IMS and Microsoft Judged in the Cold Light of IMS
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This article appeared in slightly different form in The Competition Law Review dated December 2004.
IMS and Microsoft Judged
in the Cold Light of IMS
By James Killick, White & Case LLP
This article analyses the three major recent A. Introduction
cases dealing with the boundary between EC com- In July 2001, the Commission adopted an interim
petition law and intellectual property rights: the measures decision ordering IMS to grant a compul-
Commission’s interim measures decision in the sory licence of its intellectual property (the “IMS
IMS case, the European Court of Justice’s later Decision”). It is easy to forget three years later how
judgment in IMS and, finally, the Commission’s controversial that decision was at that time. Indeed,
decision in the Microsoft case. The article starts by given the inevitable focus on the European Court of
analysing the key legal and factual elements in Justice’s recent decision in IMS on a preliminary ref-
each of these three precedents. It then examines erence (the “IMS Judgment”) it would be all too
whether the Commission’s approach in its IMS and easy to forget the IMS Decision altogether.
Microsoft decisions is consistent with that of the
European Court of Justice in its IMS judgment. The This article will examine the Commission’s approach
analysis shows that the Commission’s approach in in its IMS Decision in the light of the ECJ’s IMS
both Decisions differs from that laid down by the Judgment. It will explore the relevance of standard-
Court. In particular, the Commission has adopted a isation in both IMS cases. It will then turn to
less demanding standard as regards the conditions Microsoft and examine this Decision in the light of
under which compulsory licensing of intellectual the IMS Judgment, and conclude with some obser-
property may be ordered. The article explores a vations on parallels and differences between the
number of other topics in passing, such as the role Commission’s approaches in its IMS Decision and its
of the trustee in giving effect to the compulsory Microsoft decision.
licensing ordered by the Commission in the IMS
and Microsoft decisions and the relevance of stan- The analysis will show that the Commission’s
dardisation in both cases. The article also examines approach in both Decisions differs from that laid
the approach taken in relation to objective justifica- down by the Court in its IMS Judgment. In particu-
tion in the Microsoft Decision and concludes that it lar, the Commission has adopted a less demanding
raises serious questions as regards predictability standard when it comes to the conditions under
and legal certainty. which compulsory licensing of intellectual property
may be ordered.
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IMS and Microsoft Judged in the Cold Light of IMS
B. The Facts of IMS barred from developing a rival brick structure
IMS is the world leader in data collection on deliver- based on administrative divisions (postcode
ies by wholesalers of pharmaceuticals and prescrip- boundaries) in Germany even if it might be similar
tion sales. On the German market a geographic to the 1860 brick structure and might be deemed to
format for presenting this data had been jointly be derived from it. NDC was therefore able to mar-
developed by IMS and its customers (the pharma- ket data reported using a brick structure that would
ceutical companies) which had become the de facto meet customers’ needs.3
industry standard. This structure consists in a divi-
C. The IMS Judgment
sion of Germany into 1860 zones (or so-called
‘bricks’) according to postcodes. When competitors The European Court of Justice ruled on the prelimi-
(NDC and, latterly, AyzX) appeared on the German nary reference case on April 29 this year. While the
market, IMS relied on copyright to prevent them judgment clarifies the applicable legal standard for
using the industry standard 1860 brick structure. compulsory licensing, it does leave one key ques-
tion unanswered, which is left to the referring
The starting point for both the IMS Decision and the German court to resolve.
IMS Judgment was an interlocutory order by the
Landgericht in Frankfurt in late 2000 which prohib- After examining the case law (Volvo v. Veng4 and
ited NDC from using the 3000 brick structure that it Magill5) dealing with whether refusal to grant a
was then using or any other brick structure derived licence was an abuse under Article 82, and reiterating
from the 1860 brick structure. This order was granted the way the Court in Bronner6 summarised Magill,
on the basis that the 1860 brick structure was a pro- the Court set out the legal standard as follows:
tected database, which might be protected by copy-
right. This order had the effect of preventing NDC in order for the refusal by an undertaking which
from competing on the German market. owns a copyright to give access to a product or
service indispensable for carrying on a particular
NDC responded in two ways. business to be treated as abusive, it is sufficient
that three cumulative conditions be satisfied,
First, it asked IMS for a licence and when such namely, that that refusal is preventing the emer-
request was refused it made a complaint to the gence of a new product for which there is a
Commission claiming that the refusal to license potential consumers demand, that it is unjusti-
was an abuse of IMS’ dominant position. The fied and such as to exclude any competition on a
Commission conducted an urgent inquiry and on secondary market.7
3rd July 2001 issued an interim measures deci- The Court thereby defines a four-part test for when a
sion ordering IMS to license its brick structure refusal to license is an abuse:
(the ‘IMS Decision’).1
Second, it continued its legal battle with IMS in 1. The product or service protected by copyright
the German courts, where several copyright must be indispensable for carrying on a particu-
infringement proceedings and appeals took lar business.
place. The Frankfurt Landgericht made a refer- 2. The refusal prevents the emergence of a
ence to the ECJ in July 2001, which led to the new product for which there is potential
judgment of 29 April 2004 in Case C-418/01 (the consumer demand.
‘IMS Judgment’).
