European Commission, Microsoft Settle Dispute over Browser Tying

This posting was written by Darius Sturmer, Editor of CCH Trade Regulation Reporter.

The European Commission (EC) adopted a decision on December 16 that renders legally binding a set of commitments that were offered by Microsoft to boost competition on the web browser market.

The commitments address EC concerns that Microsoft may have tied its web browser Internet Explorer to the Windows PC operating system in breach of European Union rules on abuse of a dominant market position.

Under the commitments approved by the Commission, Microsoft will make available for five years in the European Economic Area (through the Windows Update mechanism) a “Choice Screen” enabling users of Windows XP, Windows Vista and Windows 7 to choose which web browser(s) they want to install in addition to, or instead of, Microsoft’s browser Internet Explorer. The commitments also provide that computer manufacturers will be able to install competing web browsers, set those as default and turn Internet Explorer off.

“Millions of European consumers will benefit from this decision by having a free choice about which web browser they use,” stated EC Competition Commissioner Neelie Kroes. “Such choice will not only serve to improve people’s experience of the Internet now but also act as an incentive for web browser companies to innovate and offer people better browsers in the future.”

Microsoft Senior Vice President and General Counsel Brade Smith declared the EC’s decision “a major step forward.”Smith added that the company “look[s] forward to building on the dialogue and trust that has been established between Microsoft and the Commission and to extending our industry leadership on interoperability.”

The decision follows a Statement of Objections sent to Microsoft in January 2009, outlining the EC’s preliminary view that Microsoft may have infringed Article 82 of the EC Treaty by abusing its dominant position in the market for client PC operating systems and distorted competition through the tying of Internet Explorer to Windows.

According to the EC, the tie distorted competition by giving Microsoft an artificial distribution advantage not related to the merits of its product on more than 90 percent of personal computers.

The Commission’s preliminary view was that this tying hindered innovation in the market and created artificial incentives for software developers and content providers to design their products or web sites primarily for Internet Explorer. The approved commitments address these concerns, the EC said.

This decision, which does not conclude whether there is an infringement, legally binds Microsoft to the commitments it has offered and ends the EC’s investigation. If Microsoft were to break its commitments, the EC could impose a fine of up to 10 percent of Microsoft’s total annual turnover without having to prove any violation of EU antitrust rules.

A clause in the settlement allows the EC to review the commitments in two years. Microsoft will report regularly to the EC, starting in six months’ time, on the implementation of the commitments and under certain conditions make adjustments to the Choice Screen upon EC request.

Justice Department Statement

In response to the announcement, Assistant Attorney General Christine Varney of the Department of Justice Antitrust Division issued a statement in which she commended the EC and Microsoft for resolving their disputes and lauded the settlement. “A settlement that helps to clarify obligations under European law allows the industry to move forward,” Varney remarked.

Interoperability

While the settlement ends litigation over Microsoft’s alleged tying, the EC’s investigation regarding interoperability continues. Kroes hailed Microsoft’s contemporaneous publication of an improved version of its July 2009 commitments to allow interoperability between third party products and several Microsoft products—including Windows, Windows Server, Office, Exchange, and SharePoint.

Under these commitments, Microsoft pledged to publish the technical specifications of the programs so that interoperability could be achieved by any interested party. Although this initiative was described as “very welcome” by Kroes, she noted that its “arrangements remain informal vis-a-vis the Commission.”

Therefore, Kroes cautioned, “[T]he Commission will carefully monitor the impact of Microsoft’s proposals on the market and take its findings into account in its assessment of the pending antitrust investigation.”

Trade Regulation Tidbits

This posting was written by Jeffrey May and John W. Arden.

News, updates, and observations:

 On November 27, the European Commission (EC) announced the appointment of Joaquin Alumnia as the new Commissioner-designate for Competition, for a term running through October 31, 2014. Almunia, 61, previously served as the EC Commissioner for Economic and Monetary Affairs. A career politician, he was the Socialist Party candidate for prime minister of Spain in 2000. He would replace Neelie Kroes, who served as Commissioner for Competition since November 2004 and has been appointed as Commissioner-designate of the EC Digital Agenda. The appointments must be approved by the European Parliament, which is expected to hold individual hearings on the Commissioners-designate January 11-19 and to vote on the new Commission as a whole on January 26, 2010. Further details appear here on the European Union's Europa website.

