, the Justice Department dropped the tying claim, and Microsoft agreed in settlement to allow end users and computer manufacturers either to hide access to or to disable Microsoft “middleware,” such as Internet Explorer and Windows Media Player. Microsoft’s concession blunted arguments that the bundling had any exclusionary effect on other companies’ competing middleware. TYING UP MICROSOFT Given the extensive treatment of the tying claim by the D.C. Circuit and the settlement agreement’s provisions on this issue, one would think that the European Commission would forgo a tying claim against Microsoft. In 1991, the European Commission and the Justice Department entered into an agreement to make good-faith attempts to avoid conflicts in antitrust enforcement and to harmonize their enforcement efforts. Nevertheless, the commission made its tying claim by arguing that the inclusion of Windows Media Player in the operating system was likely to “tip” the market for media players in Microsoft’s favor. The commission theorized that consumers were less likely to seek out other media players if Windows Media Player was already installed on their computers. And content providers would write more content for Windows Media Player knowing it was on every desktop system. This “tipping” would suppress innovation by reducing the incentives for other media-player makers to continue to compete or even to enter the market. Similar arguments about Internet Explorer did not persuade the D.C. Circuit, and they should not persuade the Court of First Instance. On balance, the inclusion of a previously independently sold product with another one helps consumers. Integrating specialized software into operating systems increases the efficiency of the system. And those consumers who prefer to use the bundled software have been saved an additional transaction. The only true threat to competition arises where consumers who prefer another type of software are foreclosed from their choice. In the case of the media player, choice is not limited because consumers and computer makers are free to obtain a competing product from another source. In most cases, this competing product is free (i.e., Real Player or Netscape Navigator) and easily obtained in Europe or the United States. Also, thanks to the U.S. settlement, consumers may disable or hide the Microsoft product they don’t prefer. CONFIDENTIAL DATA In addition to the media-player order, the European Commission required Microsoft to make available certain proprietary information regarding the features in its server software and their interaction with the desktop operating system. This second issue arose out of complaints by Sun Microsystems that Sun needed the confidential information to achieve full “interoperability” between its server software and Microsoft’s Windows. While this issue was not directly before the D.C. Circuit, it was addressed in the Justice Department’s settlement. Microsoft agreed to license its server communications protocols to competitors so that they could achieve better interoperability with Windows. Moreover, Sun Microsystems entered into a cross-licensing agreement with Microsoft earlier this year to share some aspects of their technology. This agreement has rendered moot any complaints that Sun itself had about interoperability with Microsoft products. Yet the European Commission’s order to Microsoft to reveal its intellectual property to anyone involved in the server market stands. How should this issue be analyzed in light of consumer welfare? Consumers have an interest in the protection of intellectual property. Regulatory orders that require its compulsory licensing tend to undermine the incentive system that fuels innovation and growth, especially in the technology industry. Consumers benefit from strong intellectual property protections by receiving better products. And the constant battle to advance technology, fueled by strong legal protection for inventions, results in fierce competition between companies, which drives down prices. The European Commission’s order would establish a broad precedent that technology companies holding dominant positions could be forced to reveal their intellectual property. The good news is the Court of First Instance two years ago reversed the commission in another case where compulsory licensing was ordered. In the case of IMS Health, the Court of First Instance found that reducing intellectual property protections to a simple right to receive a royalty from compulsory licensing was antithetical to the fundamental nature of intellectual property. GOING ITS OWN WAY The European Commission’s decision to continue to pursue Microsoft is puzzling. The issues scrutinized by the commission were extensively litigated or specifically addressed in the final settlement in the U.S. case. And there is no identifiably distinct European interest, involving consumers or competitors, to compel the commission to intervene in the case. But the European Commission’s decision to put its own, and very different, mark on this case does introduce great confusion into the technology industry. When the two largest markets in the world have different and conflicting antitrust enforcement regimes, the costs imposed on companies to conform their actions to differing standards in different jurisdictions are immense. The differing rules also will encourage strategic forum shopping and constant litigation and relitigation of the same issues. This phenomenon is harmful to business, particularly the fast-moving technology industry, because investment decisions are better made when legal rules and results are stable and predictable. No company wants to invest millions of dollars to create the next great invention when there is a possibility that, down the road, regulators will force the inventor to disgorge profits and share its innovations with competitors. The full appeal before the Court of First Instance is expected to take well over a year. The outcome is not at all clear. Perhaps Robert Bork, who, ironically, has represented organizations opposed to the U.S. Microsoft settlement, said it best: “To abandon economic theory is to abandon the possibility of a rational antitrust law.” Whether the Court of First Instance applies economic theory with particular attention to the consumer welfare aspects of Microsoft’s conduct remains to be seen. But to advance a more rational, consistent, and predictable global jurisprudence, it should. To do otherwise would be to place the European Commission alone in the seat of market arbiter and product designer. The commission’s action, if not overturned by the Court of First Instance, would foist upon the technology industry a restrictive regulatory regime that would undermine the free flow of competition and, ultimately, harm consumers around the world. Lars H. Liebeler, a partner in D.C.’s Thaler Liebeler, is antitrust counsel for the Computing Technology Industry Association. CompTIA has more than 16,000 member companies in 89 countries and is participating as an intervenor in the appeal before the Court of First Instance.

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