3. The refusal is not objectively justified.
For completeness, it should be noted that
the Commission withdrew the IMS Decision in 4. The refusal is such as to exclude all competition
August 20032 based on the fact that a German on the secondary market.
appeal court had held that NDC could not be
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IMS and Microsoft Judged in the Cold Light of IMS
The Court then gives further guidance on 3 of the Therefore, the refusal by an undertaking in a
4 criteria. dominant position to allow access to a product
protected by copyright, where that product is
1. Indispensability indispensable for operating on a secondary
market, may be regarded as abusive only
On indispensability, the Court restated its Bronner where the undertaking which requested the
judgment and confirmed that the test is whether licence does not intend to limit itself essen-
there are: tially to duplicating the goods or services
already offered on the secondary market by
products or services which constitute alternative the owner of the copyright, but intends to pro-
solutions, even if they are less advantageous, duce new goods or services not offered by the
and whether there are technical, legal or eco- owner of the right and for which there is a
nomic obstacles capable of making it impossible potential consumer demand.10
or at least unreasonably difficult for any under-
This Court’s approach confirms that this criterion,
taking seeking to operate in the market to create,
previously identified in Magill, but not emphasised
possibly in cooperation with other operators, the
in Bronner11, is an essential element of the test.
alternative products or services.8
The test is not fulfilled if there are “alternative solu- It is also important not to forget that there must be
tions, even if they are less advantageous”. Nor would “unmet consumer demand” for the new product. In
it be fulfilled unless there are obstacles making it Magill it was clear that consumers wanted a com-
“impossible or at least unreasonably difficult” for prehensive weekly TV guide – which was available in
others to create alternatives. The Court also clarifies most other Member States – rather than having to
that when assessing indispensability: buy separate guides from the BBC, ITV and RTE.
it must be established, at the very least, that the The Court did not give any guidance to the national
creation of those products or services is not eco- court on how it should answer the question of
nomically viable for production on a scale com- whether there was a new product in this case as a
parable to that of the undertaking which controls matter of fact. It was probably not in a position to do
the existing product or service.9 so as the parties submitted mutually contradictory
factual assertions to the Court. While both IMS and
2. Preventing the emergence of a new product
NDC provide the same underlying service – pharma-
for which there is potential consumer demand
ceutical sales data – NDC argued that its product
was of a different quality and nature to that offered
On emergence of a new product, the Court is clear
by IMS because inter alia of its advanced features.
that duplication (i.e., offering the same product or
“cloning”) of the rightholder’s product is not
3. Objective Justification
enough to satisfy this criterion. The party requesting
the licence must intend to produce new goods or
The Court does not add anything on objective justi-
services not offered by the owner of the right:
fication, save to say that this is for the national Court
to decide.12
in the balancing of the interest in protection of
copyright and the economic freedom of its
4. Exclusion of all competition on a secondary
owner, against the interest in protection of free
market
competition the latter can prevail only where
refusal to grant a licence prevents the develop-
Finally, as regards the criterion of excluding all
ment of the secondary market to the detriment
competition on a secondary market, the Court limits
of consumers.
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IMS and Microsoft Judged in the Cold Light of IMS
itself to considering whether there need be two Finally, there is a discussion about the policy
separate products being marketed. The Court finds reasons that led the Commission to intervene in the
that it is not necessary that the upstream product is case as well as the relevance of industry standards.
itself being marketed. It was sufficient:
1. The legal analysis in the IMS Decision
that a potential market or even a hypothetical
market can be identified. Such is the case where The Commission’s legal analysis17 is grounded in
the products or services are indispensable in order the language of essential facilities. After citing
to carry on a particular business and whether there Commercial Solvents18, Volvo v. Veng and Magill,
is an actual demand for them on the part of the the Commission then relies on paragraph 131 of
undertakings which seek to carry on the business Ladbroke19 to state that:
for which they are indispensable.13
a refusal to license may constitute an abuse not
The Court holds that it is “determinative” that “two
only when this refusal prevents the introduction
different stages of production may be identified and
of a new product but also when the product or
that they are interconnected, the upstream product is
service in question is essential for the exercise of
indispensable in as much as for supply of the down-
the activity in question.
stream product.”14 The Court also confirms that the
test is whether the refusal to license is “such as to After citing Bronner regarding whether access to a
exclude any competition on a secondary market”.15 product or service is essential, the Commission con-
cludes that the applicable test is whether:
The Court does not actually give any guidance as to
whether there is a secondary market in this case. – the refusal to access the facility is likely to elimi-
This question is left to the national court, which must nate all competition in the relevant market;
consider whether “the 1860 brick structure consti-
– such refusal is not capable of being objectively
tutes, upstream, an indispensable factor in the
justified; and
downstream supply of German regional sales data
for pharmaceutical markets” and the refusal to – the facility itself is indispensable to carrying on
license is capable of excluding all competition.16 business, inasmuch as there is no actual or
potential substitute in existence for that facility.20
The absence of clear guidance from the European
On the facts, the Commission found that there was
Court on the secondary market issue is unfortunate
no real or practical possibility for companies wish-
as the Court was in possession of all the facts neces-
ing to offer pharmaceutical sales data in Germany to
sary to answer the question. Particularly as there is
employ another structure. The Commission there-
a difficult line to be drawn here – if the Court accepts
fore considered that the refusal of access was likely
a hypothetical market for the intellectual property
to eliminate all competition. The structure was indis-
itself, then the criterion of a secondary market would
pensable for the competitors to carry on their busi-
become meaningless, as it would be met in all or
ness, as there were no actual or potential
almost all cases. The secondary market would sim-
substitutes.
ply be the hypothetical one for the licensing of the
intellectual property right that is the subject of the
Much of the Commission’s conclusion on this point
compulsory licence.
was founded on the fact that the German courts were
D. The IMS Decision (at that stage) preventing NDC from using any other
brick structure based on postcodes because such
Jumping back to 2001, we revisit the Commission’s
structures constituted a derivative work. This pre-
interim measures decision. The legal analysis
vented NDC from offering its services to the cus-
applied in that Decision is considered first, followed
tomers in the industry standard format that they both
by a comparison with the ECJ’s IMS Judgment.
desired and required (at least in the immediate term).
