December 22, 2004

Court Rules Microsoft Must Divulge Secrets

BRUSSELS, Belgium (AP) -- A European Union court ruled Wednesday that Microsoft Corp. (MSFT) must immediately divulge some trade secrets to competitors and produce a version of its flagship Windows operating system stripped of the program that plays music and video.

The 91-page ruling effectively thwarts Microsoft's attempt to delay, pending appeal, implementation of the EU's landmark antitrust decision in March that demanded changes in the software giant's business practices.

The implications for Microsoft are huge, though the company did not immediately disclose whether it intended to offer a version of Windows without the Media Player in Europe alone or more broadly. Software that plays media files is increasingly in demand as more consumers get broadband connections to the Internet and use their PCs as entertainment centers.

There is also the question of precisely what computer code Microsoft will share with competitors so that those companies' programs work better on networks run by Microsoft server software.

The Luxembourg-based European Court of First Instance found that Microsoft "has not shown that it might suffer serious and irreparable damage as a result of implementation of the contested decision," the court said.

"Microsoft's application for interim measures is therefore dismissed in its entirety," said the president of the court, Judge Bo Vesterdorf.

The EU was buoyant since its ruling was fully upheld and would force immediately compliance from Microsoft.

EU spokesman Jonathan Todd said the ruling "preserves the effectiveness of antitrust enforcement, in particular in fast-moving markets."

"Implementation of the Commission's March decision will not only benefit consumers of computer products in terms of choice of media players on computers and choice of work group servers, but also stimulate innovation," Todd said.

Microsoft said the ruling still held encouraging comments and hoped it would help reopen settlement talks with the European Commission. "There is ample room for us to continue to press forward with cause for optimism," said Microsoft counsel Brad Smith.

"While the court did not find immediate irreparable harm from the Commission's proposed remedies, the court recognized that some of our arguments on the merits of the case are well-founded and may ultimately carry the day when the substantive issues are resolved in the full appeal," the Redmond, Wash.-based company said.

Microsoft said it would look closely at the order before deciding on its next step but will comply fully with the court order when it comes into force. The full appeals process could take up to five years.

Though Microsoft reiterated its desire for settlement discussions, EU officials have said a ruling in their favor would make it unlikely that antitrust regulators would reopen talks.

"We are not in the process of renegotiation," Todd said.

Such talks had failed to make headway after EU antitrust regulators fined Microsoft a record $666 million and ordered the other measures. They ruled that Microsoft abusively wielded its Windows software monopoly and locked competitors out of the market.

Microsoft had settled with four of the five major interveners in the EU's case. Novell Inc. (NOVL) and the Computer and Communications Industry Association pulled out of the case following deals with Microsoft, and the company spent $2.4 billion to settle claims by Time Warner Inc. (TWX) and Sun Microsystems Inc. (SUNW)

Seattle-based RealNetworks Inc. (RNWK), maker of a rival to Microsoft's digital Media Player application, is Microsoft's last big commercial opponent in the case.

"The court has taken an important step toward promoting robust competition in digital media, fostering technological innovation and giving consumers real choice," said Dave Stewart, deputy general counsel for RealNetworks.

Vesterdorf had been assessing the case since the final hearings in October. EU lawyers accused Microsoft of trying to avoid competition and decide what's best for all consumers. Microsoft insisted the order would hurt small companies and their customers, since the companies would no longer be assured that their products would work with Windows.

The EU's March ruling went much further than Microsoft's 2002 settlement of similar charges with the U.S. Justice Department, which required only that users be allowed to hide Media Player and set another as the default.

Analysts predicted the financial impact on the company would not be huge. Microsoft has already counted the fine against its quarterly earnings, said Matt Rosoff, an analyst with Directions on Microsoft.

Even if the court makes Microsoft put "Windows lite" without Media Player on the market, Rosoff said he can't imagine many manufacturers would want it. "I don't see a lot of consumer demand for a PC without Media Player," he said.

Rosoff said the biggest threat was that the ruling, compelling Microsoft to strip something out of its operating system, would set a legal precedent for similar lawsuits.

Mark Ostrau, a lawyer who is following the case, said that could threaten Microsoft's ability to bundle more features into future versions of its operating system.

"The real key to Microsoft's success is its ability to bundle. So not being able to bundle, or having that risk every time they want to bundle, that really does cramp their style."


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Associated Press Writer Liz Gillespie in Seattle contributed to this report.