 A group of 59 senators from both sides of the aisle have sent a letter to the Acting Head of the Delegation of the European Commission (EC) to the United States, requesting that the EC complete expeditiously its investigation of Oracle Corporation's proposed acquisition of Sun Microsystems Inc. Oracle announced on November 9 that the EC had issued a statement of objections (SO) concerning the proposed merger, despite U.S. approval of the transaction. The U.S. Department of Justice approved the plan in August, concluding the merger would not be anticompetitive. In a November 24 statement, Senator John Kerry (D, Massachusetts), who signed the letter, said: “The EC is within its sovereign rights to set the rules for operation in its market, but with our Department of Justice having made a compelling case that the merger does not pose a threat to competition, it is fair to ask the EC for the basis on which a delay on decision making is warranted and to make a decision one way or the other.” Orrin Hatch (R, Utah), another signatory, said “I have become increasingly concerned about the growing body of evidence that foreign regulatory agencies are unfairly using their review processes to impede the business of American corporations,” said Senator Orrin Hatch (Utah), another signatory.

 An increase in false advertising litigation and other dispute resolution might be the product of the “dismal economy,” according to a November 22 New York Times article. The number of complaints filed with the National Advertising Division of the Council of Better Business Bureaus is on track to set a record this year. The 82 formal complaints so far in 2009 follows 84 challenges in 2008, 62 challenges in 2007, and 52 challenges in 2006. Although there are no numbers available regarding the Lanham Act false advertising lawsuits filed this year, lawyers are reporting a corresponding increase. “In this economy, where margins are a bit tighter, a lot of marketing departments have decided to become more aggressive in going after their competitors in hopes that they can either protect their market position or capture an additional market share,” said John E. Villafranco, partner at Kelley, Drye & Warren and contributor to CCH Advertising Law Guide. (“Best Soup Ever? Suits Over Ads Demand Proof.)”

 A number of appointments of FTC senior staff were announced by the agency on November 30. Among them, Cecelia Prewett was named as Director of the Office of Public Affairs; Jessica Rich and Charles Harwood were named as Deputy Directors in the Bureau of Consumer Protection; and Norm Armstrong, Jr. was named Deputy Director in the Bureau of Competition. FTC Chairman Jon Leibowitz also announced a number of personnel changes within the Bureau of Consumer Protection. Joel Winston was named Associate Director of the Division of Financial Practices; Maneesha Mithal was named Associate Director of the Division of Privacy and Identity Protection; and Mark Eichorn was named Assistant Director of the Division of Privacy and Identity Protection. An announcement appears here on the FTC website. A list of senior FTC enforcement personnel appears at CCH Trade Regulation Reporter ¶9557.

After U.S. Clearance, EC Questions Oracle’s Acquisition of Sun

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Oracle Corporation announced on November 9 that the European Commission (EC) has issued a statement of objections (SO) concerning the company’s proposed acquisition of Sun Microsystems Inc.

The SO follows a decision by the U.S. Department of Justice not to challenge the transaction. The Justice Department terminated the waiting period under the Hart-Scott-Rodino Act in August.

“Oracle plans to vigorously oppose the [European] Commission’s Statement of Objections as the evidence against the Commission’s position is overwhelming,” according to a company statement. “Given the lack of any credible theory or evidence of competitive harm, we are confident we will ultimately obtain unconditional clearance of the transaction.”

At the time of Oracle’s disclosure, the EC had not made the SO public. However, the EC announced in September that it had opened an in-depth investigation into Oracle’s acquisition of Sun.

Competition Concerns in Databases Market

According to the EC, its initial market investigation indicated that the combination of the U.S. technology companies would raise serious competition concerns in the market for databases—a key element of company IT systems.

EC Competition Commissioner Neelie Kroes said the transaction would combine “the world’s leading proprietary database company” and “the world’s leading open source database company.”

In its November 9 statement, Oracle said that “the database market is intensely competitive with at least eight strong players, including IBM, Microsoft, Sybase and three distinct open source vendors.”

According to Oracle, “there is no basis in European law for objecting to a merger of two among eight firms selling differentiated products. Mergers like this occur regularly and have not been prohibited by United States or European regulators in decades.”