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IMS and Microsoft Judged in the Cold Light of IMS
The Commission considered the impact on intellec- downstream supply of pharmaceutical sales data.
tual property rights more generally. It concluded that This is something that will become clear when the
its Decision was compatible with TRIPS as the com- German litigation reaches its conclusion.
pulsory licence was “a special case, which is clearly
defined and narrow in scope”.21 It responded to IMS’ 3. General remarks on the Commission’s
claims that innovation would suffer by noting the approach in the IMS Decision
particular facts of the case:
(a) The case was one that the Commission had to
A dominant company has negotiated over a long take seriously
period with its customer industry, which are now
The facts of the case had many similarities with
dependent on it, so as to produce a structure
Magill. The conduct of IMS, seeking to retain its
which it subsequently claims is its intellectual
absolute monopoly on the provision of the serv-
property, and refuses to license this structure
ices in question, was not particularly attractive
to competitors so that no competing products
from a competition policy perspective. This was a
based on this product can be produced. These
case where the Commission had good grounds to
circumstances, which give rise to an abuse of
consider intervening.
Article 82, are extremely specific.22
The Commission’s interim measures decision The brick structure had largely been created by
required IMS to embark on the process of negotiating IMS’ customers, the pharmaceutical companies,
a fee-generating licence over the copyright on its brick which were heavily involved in drawing up the
structure. If the negotiations failed, an expert was to relevant map.
determine the terms and conditions of the licence.
IMS gave the rights to the 1860 structure away to
other companies with which it was not in compe-
2. The legal analysis of the IMS Decision
tition (as did the broadcasters in Magill).
judged in the light of the IMS Judgment
IMS brought its copyright infringement action to
The legal theories in the IMS Decision are quite dif- block a new entrant to the market, like the broad-
ferent from the legal standard laid down by the ECJ casters in Magill.
on April 29.23 The Commission’s decision omits to
Similarly to the TV listings in Magill, the subject
consider two of the four criteria laid down in the
matter of the right, namely a grouping of German
ECJ’s IMS Judgment, namely;
postcodes, is somewhat “difficult to justify in
terms of rewarding or providing an incentive for
the need for the refusal to prevent the emergence
creative effort” (in the words of Advocate General
of a new product for which there is unmet
Jacobs in Bronner24).
consumer demand; and
Finally, IMS was unpopular with its customers –
the need for the refusal to license to eliminate
the pharmaceutical industry – for its high prices
competition on a secondary market.
and old-fashioned means of delivery for its serv-
However, while the Commission’s Decision may ices. Members of the industry were critical of
not have analysed all the criteria in the applicable IMS’ behaviour in their replies to Commission
legal standard, there may have been evidence to requests for information.
support findings that these criteria would have
Given the number of policy reasons for the
been fulfilled. In particular, given the way in which
Commission to intervene, the further question worth
the IMS judgment interpreted the need for a
considering is whether it approached the case from
secondary market, the brick structure may consti-
the wrong perspective.
tute upstream an indispensable factor in the
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IMS and Microsoft Judged in the Cold Light of IMS
(b) The relevance of industry standards in IMS license this structure to competitors so that no
Did the Commission approach this case from the competing products based on this product can
wrong direction? Rather than looking at the case be produced.25
from the perspective of essential facilities, would it The alternative theory would have been that
not have been better to start the analysis from the the appropriation of open standards constituted
basis that the brick structure was originally an open an exceptional circumstance under Magill.
industry standard and argue that IMS was claiming Unfortunately the Commission never expanded
intellectual property rights over that standard for the on this point and it did not base the compulsory
abusive purpose of excluding competition by pre- licence on this line of reasoning. Standardisation
venting its competitors from using the standard? is only mentioned as an afterthought when the
Commission justifies why the Decision would not
It is submitted the real core of the case was really
have an adverse effect on intellectual property
about IMS’ appropriation of what was until then
protection in general.
thought to be an open standard (agreed between IMS
and the industry and based on postal codes) than
From a policy perspective, there are good reasons
about a refusal to license. The refusal to license only
why Article 82 should have a role to play in standard-
occurred late on in the day as NDC asked for a licence
setting cases, where a company claims copyright
only after it was on the receiving end of IMS’ court
over a structure jointly developed with the client
action. The real problem was IMS’ use of intellectual
industry, which has become the de facto industry
property to prevent NDC making use of the industry
standard and upon which customers depend.
standard brick structure (or any derivative structure)
Obviously, there would have to be circumstances
and thereby preventing NDC from competing.
showing abusive conduct. This could be the case
where the standard was initially open, not protected
The Commission gives a tantalising glimpse of what
by intellectual property rights, but where subse-
the case might have looked like had it approached
quently intellectual property rights were invoked by
the facts from this angle. At paragraph 211 of the
one of the companies that developed the standard in
Decision, where the Commission describes why the
circumstances that were deemed abusive. In such a
compulsory licence would not have a negative effect
case, Article 81 might not be applicable to the initial
on innovation and deter investment in intellectual
discussions, because the standard created is open
property, the Commission outlines an alternative
and available to all. So it is therefore important that
theory of the case:
Article 82 could be applicable if an individual com-
pany seeks to rely on an intellectual property right to
The Commission fully recognises the essential
close the standard and exclude all competitors.
role played by intellectual property rights in
promoting innovation and competition.
