Microsoft is dealt a severe blow by EU

NEW YORK (CNNMoney.com) -- A European court dealt Microsoft Corp. a harsh blow Monday as it rejected the company's appeal of a landmark 2004 antitrust ruling, and upheld a $605 million fine against the world's largest software maker.

The European Union's Court of First Instance said the EU's antitrust commission ruled correctly against Microsoft when it said the software maker stifled competition by unfairly leveraging its dominant position in the market for PC operating systems into work-group server operating systems and media players.

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Brad Smith, Microsoft's senior vice president and general counsel, labeled the ruling as "disappointing" for the Redmond, Wash.-based firm, but said it would do everything necessary to come into compliance with the 2004 decision.

"We are 100 percent committed to every aspect of the commission's decision," said Smith, speaking at a press conference Monday morning in Luxembourg, the site of the court's ruling.

Under the decision, the Redmond, Wash.-based Microsoft was ordered to share information about its operating system with competitors and offer a version of Windows without its Windows Media Player.

Microsoft had argued that sharing information violated its intellectual property rights, and would result in competitors cloning its products and would hinder innovation at the software giant.

The court did rule in Microsoft's favor in one instance, rejecting the EU's decision to appoint a third party to monitor Microsoft's compliance, which was to be paid by the company.

Microsoft's Smith said the company had not yet decided whether it would file for an appeal with the Court of Justice of the European Communities, saying that they wanted more time to study the court's 248-page ruling.

European regulators applauded the court's decision.

"The Court ruling shows that the Commission was right to take its decision," EU's Competition Commissioner Neelie Kroes said in a statement. "The Commission will do its utmost to ensure that Microsoft complies swiftly."

Open-source software advocates such as Eben Moglen, the executive director of the Software Freedom Law Center, characterized the ruling as a blow to Microsoft's "monopolistic misbehavior" and a victory for free and cooperative software developers.

Microsoft's troubles began in 1998 when European regulators began investigating the company's monopoly on its operating system software, and its practice of bundling new products into its Windows operating system.

European regulators contended that as a result, Microsoft not only impeded competitors such as Sun Microsystems (down $0.02 to $5.71, Charts, Fortune 500), Novell (down $0.07 to $7.29, Charts) and RealNetworks (down $0.06 to $6.28, Charts), but ultimately hindered innovation and consumers.

Microsoft was ordered to pay a fine of €497 million ($605 million) and was hit with another fine totaling €280.5 million in 2006 for not complying with the earlier ruling.

The software firm had suffered a similar setback several years earlier in the United States when it reached an antitrust settlement with U.S. regulators over the same bundling practices.

During a question and answer session, Microsoft's Smith stressed that the company has already made significant strides toward coming into compliance, even as it appealed the commission's decision.

He pointed at the company's decision to offer a version of Windows without Windows Media Player to European customers for the past two years, as well as to new interoperability agreements with companies such as phone maker Nokia (up $0.38 to $34.01, Charts) and Sun Microsystems.

Apart from Microsoft, the ruling has, so far, generated plenty of criticism.

Thomas Barnett, the assistant attorney general for the U.S. Justice Department's antitrust division worried that the decision could chill innovation and discourage competition.

"In the United States, the antitrust laws are enforced to protect consumers by protecting competition, not competitors," Barnett said in a statement.

Some software experts said that Monday's court ruling set a dangerous legal precedent that threatens the broader technology sector.

Large tech firms that dominate their respective niches in Europe like Google Inc. (down $2.73 to $526.02, Charts, Fortune 500) or Apple Inc. (down $0.22 to $138.59, Charts, Fortune 500), which are already experiencing scrutiny from European regulators, could see their market share challenged not by old-fashioned competition, but through litigation, warn experts.

"It shows that filing a suit is a legitimate means of competing," said Dawn Talbot, software analyst with Soleil Securities.

Lars Liebeler, an attorney for the Computing Technology Industry Association warned that the decision, which prompted Microsoft to produce an alternate version of its Windows software, could mean higher costs for consumers and may hamper multi-national firms developing products for the European Union.

"This decision will occupy, as it should, the thoughts and discussion of many people in the months ahead," said Microsoft's Smith. "This is one of those decisions that has this extraordinary impact."

Microsoft (Charts, Fortune 500) shares fell over 1 percent in Monday afternoon trade on the Nasdaq.

Talbot does not own shares nor does her firm conduct investment banking business with Microsoft, but a member of her family does own shares of the software firm.