Justice Department Reaction

In response to the EC’s action, Deputy Assistant Attorney General Molly Boast of the Department of Justice Antitrust Division issued a statement on November 9, reiterating the Antitrust Division’s earlier determination that “the merger is unlikely to be anticompetitive.”

Boast pointed to the number of open-source and proprietary database competitors to justify the U.S. position. “We remain hopeful that the parties and the EC will reach a speedy resolution that benefits consumers in the Commission’s jurisdiction,” Boast said.

The Department of Justice statement appears here on the DOJ website.

Agency Heads Discuss Antitrust Convergence, Recent Developments

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Speaking on the topic of international convergence at Fordham University’s 36th Annual Conference on International Antitrust Law and Policy, the heads of the two federal antitrust agencies commented on increased convergence between their respective agencies.

Agencies “In Sync”

In his September 24 remarks, FTC Chairman Jon Leibowitz noted that the FTC and Department of Justice Antitrust Division were much more in sync in recent months, pointing to the recently announced decision for a joint review of the horizontal merger guidelines as an example.

Another indication of growing consensus between the agencies includes Assistant Attorney General Christine Varney’s decision to withdraw the Antitrust Division’s September 2008 report, entitled “Competition and Monopoly: Single-Firm Conduct Under Section 2 of the Sherman Act.”

When the Justice Department’s report was released last September, three of the four FTC members objected to it. According to Leibowitz, consistency at home will help efforts to promote international antitrust convergence.

Merger Review

Antitrust Division chief Varney noted that there has been a trend toward convergence in the area of merger review. Varney expressed her belief that “openness to others’ ideas and new approaches is critical to our efforts towards greater convergence.” This openness is reflected in the decision to hold joint Department of Justice/FTC workshops to review the horizontal merger guidelines, as well as the European Commission’s review of its merger review practices and remedies and subsequent 2004 issuance of guidelines regarding horizontal mergers and a 2005 Merger Remedies Study.

Varney also noted that, while there have been “strides towards convergence regarding the standards for single-firm conduct,” there was “a need to continue making progress on that front.” Varney pledged to work toward convergence, noting that a lack of unity regarding single-firm conduct standards presented significant issues for international businesses.

Varney’s September 24 speech is available here on the Department of Justice website.

Fines Imposed by the European Competition Commission

At a later session of the Fordham program, European Commission (EC) Competition Commissioner Neelie Kroes told attendees that fines are starting to deter cartel behavior. “Never, ever under-estimate the effect [of] large fines,” Kroes said. Despite the absence of the threat of jail terms for antitrust violations, “senior management across all sectors . . . are now starting to understand that we mean business.”

Kroes explained that fines were not deterrent in previous decades. “Now, taking better account of the economic impacts of abuses and cartels, we fine in order to deter, linking the fine to the relevant sales of the infringing company,” the official said. “If we catch recidivists—the French glass company Saint-Gobain is a good example—the fine increases are severe.”

Last November, Saint-Gobain was fined 896 million Euros for its role in an illegal market sharing agreement.

The fines are imposed without regard to the nationality of the company, according to Kroes. “I would like to point out that only 13 of the 180 companies fined by the European Commission in my term are based in the U.S.,” she added.

The Commissioner’s remarks appear here on the European Union’s “Europa” website.

EC Proposes Amendments to Block Exemption for Supply, Distribution Agreements

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

The European Commission (EC) proposed a revised Block Exemption Regulation and Guidelines on supply and distribution agreements, including franchise and other types of vertical agreements, on July 28. The proposed amendments would address recent market developments, including the increased buying power of large retailers and Internet sales.

Block exemptions create safe harbors from EC competition law for categories of agreements, relieving the contracting parties from the need to individually analyze the legality of those agreements under the general EC rules regarding vertical agreements. The current block exemption for those types of agreements (Commission Block Exemption Regulation N° 2790/1999) is due to expire in May 2010.

Proposed Amendments

Based on its analysis of the existing supply and distribution agreement block exemption, which has been in effect since 1999, and on stakeholders' comments, the EC found that the existing rules are working well overall and should not be fundamentally modified.

However, in light of recent market developments, the EC suggested amending the existing regulation and guidelines to take into account the increased buying power of big retailers and the evolution of Internet sales.