This sort of approach can be seen in the
Nevertheless, as IMS admits and as the Court
Commission’s approach to the ETSI Interim IPR
established in the Magill judgment (paragraph
Policy.26 This case concerned ETSI’s rules which
50), read in conjunction with the Ladbroke and
aimed at preventing a particular company from
Bronner cases, Community law can apply to the
hijacking a standard. They provided that ETSI mem-
exercise of that right in ‘exceptional circum-
bers were obliged to inform ETSI in a timely manner
stances’. Such exceptional circumstances exist
of intellectual property rights they become aware of
in this case. A dominant company has negoti-
in a given standard being developed. If the member
ated over a long period with its customer indus-
was unwilling to grant a licence, ETSI would seek a
try, which are now dependent on it, so as to
viable alternative technology that was not blocked
produce a structure which it subsequently
by that intellectual property right, and if no viable
claims is its intellectual property, and refuses to
technology is found, work on that standard would
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IMS and Microsoft Judged in the Cold Light of IMS
cease. Members were required to explain in writing able to use freely. At the time everyone contributed
the reasons for refusing to license the intellectual his expertise, it was expected that everyone would
property right in question, and this explanation be able to use the standard without restriction.
would be sent inter alia to the Commission. The The standard would be an open one. Dell’s subse-
Commission approved ETSI’s Interim licensing pol- quent invocation of its patent effectively gave it
icy on the basis that there was no restriction of com- control of the standard, despite the fact that Dell
petition. It approved ETSI’s efforts to prevent one was only one of many participants in the standard
company from hijacking a standard. setting and had not contributed the crucial know-
how to the process.
The US FTC adopted a similar approach to standard
setting in the Dell case27, which concerned VESA, a This is not dissimilar to the situation in IMS. It is the
voluntary standard setting organisation composed sort of conduct that ought to be able to be covered by
of major computer software and hardware manufac- Article 82 if the facts are clear enough. It is submitted
turers. Agreement on a particular standard was that the Commission missed an opportunity by not
founded on representations by the participants that developing this line of argument further in IMS.
no firm held intellectual property rights that might
block others from developing towards the standard, (c) The role of the expert
or that any rights that might impinge on the stan-
Finally, a few words on the role of the expert: the IMS
dard would be licensed at a reasonable rate. With
Decision gives the expert the task of determining the
these representations, the VESA participants came
licence fee and conditions, yet gives no guidance on
up with a new product that was commercially suc-
how that task is to be accomplished, except to say
cessful. However, Dell then alleged that the new
that “the expert will make a determination on the
standard infringed on one of its patents. Dell made
basis of transparent and objective criteria”. This is
its claim only after the standard began to achieve
quite remarkable – the Commission orders a compul-
success, and its claim for royalties gave it effective
sory licence of the intellectual property rights, yet fails
control of the standard.
to give any guidance on the terms of that license. In
essence, the Commission hands over a crucial part its
The Federal Trade Commission investigated the
decision making power to a third party.
matter and charged Dell with unfair competition in
violation of section 5 of the Federal Trade E. The Commission Decision In Microsoft
Commission Act. Dell’s belated assertion of patent
1. Description of Decision and legal
ownership in this case enabled it to exercise mar-
standard applied
ket power with anti-competitive effect. The FTC
specifically alleged that industry acceptance of the
The Commission adopted a Decision on 24 March
new standard was delayed, and that uncertainty
200428 in which found Microsoft guilty of abusing its
about the acceptance of the design standard
dominant position in the market for client PC operat-
raised the cost of implementing the new design.
ing systems by failing to supply “interoperability
Dell entered into a consent order, which required
information” to Sun Microsystems. “Interoperability
that it refrain from enforcing its patent against any
information” is defined in the Decision as:
computer manufacturer using the new design
in its products. In addition, Dell was prohibited
the complete and accurate specifications for all
from comparable behaviour in its future standard
Protocols implemented in Windows Work Group
setting involvements.
Server Operating Systems and that are used by
Windows Work Group Servers to deliver file and
In Dell, many competitors had come together to
print services and group and user administration
agree on a standard, which they all expected to be
services… to Windows Work Group Networks.29
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IMS and Microsoft Judged in the Cold Light of IMS
The Commission ordered that Microsoft should (b) The legal test applied for the compulsory licence
create the necessary specifications, “make them
Unlike the IMS Decision, the Microsoft decision
available to any undertaking having an interest
nowhere clearly states the legal standard being
in developing and distributing work group server
applied. For this reason, a close analysis of what the
operating systems” and “allow the use of the inter-
Decision says is necessary.32
operability information by such undertakings”.30
The Commission’s legal analysis starts by quoting
(a) This is a compulsory licence case
Commercial Solvents and Télémarketing:33
While some parts of the Decision doubt the exis-
tence of intellectual property rights, the Decision In Commercial Solvents, the Court of Justice
expressly imposes a compulsory licence. Article 5(a) found that ICI (a subsidiary of Commercial
of the Decision forces Microsoft to “allow the use” of Solvents Corp.) had engaged in a refusal to sup-
the specifications. This would not have been neces- ply contrary to Article 82 of the Treaty. The Court
sary if there were no intellectual property rights at concluded that “an undertaking which has a
stake. Indeed the Decision expressly states that a dominant position in the market in raw materials
compulsory licence is contemplated: and which, with the object of reserving such raw
material for manufacturing its own derivatives,
to the extent that this Decision might require refuses to supply a customer, which is itself a
Microsoft to refrain from fully enforcing any of its manufacturer of these derivatives, and therefore
intellectual property rights, this would be justified risks eliminating all competition on the part of
by the need to put an end to the abuse.31 this customer, is abusing its dominant position
within the meaning of Article 86 [now Article 82]”.
