Europe's Microsoft Case Goes Too Far

In a spat over royalties, the European Commission has declared war on accepted global conventions regarding intellectual property rights

With the collapse of the former Soviet Union, I thought the days of property expropriation in Europe were over. Now I wonder, following the European Commission's latest policy twist in its interminable case against Microsoft.

The question hinges on what royalties Microsoft (MSFT) may charge competitors for licensed access to its server protocols. Effectively, the European Commission has declared war on accepted international and European conventions regarding intellectual property rights, applying instead its own test (determined by the Directorate General for Competition) of what constitutes innovation and novelty as a measure of both value and worth.

At a stroke the commission has transformed into a self-appointed arbiter, a global primus inter pares on the valuation of intellectual property rights. Any company relying on such rights in its licensing arrangements should sit up and take notice. This may not be your problem today, but it could be some day.

A Very Public Rocket

In March, 2004, the commission handed down a 300-page "decision" with only a single sentence on the royalties Microsoft can charge for its interoperability protocols. These, it says, should be "reasonable and nondiscriminatory" and should not reflect the strategic value of Microsoft's market power. For well over two years, Microsoft has been working hard to reach agreement with Brussels on exactly what this means, submitting a detailed pricing proposal last August.

The first response of any kind was the recent very public rocket accompanied by a spokesman's comment: "This is a company which apparently does not like to have to conform with antitrust decisions." The record suggests otherwise as regards Windows Media Player, not to mention Microsoft's compliance with U.S. and Korean antitrust decisions.

The heart of the commission's theory, to quote its press release, is that "there is no significant innovation in the interoperability information" supplied by Microsoft and "hence the prices proposed by Microsoft are unreasonable." On this basis, the assertion is that Microsoft may charge only a nominal fee for the 10,000 pages of technical documentation it has provided and may face fines of up to 2 million to 3 million euros a day if the company does not yield.

Patent Truths

The commission is silent on some inconvenient truths. European and U.S. patent offices have awarded Microsoft 36 patents for the technology in these interoperability protocols, and the company has an additional 37 pending applications being reviewed by patent offices around the world.

In order for technology to be patentable, it must be novel, "non-obvious," and make a technical contribution—in short, it must be innovative. What's more, trade secrets and knowhow also are valuable intellectual property, valued independently of their patentable character and protected by law and precedent internationally and in the EU. Indeed, the World Trade Organization's TRIPS agreement, to which all EU 27 member states are bound, expressly protects undisclosed information as a form of intellectual property, different from but co-equal with patents.

Paradoxically, under the same TRIPS agreement the European Commission has just launched an investigation into a claim by Philips (PHG) that a compulsory license on recordable compact discs imposed by Taiwan fails to respect Philips' core technology and patents. "The proper enforcement of intellectual property rights is one of the central planks of the EU's Global Europe Strategy," asserts Trade Commissioner Peter Mandelson in support of this investigation.

Close to Confiscation

As with Philips in Taiwan, the devil for Microsoft is in the details. To what extent is the commission issuing a compulsory license order—and what royalties should be associated with it?

This is not a dispute about the goal of interoperability, as such. At the limit, Microsoft's detractors and many of its competitors would only be satisfied with disclosures that allowed them to clone its software outright, free of charge. Formally, of course, this is not on the table. But the unilateral voiding of standard intellectual property rights, coupled with nominal royalties for a company's innovation and knowhow, are a close approximation.

For the commission to threaten the value and fate of assets—located anywhere in the world, not just inside the EU—by a definition exclusively of its own devising is an unprecedented departure from longstanding practice regarding nondiscriminatory licensing on reasonable terms. It is also a unilateral application of administrative law unaccountable to and unapproved by the European Parliament and European Council. In my opinion, it comes perilously close to the expropriation and confiscation of assets.

Time to Wake Up

Many people may feel little sympathy for Microsoft, given its size and ubiquity, but once this kind of rot sets in, what are its limits, and who decides? This is a big question involving important principles and precedents larger than this particular case.

What does it mean for the European Patent Office? How would it affect commission efforts at patent reform? What would it say to Taiwan and others in the Philips and similar cases? Does the EU really want to go there?

European policymakers should wake up and remind their DG-Competition colleagues that junking conventional wisdom and standard practice on intellectual property is not the right way to build a dynamic and innovative European economy.

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