To address those developments, the EC proposed that the block exemption be available only to vertical agreements in which the supplier's market share does not exceed 30 percent.

The EC's proposal also refined, in the context of Internet sales, the distinction between sales made as a result of active marketing and “passive sales” made as a result of the consumer taking the initiative.

In addition, the proposed amendments address certain conditions imposed in relation to Internet sales, such as a requirement imposed by a supplier that the distributor should have a "brick and mortar" shop before engaging in Internet sales.

Commission Statement

Of the proposed revision, EC Competition Commissioner Neelie Kroes stated:

"Competitive and efficient distribution are essential for consumer welfare and for our economy. The review launched today aims to ensure that the assessment of supply and distribution agreements under the competition rules takes account of recent market developments, namely further increased market power at the level of buyers and new forms of distribution including the opportunities brought by the Internet."

The Commission invited interested parties to submit comments about the proposed revisions by September 28, 2009.

A press release on the proposal appears here on the European Union’s Europa web site. Further information on the proposal—and instructions on how to submit written comments—appear here.

European Commission Fines Intel for Abuse of Dominant Position

This posting was written by John W. Arden.

Computer chip giant Intel was fined €1.06 billion ($1.45 billion) on May 13 for violating European Commission Treaty antitrust rules on the abuse of a dominant position (Article 82) by engaging in illegal anticompetitive practices to exclude competitors from the market of computer chips called x86 central processing units (CPUs).
In addition to imposing the fine, the European Commission ordered Intel to cease the illegal practices that were still ongoing.

“Intel has harmed millions of European consumers by deliberately acting to keep competitors out of the market for computer chips for many years,” said Competition Commissioner Neelie Kroes. “Such serious and sustained violation of the EU’s antitrust rules cannot be tolerated.”

The Commission found that Intel—while maintaining a dominant position in the x86 CPU market—engaged in two forms of illegal practices.

Exclusionary Rebates, Payments

First, Intel gave wholly or partially hidden rebates to computer manufacturers on the condition that they bought all, or nearly all, of their x86 CPUs from Intel. The chip manufacturer also made direct payments to major retailer Media Saturn Holding on the condition that it stock only computers with Intel x86 CPUs.

“Such rebates and payments effectively prevented customers—and ultimately consumers—from choosing alternative products,” the Commission stated.

Halt or Delay Products with Other Chips

Second, Intel made direct payments to computer manufacturers to halt or delay the launch of products containing competitors’ x86 CPUs and to limit the sales channels for these products, according to the Commission.

“By undermining its competitors’ ability to compete on the merits of its products, Intel’s actions undermined competition and innovation,” the Commission said.

“Abusive” Rebates

While some rebates can lead to lower prices for consumers, those offered by a company in a dominant position that are conditioned on a manufacturer buying less of a rival’s products or none at all are abusive according to settled case law of European Community courts, unless they are justified by some specific reasons.

In this case, the Commission did not object to rebates, but to the conditions Intel attached to the rebates, it was explained.

Promotion of Innovation

In a question and answer document released on Wednesday, the Commission said that this decision will promote innovation in the market because Intel’s practices stifled innovative products from reaching customers.

“Such practices deter innovative companies which might otherwise wish to enter and compete in the market. By ordering Intel to end its abusive practices, competition on the x86 CPU market will play out on the merits with the effect that innovation to the benefit of the consumer can flourish.”

The document refers to the “legal underpinning” of the Commission’s case, based on a consistent pattern of jurisprudence, including Case 85/87 Hoffmann-La Roche v. Commission; Case T-203/01 Michelin v. Commission; Case C-95/04 British Airways v. Commission; Joined Cases T-24/93 and others, Compagnie Maritime Belge v. Commission; and Case T-228/7 Irish Sugar.

The European Commission and the Federal Trade Commission kept each other regularly informed on their respective investigation of Intel.

Text of the press release and the questions and answers appear on the European Union website.

Intel’s Reaction

In a May 13 statement, Intel President and CEO Paul Otellini took “strong exception” to the Commission decision.

“We believe the decision is wrong and ignores the reality of a highly competitive microprocessor marketplace—characterized by constant innovation, improved product performance and lower prices,” Otellini said. “There has been absolutely zero harm to consumers. Intel will appeal.”