The specifications that Microsoft is ordered to
create, make available and allow the use of will be In Télémarketing, the judgment in Commercial
long, complex documents. They are akin to a blue- Solvents was held to also apply “to the case of an
print of a chemical plant – very valuable even if the undertaking holding a dominant position on the
competitor still has work to do to actually build its market in a service which is indispensable for the
competing chemical plant. Microsoft’s stated position activities of another undertaking on another mar-
is that the Decision involves a compulsory licence of ket.” The Court of Justice stated that “an abuse
its patent, copyright and trade secret rights. within the meaning of Article 86 [now Article 82]
is committed where, without any objective
While it therefore appears clear that the Decision necessity, an undertaking holding a dominant
follows on from Magill and IMS in imposing a com- position on a particular market reserves to itself
pulsory licence of intellectual property rights, there […] an ancillary activity which might be carried
is a difference between Microsoft and those two out by another undertaking as part of its activities
cases – the value of the information that the on a neighbouring but separate market, with the
Commission has ordered to be disclosed. The spec- possibility of eliminating all competition from
ifications that to be disclosed will represent the such undertaking.”34
fruit of much more significant intellectual effort by
The Decision then turns to Magill to support the
Microsoft than the map of Germany in IMS or the
proposition that “intellectual property rights are not
TV listings in Magill. There is a further difference
in a different category to property rights as such”.
with IMS: the value of the intellectual property IMS
refused to license is largely the fact that it locks in
The Court of Justice stated that “the refusal by the
customers rather than its inherent innovation;
owner of an exclusive right [copyright] to grant a
while Microsoft’s intellectual property, which
licence, even if it is the act of an undertaking hold-
results from extensive R&D, is valuable because it
ing a dominant position, cannot in itself constitute
solves complex technical challenges.
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IMS and Microsoft Judged in the Cold Light of IMS
abuse of a dominant position.” It pointed out, In Bronner, a preliminary ruling on the basis of
however, that “the exercise of an exclusive right Article 234 of the Treaty, access to a nation-wide
by the proprietor may, in exceptional circum- home-delivery scheme for newspapers was at
stances, involve abusive conduct” thereby clarify- stake. The Court of Justice concluded that there
ing that intellectual property rights are not in a was in that specific case no obligation to deal
different category to property rights as such.35 pursuant to Article 82 of the Treaty, finding that
access to the scheme was not indispensable for
The Commission goes on to identify three sets of
Bronner to stay in the newspaper market.
exceptional circumstances in Magill:
Microsoft interprets Bronner as requiring the
First, the Court of Justice underlined that the Commission to show that (i) supply of the infor-
dominant undertakings’ refusal prevented the mation is essential to carry on business; (ii) the
appearance of a new product which the domi- refusal is likely to eliminate all competition; and
nant undertakings did not offer and for which (iii) the refusal is not objectively justified. Microsoft
there was a potential consumer demand. As argues that the Commission cannot prove any of
such, the refusal was inconsistent in particular these three elements. Contrary to what Microsoft
with Article 82(b) of the Treaty, which provides asserts, it will be established below that this
that abuse as prohibited by Article 82 of theTreaty Decision is consistent with Bronner.38
may consist in “limiting production, markets or
The Decision’s failure to address Bronner is a
technical development to the prejudice of con-
significant omission since this was the most recent
sumers”. Second, along the lines of Commercial
case on point when the Decision was adopted. The
Solvents, the Court of Justice pointed out that the
closest the Decision comes to analysing it is in
conduct in question enabled the dominant under-
footnote 67039 (at the end of the paragraph 554,
takings to reserve “to themselves the secondary
quoted above); but this merely responds to
market of weekly television guides by excluding
Microsoft’s arguments without actually saying
all competition on that market”.Third, the refusal
what the applicable test is.
was not objectively justified.36
It then quotes Ladbroke on essential facilities: The Commission then changes tack. It ends the
analysis of the Magill line of caselaw and states that:
In Tiercé Ladbroke, the Court of First Instance
stated that the refusal to supply could fall within On a general note, there is no persuasiveness to
the prohibition laid down in Article 82 of the an approach that would advocate the existence of
Treaty where it “concerned a product or service an exhaustive checklist of exceptional circum-
which was either essential for the exercise of the stances and would have the Commission disre-
activity in question, in that there was no real or gard a limine other circumstances of exceptional
potential substitute, or was a new product whose character that may deserve to be taken into
introduction might be prevented, despite spe- account when assessing a refusal to supply.40
cific, constant and regular potential demand on
In other words, the Commission does not consider
the part of consumers”.37
that there is one single test based on the Magill judg-
Then this line of analysis then somewhat unexpect- ment that determines whether a failure to license
edly stops. The Commission summarises the out- intellectual property rights is abusive. It proposes a
come of Bronner, notes Microsoft’s interpretation of looser test: the refusal to license can be an abuse
Bronner, but never says what the Commission itself whenever there are “exceptional circumstances”.The
thinks Bronner means. Commission then examines other cases as giving
further examples of exceptional circumstances.
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IMS and Microsoft Judged in the Cold Light of IMS
It notes that a disruption of previous supply was peters out after its discussion of Ladbroke. This is
found abusive in Commercial Solvents and far from the clear four-stage test set out in Magill
Télémarketing and says: and in the IMS Judgment.
While not a necessary condition for finding an The Commission’s summary of the facts contains ref-
abuse of a dominant position – there had been no erence to three exceptional circumstances:44
previous supply relationships in Magill or (a) “Microsoft’s refusal to supply risks eliminating
Bronner - the disruption of previous levels of sup- competition in the relevant market for work group
ply is therefore of interest when assessing server operating systems”; (b) “that this is due to the
instances of refusal to supply.41 fact that the refused input is indispensable to carry
on business in that market”; and (c) “Microsoft’s
The Commission also quotes from Volvo v. Veng to
refusal has a negative impact on technical develop-
give a further example of exceptional circumstances
ment to the prejudice of consumers”. In addition the
capable of constituting an abuse:
Commission refers to Microsoft’s “disruption of
previous levels of supply”.45
the exercise of a holder’s exclusive right might be
prohibited by Article 82 of the Treaty if it involves
So while the Commission does analyse some of the
“certain abusive conduct such as the arbitrary
criteria set by Magill, the Commission does not base
refusal to supply spare parts to independent
its Decision directly on the four-stage Magill/IMS test.
repairers, the fixing of prices for spare parts at an
Its approach is a looser and less predictable one.
unfair level or a decision no longer to produce
spare parts for a particular model even though
(c) Intellectual property and objective justification
many cars of that model are still in circulation.”42
There is one other part of the Commission’s decision
The Commission’s conclusion on the applicable
that deserves scrutiny – its approach to objective
legal standard is:
justification and intellectual property rights.
