The Court of First Instance's judgment in the one of the EU's longest running legal battles may shape how the union deals with future competition cases, but it could also end up removing incentives for technology companies to innovate, writes Jamie Smyth

When Judge Bo Versterdorf walks into the Court of First Instance in Luxembourg on Monday to announce the judgment in one of the longest running antitrust battles in EU history, the world will be watching.

It is almost 10 years since the European Commission began investigating the business practices of the world's largest software company, Microsoft. And since the EU regulator found in 2004 that the firm had abused its near monopoly position in the market for PC operating systems, the gloves have come off in an increasingly bitter battle that is likely to shape future antitrust policy and even the future of innovation.

"The March 2004 decision is about preserving the incentives for all firms to innovate," says Jonathan Todd, spokesman for competition commissioner Neelie Kroes, who chaired an off the record pre-decision briefing for journalists this week.

"Microsoft has held a near monopoly on the PC operating system market for 15 years now. If Microsoft can abuse its monopoly to exclude competitors from other markets without constraint, consumer choice and innovation will suffer," said Todd.

A very different message was being sold at Microsoft's Brussels' office less than a kilometre away.

"This case is about whether a market leading company like Microsoft can continue to improve a product by including features that a consumer wants," says Erich Andersen, associate general counsel at Microsoft.

"We also expect the judgment to give guidance to leading companies under European law about when they have to provide market-leading technology to their competitors."

The Court of First Instance case centres on Microsoft's legal appeal against the 2004 antitrust ruling by the commission, which had two separate strands.

The commission found that Microsoft abused its dominant market position by bundling its own media player - a software application that plays video and audio content on computers - into its ubiquitous operating system, Windows, to the detriment of rival players.

This caused consumers not to download rival players and crushed competitors, says the commission, which noted the same tactic had destroyed the search engine Netscape Navigator - a rival to Microsoft's Internet Explore - during the 1990s.

The second part of the case relates to Microsoft's refusal to provide rivals with adequate technical information to enable them to design server software that is fully interoperable with Windows.

During the Court of First Instance hearing last year, Anthony Whelan, the Irish-born commission lawyer, said that this refusal confined rivals to using "last century technology" and led to a "gradual erosion" of their market share in the workgroup server market (computers that enable different systems to talk to one another).

The commission cites statistics showing that Microsoft's market share in this area has jumped to 80 per cent from 20 per cent when the investigation began.

In court, Microsoft vigorously defended its business strategy. The firm said that forcing it to divulge the core technology in the Windows system amounted to the "biggest encroachment on intellectual property rights in competition law history".

It also criticised the commission decision on "tying", arguing that consumers wanted additional functionality such as media players added to Windows. It points to the negligible sales of a new version of Windows that were marketed without media player by order of the commission decision. Just a few thousand were sold, compared to the millions of copies of Windows XP bought by consumers with a media player.

The commission counters that this poor sales performance occurred because the market had reached a "tipping point" by the time the new Windows was marketed.

The stakes could not be higher for all parties concerned. For the judge, who will retire from Europe's second highest court later on Monday, the case has boosted the court's profile.

It has also handed the 13-judge grand chamber, which has written and amended the judgment in recent weeks, the opportunity to set legal principles that will shape how the EU deals with competition cases for perhaps decades to come.

"I think the court understands the importance of this case and Versterdorf will want to leave a clear legacy," says Alec Burnside, partner at the Brussels-based law firm Linklaters, which is representing CompTIA, a trade association that has intervened on behalf of Microsoft in the appeal. "Article 82 is on the cusp of reform; in fact, this reform had been put on hold until this judgment is made."

Article 82 is the clause in the EU treaty that deals with abuses from dominant firms that exclude other competitors from the market. A review initiated by the commission in 2005 is due to clarify the instances where it can be applied in competition law, and the court's decision on Microsoft should play a critical role in shaping the proposed reform.

So, for the EU executive, and European competition commissioner Neelie Kroes, the significance of the case goes beyond the software sector. Kroes, who despite coming from a business background has been an activist regulator in the commission, could find her scope to intervene in antitrust cases undermined by a negative verdict.

If the Court of First Instance dismisses Microsoft's appeal outright, the firm will lose the €497 million fine that it has already paid in trust to the commission.

It would also face further substantial fines - currently running at €3 million per day - for non-compliance with the original decision. More importantly for the cash-rich US firm, a negative ruling would also call into question its successful business model.

"Fundamentally, any company like ours only stays in business by producing great products at low cost. Any constraint on that . . . is a real problem," says Microsoft's Andersen, who also highlights the chilling effect on the industry from a ruling that forces other firms to provide rivals with core technology and prevents innovation. A decision against Microsoft by the court may also provoke criticism from the United States, where lawmakers have previously accused the EU executive of undertaking a "witch hunt" against the US firm.

Accusations that the EU issusing competition policy as a form of protectionism could serve to create a transatlantic trade rift, say observers.

History shows that the court rarely overturns article 82 decisions taken by the commission - the last occasion that lawyers remember harks back to the 1970s. But the court regularly reduced the level of fines imposed on firms by the commission and, in a case of this significance anything is possible, according to lawyers close to the case.

Whatever the verdict on Monday, the mammoth legal battle may not be over just yet. Both sides can seek an appeal to the European Court of Justice on points of law in the judgment, which could delay a final resolution of the case for another two years at least.