Microsoft's Sun deal 'will not affect EU appeal'

Microsoft's $2bn settlement with Sun will not have much impact on its antitrust trial with the European Competition commission, say legal observers

Microsoft's $2bn deal with Sun dramatically changes its relationship with an archrival, but Europe's competition lawyers are divided over how the deal will affect the software giant's battle with the European Competition Commission.

Last month Mario Monti, the European competition commissioner, ruled that Microsoft had stifled competition by failing to provide information to rivals needed to compete fairly in the market for server software, and by bundling its media player with Windows. He fined the American software giant $613.4m (€497m), which is the heaviest punishment in any European competition case to date.

That heavy fine has now been dwarfed by the $1.9b that Microsoft is paying to Sun, in a settlement which casts a long shadow over the antitrust case. It was Sun who filed the initial complaint to the Commission in 1998. According to the Commission, Sun alleged that Microsoft "had refused to provide interface information necessary for Sun to be able to develop products that would 'talk' properly with the ubiquitous Windows PCs, and hence be able to compete on an equal footing in the market for work group server operating systems".

At a press conference last Friday, Microsoft chief executive Steve Ballmer suggested that there was no link between the European Commission's ruling and the settlement with Sun, saying: "I think you need to completely separate the two things." However, Sun seems to feel there is a link, as the company said the points of the agreement "satisfy the objectives" that it was pursuing in the European Commission's case against Microsoft.

One European competition lawyer said that the Court of First Instance, to which Microsoft will make its appeal in 60 days, could view the settlement with Sun as proof that the Competition Commission's concerns over the future implications of Microsoft's behaviour were overblown. If Microsoft can play nicely with Sun, what's the big problem?

"If the court came to the conclusion that the Commission went too far in looking into the future, then to that extent that would be a good argument," said Hans Jurgen Meyer-Lindemann, a competition lawyer with Shearman & Sterling in Brussels.

However, another European antitrust lawyer said that the Commission's case rests on very different principles from the commercial imperatives that have brought Microsoft and Sun to settlement.

"I don't think Microsoft was saying that it technically impossible to interoperate better with Sun, I think they were saying that it was commercially not in their interest. Now they've found a way to make it commercially viable. The settlement is a good thing, but I don't think it has much impact on the Commission's case," said David Wood, a competition lawyer for antitrust law firm Howrey Simon in Brussels.

Sun is also not the competitor to have complained to the Commission about Microsoft, and the Commission found that Microsoft's activities "were part of a broader strategy designed to shut competitors out of the market." The Commission can argue that Microsoft still has to answer for this strategy even if Sun is now happy with its relationship with Microsoft.

However, it is certainly convenient for Microsoft that one of its most troublesome and litigious competitors has negotiated a lucrative settlement. There is precedent in European competition law of companies using cash to shift the ground of a competition deal.

When German utility giant Eon was undergoing review by the national competition regulator because of a take-over deal, it made a large cash settlement with one of the parties involved in the case.

"When they got their money, they didn't pursue their complaint with the cartel office. This is not totally unheard of. There is a parallel with Microsoft and Sun," said Meyer-Lindemann.

"There is always the risk that consultants for the Commission have turned around and been paid by one of the parties -- and given different advice. It's clearly something that the Commission loathes, but the Commission has got shorter pockets than big companies," said Wood.

Sun has also been very active in helping the Commission understand the issues involved in the case. While its initial complaints still stand, and it must continue to fulfil any statutory obligations to the commission, the dynamic may now be rather different from when it was enthusiastically lobbying against what Sun chief executive Scott McNealy used to call the "evil empire".

Marc Hansen, an attorney with Latham & Watkins in Brussels, puts it succinctly: "If the Commission needs help, who is going to help them?"

In some ways, the settlement with Sun could be interpreted as Microsoft trying to address in an out-of-court settlement with a key competitor the central allegation of both the US and EU antitrust cases; that the company simply won't play fair with rivals.

However, Microsoft is now in a difficult position. If it changes tack on either the issue of providing more information to rivals to make it easier to interoperate with Windows, or on bundling additional functionality into Windows, it looks as though it is admitting that its previous tactics were at fault. On the other hand, if it persists in the behaviour that has now been labelled anticompetitive, it risks storing up trouble in terms of future litigation.

"Once you get hit by an antitrust violation, your room for manoeuvre becomes limited by your legal strategy. If you defend yourself to the hilt, it's very hard to change tack," said Wood.

For Wood, the interoperability issue is less important than the issue of unbundling Microsoft's media player from Windows.

The bundling issue is not an area where we have a clear statement of community law. It's virgin territory. I think the Commission is more interested in the bundling issue," said Wood.