The case-law of the European Courts therefore
The Commission makes the general statement that:
suggests that the Commission must analyse
the entirety of the circumstances surrounding a
The central function of intellectual property rights
specific instance of a refusal to supply and
is to protect the moral rights in a right-holder’s
must take its decision based on the results of
work and ensure a reward for the creative effort.
such a comprehensive examination.43
But it is also an essential objective of intellectual
On one level this is nothing more than common property law that creativity should be stimulated
sense and a statement with which no one could for the general public good. A refusal by an
object to – the Commission must consider all the cir- undertaking to grant a licence may, under excep-
cumstances of the case and take its decision based tional circumstances, be contrary to the general
on such a comprehensive analysis. public good by constituting an abuse of a domi-
nant position with harmful effects on innovation
However, on another level it is troubling: the and on consumers.46
Commission puts forward no test by which domi-
The Commission finds that in view of the exceptional
nant companies can judge their actions and decide
circumstances, Microsoft’s refusal to supply cannot
whether they are obliged to license their intellec-
be objectively justified merely by the fact that it
tual property rights. The lack of clarity is made
is a refusal to licence intellectual property.47
worse by the way the Commission’s legal analysis
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IMS and Microsoft Judged in the Cold Light of IMS
The Commission then applies a balancing test The Commission’s approach to whether the
initially described as balancing Microsoft’s incentives refusal to supply would eliminate competition is
to innovate against these exceptional circumstances: different to the test applied in the IMS Judgment.
The Decision uses the test of “risk of elimination of
It is therefore necessary to assess whether competition” (at some point in the future) instead
Microsoft’s arguments regarding its incen- of whether the refusal to license was “likely to
tives to innovate outweigh these exceptional eliminate all competition” (more imminently).
circumstances.48
On the facts, the Commission appears to have
However, the Commission actually balances the applied a lower standard for indispensability
negative impact of an order to supply on Microsoft’s than in the IMS Judgment (or Bronner).
incentives to innovate against the positive impact of
These will be explored in more detail below,
such an order on the level of innovation of the whole
together with a discussion of the Commission’s
industry. The Commission equates this second test
with the initial test: position on objective justification.
a detailed examination of the scope of the disclo- (a) Risk of Elimination of Competition
sure at stake leads to the conclusion that, on bal- The Commission applies the test of “risk of
ance, the possible negative impact of an order to elimination of competition” based on quotes from
supply on Microsoft’s incentives to innovate is the original judgments in Commercial Solvents
outweighed by its positive impact on the level of and Télémarketing.
innovation of the whole industry (including
Microsoft). As such, the need to protect 5.3.1.2 Risk of elimination of competition
Microsoft’s incentives to innovate cannot consti-
tute an objective justification that would offset In Magill, Commercial Solvents and
the exceptional circumstances identified.49 Télémarketing, one of the constituent elements of
the abuse finding was that the dominant under-
As will be noted below, this is not a test whose takings’ behaviour risked eliminating competi-
outcome is easily predictable in advance. tion. In Bronner, the Court of Justice clarified that,
for the judgment in Magill to be relied upon, it
2. Microsoft judged in the light of the was necessary to show that supply is indispensa-
IMS Judgment ble to carry on business in the market, which
means that there is no realistic actual or potential
The Microsoft decision is inconsistent with the test
substitute to it.51
laid down by the ECJ in IMS in a number of respects.
While the Court in Commercial Solvents and
The most obvious difference is the failure of the Télémarketing did refer to a risk of elimination of
Commission to address whether the refusal to competition, in fact it applied a more stringent test.
license prevented the emergence of a new prod- In both cases, there was more than just a risk of
uct for which there is unmet consumer demand. elimination of competition; in each, the refusal
The Microsoft Decision does have a short section would have eliminated the complainant, as there
discussing whether the refusal to supply “limits was no substitute supplier.
technical development to the prejudice of con-
sumers”.50 However, the approach taken by the Commercial Solvents was the only supplier of the
Commission is unclear. It would be impossible to raw material in Europe (and was endeavouring to
predict how this approach would be applied in a eliminate its former customer following the failure
future case. of takeover talks) and RTL was the sole commercial
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IMS and Microsoft Judged in the Cold Light of IMS
(francophone) TV station in Belgium. Refusal by Moreover, in the Microsoft Decision, the
Commercial Solvents and RTL was therefore likely Commission presents “strong competitive disad-
to eliminate all competition in the respective mar- vantage” almost as equivalent to “risk of elimination
kets. In practical terms, the Court applies in these of competition”.55
two cases the same test as in Bronner, Ladbroke and
Magill. Indeed, in Bronner, the Court expressly con- In the following recitals … it will be established that
firms that the refusal to supply in Commercial Microsoft’s refusal puts Microsoft’s competitors at
Solvents and Télémarketing was likely to eliminate a strong competitive disadvantage in the work
all competition. This is a more stringent test than “a group server operating system market, to an extent
risk of eliminating competition”.52 where there is a risk of elimination of competition.
Being put at a strong competitive disadvantage is a
In the IMS Judgment, the Court makes clear that the
lower threshold than Magill and IMS, where the
test is “elimination of all competition” and not “risk
refusal to supply had the immediate effect of forcing
of elimination of competition”.53 The test used in the
Magill and NDC off the market. The difference is also
operative part of the IMS Judgment of “reserving
clear in the footnote accompanying that recital:
the market to [itself] by eliminating all competition”
is a more stringent test than the “risk of elimination
The present Decision does not purport to estab-
of competition” used in the Microsoft decision.
lish that competition is already eliminated in the
market for work group server operating systems,
While this may appear like a question of semantics,
or that it would be impossible to achieve even
the difference is one of substance. It becomes clear
some partial interoperability with Windows client
when one looks at the facts constituting the abuse.
PC and work group server operating system
In Magill, the refusal to license prevented Magill
(some partial interoperability is possible, not
from printing the second issue of its TV guide – in
least due to previous disclosures made by
other words, this weekly publication died after one
Microsoft and due to the fact that Microsoft’s
edition. All competition was instantly (within a mat-
products are backward-compatible). However, it
ter of days) eliminated by the refusal to license. In
will be demonstrated that the degree of interop-
IMS, the refusal to license coupled with the injunc-
erability that can be achieved on the basis of
tion obtained by IMS (in the early stages of the
Microsoft’s disclosures is insufficient to enable
German court battle) prevented NDC from providing
competitors to viably stay in the market.56
data in the format that the customers needed. NDC
was prevented from competing. Again, the refusal to In sum, the Decision’s adopts a different and less
license had near-instant effects once the Court strict approach than the IMS Judgment and Magill.
injunction was in force. In contrast, the refusal to It is based on the finding that the refusal to license
license54 in Microsoft’s case did not have such an leads to a competitive disadvantage to the extent
immediate effect. Microsoft continues to face signif- there is a risk of elimination of competition. This is a
icant competition more than 5 years after the day long-term process likely to extend over the course of
the Commission found the refusal took place. a decade or more (even on the Commission’s analy-
Indeed, Linux entered the market after the refusal sis of the facts, which Microsoft contests); it is much
and has grown its market share significantly. These less immediate or direct than in Magill (or in IMS),
facts indicate that the Microsoft decision uses a where the refusal put the competitors off the market
lower test than the one proposed Magill and con- in a matter of days.
firmed by IMS.
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IMS and Microsoft Judged in the Cold Light of IMS
(b) Indispensability even though it admits that interoperability is a
matter of degree and recognises that a lower
The Commission’s analysis links indispensability
level of interoperability exists.
with the question of whether competition would be
eliminated. It applies the test of whether there are no
Overall, the fact that competing server products are
“realistic actual or potential substitutes” to the
able today to interoperate with Microsoft products,
requested information.
and in particular the fact that some of them have
increased their market share since the refusal to
In Bronner, the Court of Justice clarified that, for
supply, indicates that the Commission appears to
the judgment in Magill to be relied upon, it was
have applied a higher standard of interoperability
necessary to show that supply is indispensable
and, correspondingly, a lower standard for indis-
to carry on business in the market, which means
pensability than was applied in IMS (and Bronner).
that there is no realistic actual or potential
substitute to it.57
There are compelling policy arguments which point
The Commission assesses indispensability by evalu- against granting too easy access to a dominant com-
ating the level of interoperability that exists in the pany’s resources. If access is granted too easily,
market. It admits that it would be possible to achieve there may be a short-term benefit in terms of an
some interoperability without the compulsory increase in competition. In the long term, however,
licence; however, the Commission argues that the there would be a decrease in competition as there
degree of interoperability that can be achieved on the would be no incentive for a competitor to develop
basis of Microsoft’s current disclosures “is insufficient competing facilities62 and a chilling effect on invest-
to enable competitors to viably stay in the market.”58 ment in R&D and innovation by the dominant under-
taking as well.63
The Commission’s test is different from that applied
by the ECJ in the IMS Judgment, where the Court (c) Emergence of a new product for which there is
confirmed the test set out in Bronner – namely that unmet customer demand
European law does not require that optimal access to
In IMS, the ECJ makes it clear that a rightholder’s
the market be granted; “actual and potential alterna-
refusal to license is only an abuse when the undertak-
tives” include those facilities that exist and are used
ing reserves the secondary market to itself, thereby
by competitors even though they may be less advan-
preventing the emergence of a new product. The
tageous.59 The IMS Judgment confirmed that it is
Court is clear that “duplicating” existing products or
necessary to examine whether there are “alternative
services sold by the rightholder is not sufficient; a
solutions, even if they are less advantageous”.60
company that wishes to receive a licence must
In Microsoft, the Commission admits that such alter-
“intend to offer new goods or services not offered by
natives exist but argues that they are so disadvanta-
the owner of the right and for which there is potential
geous as to not in reality constitute alternatives.
consumer demand”.64 As noted above,65 the court in
Bronner did not expressly mention this condition
The underlying question about the Commission’s
when setting out the test it considered was applica-
analysis is therefore whether it has based its
ble;66 IMS restates the full test set out in Magill.
analysis on the correct level of interoperability.
The Commission rejects as alternatives open
The Microsoft Decision does not address this point.
industry standards, add-ons and reverse engi-
The Commission does not demonstrate that, once
neering. It rejects Microsoft’s argument that dif-
its request67 had been acceded to, Sun would have
ferent server OS interoperate perfectly well in
offered a new product or service for which there was
practice today in many customers’ computer net-
unmet consumer demand. Nor does it show that
works. The Commission’s approach requires a
Sun ever informed Microsoft that it wanted the
near-perfect, “native” level of interoperability,61
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IMS and Microsoft Judged in the Cold Light of IMS
licence to be able to offer a new product.68 To the interface information to bring “innovative work
contrary, the Commission seems to indicate that group server operating system features” to the mar-
competing producers of server operating systems ket71 and that competitors were being “discouraged
need the interface information to compete directly from developing new products”.72 The Commission
with Microsoft.69 In other words, they would offer does not show they would bring new products to
the same products as currently offered by Microsoft. the market, merely that they might be able to
improve their existing products. That is a test that
Instead of looking to products for which there is would be satisfied in almost every case when valu-
unmet customer demand, the Commission bases able intellectual property was disclosed to competi-
its analysis on the fact that the refusal to supply tors – there are few instances when the competitors
would limit technical development to the prejudice would be unable to use the information to improve
of consumers. their own products.
Article 82(b) of the Treaty provides that abuse as (d) Conclusion on Microsoft and IMS
prohibited by that Article may consist in limit-
The Microsoft decision applies a legal standard on
ing technical development to the prejudice
when a compulsory licence should be ordered that
of consumers.
differs significantly from the test set out in Magill
Due to the lack of interoperability that competing and IMS. If upheld on appeal, the Decision would
work group server operating system products represent a considerable loosening of the circum-
can achieve with the Windows domain architec- stances when a compulsory licence will be ordered.
ture, an increasing number of consumers are This loose test would also introduce a considerable
locked into a homogeneous Windows solution at degree of legal uncertainty.
the level of work group server operating systems.
This impairs the ability of such customers to ben- 3. Objective justification and intellectual
efit from innovative work group server operating property rights
system features brought to the market by
Microsoft’s competitors. In addition, this limits This is an area where neither the Court nor the
the prospect for such competitors to successfully Commission has given guidance in the past. The
market their innovation and thereby discourages IMS Judgment simply states that the refusal should
them from developing new products. not be capable of being justified. The only case in
which this was even considered was the IMS
If Microsoft’s competitors had access to the inter-
Decision, where the objective justifications offered
operability information that Microsoft refuses to
by IMS were rejected relatively briefly.
supply, they could use the disclosures to make
the advanced features of their own products
The Commission’s approach in Microsoft breaks
available in the framework of the web of interop-
new ground. It balances the negative impact of an
erability relationships that underpin the Windows
order to supply on Microsoft’s incentives to innovate
domain architecture.70
against the positive impact of such an order on the
In Magill the new product – the multi-channel TV level of innovation of the whole industry:
guide – was known and even appeared for one issue
and it was obvious there was unmet consumer a detailed examination of the scope of the disclo-
demand because such guides were sold in many sure at stake leads to the conclusion that, on bal-
other Member States. In Microsoft, the Commission ance, the possible negative impact of an order to
never identifies any new product, nor does it identify supply on Microsoft’s incentives to innovate is
unmet consumer demand. The closest it gets is outweighed by its positive impact on the level of
when it says that competing producers need the innovation of the whole industry (including
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IMS and Microsoft Judged in the Cold Light of IMS
Microsoft). As such, the need to protect This statement – that an abstract notion of “the gen-
Microsoft’s incentives to innovate cannot consti- eral public good” should be allowed to override
tute an objective justification that would offset intellectual property rights – raises further issues
the exceptional circumstances identified.73 of legal certainty. Judging if something may be
contrary to the “general public good” is even more
Neither formulation of the balancing test is based on
difficult than balancing incentives to innovate.
any Court precedent, nor any previous Commission
decision. There are two reasons why this test is
4. Further Observations on the Microsoft
wrong as a matter of principle.
Decision
First, it will dramatically reduce legal certainty, a fun-
(a) The standardisation inherent in the remedy
damental principle of EC law.74 The balancing test is
almost impossible for any company to apply it ex The Decision orders Microsoft to create specifica-
ante. The Commission gives no guidance on how a tions, to make them available to third parties and
company is to assess whether its incentives to inno- allow their use by any interested third parties. The
vate outweigh the positive impact of a compulsory Decision is therefore unlike the two previous com-
licence would have on the market. Even the most pulsory licensing cases – Magill and IMS – where the
creative of economists would struggle to come up only intended beneficiaries of the remedy were the
with any sensible method of balancing incentives parties which had requested, but been refused, the
for innovation. The absence of legal certainty is par- licence. Here any interested party can benefit from
ticularly troublesome given the risk of a colossal fine the remedy – including those competitors that never
if the company – or its advisers – get this balancing asked for a licence.
exercise wrong.
This means that the remedy is not so much a com-
Second, intellectual property rights already pulsory licence; rather it is a form of compulsory
involve a short- and long-term balancing of incen- standardisation. Microsoft is required to produce
tives to innovate. Intellectual property rights such detailed specifications explaining how its communi-
as patents give a period of exclusivity to encour- cations protocols work inside its product to all inter-
age and reward the author’s inventiveness. They ested parties. These third parties will use these
represent a trade off between the short-term specifications to ensure that their products can inter-
disadvantage of exclusivity and the long-term act in native mode.76 What was previously private
advantage of creativity. They aim to create incen- technology, which Microsoft could change, becomes
tives to innovate and generate long-term benefit public technology that Microsoft is obliged to main-
for society. The Decision approach appears to sec- tain so as to ensure compatibility with its competi-
ond-guess this careful balancing exercise, in par- tors’ products. In other words, Microsoft is forced to
ticular when it states: set industry standards.
The central function of intellectual property rights This provides an interesting contrast from the IMS
is to protect the moral rights in a right-holder’s Decision. In IMS, open standards were created by
work and ensure a reward for the creative effort. IMS in conjunction with its clients – the pharmaceu-
But it is also an essential objective of intellectual tical industry – and intellectual property rights were
property law that creativity should be stimulated only invoked by IMS to prevent a competitor that
for the general public good. A refusal by an wanted to enter the market from using those indus-
undertaking to grant a licence may, under excep- try standards. IMS tried to close an open standard;
tional circumstances, be contrary to the general the Commission’s Decision ordered IMS to reopen
public good by constituting an abuse of a domi- the standard. In contrast, Microsoft created its own
nant position with harmful effects on innovation technology, which the Decision orders to be dis-
and on consumers.75 closed to create open industry standards. The critical
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