A European Union judge has denied Microsoft Corp. a reprieve from the antitrust penalties imposed by the European Commission in March—a serious blow to Microsoft’s case. Microsoft said it would begin complying with the order immediately.

In a 91-page decision issued on Wednesday morning, Judge Bo Vesterdorf, the president of the EU’s Court of First Instance (CFI), said Microsoft had failed to prove its case. “The application must therefore be dismissed in its entirety,” he wrote.

If upheld by Europe’s highest court, the decision could force Microsoft to sell a version of Windows without bundling Windows Media Player and to reveal secret communications protocols, in as little as six months’ time. But Microsoft will begin complying right away, even though the final decision could reverse the CFI’s order, Microsoft said.

Click here to read why Microsoft Watch’s Mary Jo Foley says unbundling IE and Media Player could be a positive thing for Microsoft.

Aside from its immediate effects, the legal opinion handed down by Vesterdorf, a senior figure in the EU’s legal world, is expected to have a profound influence on future EU competition cases. Microsoft is expected to appeal the decision with the European Court of Justice.

“This is a great victory for free software,” said Carlo Piana, a partner at Milan law firm Tamos Piana & Partners, which represents the Free Software Foundation Europe, an open-source group that is opposing Microsoft in the case. “It is a straightforward demonstration that we were completely right. The market is desperately awaiting these kinds of remedies.”

Microsoft said it is “encouraged” that Vesterdorf’s decision recognized that the Redmond, Wash., company had presented some strong arguments. “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 company said in a statement.

Microsoft pointed out that the court agreed that there was a prima facie case, one of the three requirements for winning its appeal. Microsoft also had to prove that the penalties would cause harm that couldn’t be repaired if the Commission eventually loses the case, and that the “balance of interests” favored the company.

The company said it hopes the court’s decision will help to reopen settlement negotiations with the Commission. The company said it believes the remedies will “harm many users of the Windows operating system and the thousands of companies across Europe who have built their businesses on the Windows platform,” but said it will comply with the court order.

Microsoft said it is reviewing the decision before announcing its next step. It has two months to file an appeal. Legal experts said an ECJ decision could arrive relatively quickly—about four months after the appeal—because most of the evidence-gathering has already been done.

In the meantime Microsoft will immediately begin complying with the Commission’s decision, Microsoft General Counsel Brad Smith said in a press conference call. The company will begin supplying a version of Windows without Windows Media Player to computer makers next month, and to other customers in February, Smith said. On Wednesday afternoon Microsoft will create a Web site for sharing communications protocols with rivals, Smith said.

The Commission said it is “not in the process of renegotiation” with Microsoft, Commission competition spokesman Jonathan Todd said in a statement. He said the ruling “means the March 2004 decision becomes effective immediately.” The Commission may press Microsoft to immediately begin preparing to implement the remedies, although actual implementation may not begin before the ECJ gives its ruling, according to legal analysts.

The ruling “preserves the effectiveness of antitrust enforcement in particular in fast moving markets as in this case,” Todd stated.

Next Page: What difference will it make?

In March, the European Competition Commission fined Microsoft a record 497 million euros (about $613 million) for abusing its dominant market position in operating systems. The Commission also ordered Microsoft to ship a version of Windows without bundled media players and to license protocols that would allow competitors to integrate their servers with Microsoft desktop systems. Microsoft filed two challenges to the ruling: one seeking to overturn the March ruling, and another requesting a suspension of these remedies until the larger case has been settled.

Since the overall appeals process is likely to take several years, an immediate suspension—which could still be granted by the ECJ—would effectively remove any threat to Microsoft, according to legal experts. By the time the case is concluded, the fast-moving world of IT is likely to have made it irrelevant. If the ECJ also denies Microsoft’s appeal, Microsoft General Counsel Brad Smith has said the company is prepared to carry out the measures prescribed by the Competition Commission.

Click here to read “Report: Why EU Socked It to Microsoft.”

Vesterdorf’s decision may be difficult for the ECJ to reverse, according to some legal analysts. To reverse it, the court must find a weakness in the Court of First Instance’s legal point, not in its factual findings.

The CFI has been considering the suspension request since June, when Microsoft filed its appeal, and the process culminated in late September with several days of oral argument before Vesterdorf.

The decision makes the possibility of a settlement between Microsoft and the Commission more remote, although Microsoft says it is still pursuing this option. Part of the Commission’s motivation is to establish a legal framework for similar situations that might crop up in the future, according to analysts, and this wouldn’t be possible through a settlement.

Even if Microsoft is finally obliged to carry out the Commission’s measures by an ECJ decision—which could happen in the next few months—they won’t necessarily make much difference, according to some critics. The restriction on media player bundling could keep media player competitors such as RealNetworks Inc. and Apple Computer Inc. from being forced out of the market. The licensing of communications protocols is designed to benefit competing systems in the server and networking worlds, such as the Linux OS and Samba, which allows Unix and Linux operating systems to communicate with Windows networks.

But PC manufacturers, if left to their own devices, likely would not to choose to install a stripped-down version of Windows, industry analysts point out. As for interface protocols, the Commission’s decision does not require Microsoft to give away any information protected by intellectual property law.

Next Page: Attorney: Measures are “weak.”

The measures are “weak,” according to attorney Piana, and even if they are implemented, Microsoft may still find a way to make them ineffective. “The market is evolving very rapidly, and Microsoft has always been able to overcome or circumvent the implementation of measures of this nature,” Piana said.

Microsoft itself argues that the remedies will cause more harm than good. “We believe that the code removal remedy, obliging Microsoft to release a degraded version of the Windows operating system, will be harmful to consumers and competition and undermines the technology integration that has been the backbone of the IT revolution over the past three decades,” the company said in its Wednesday statement.

But Piana argued the measures are better than nothing. “If they are granted a stay [by the ECJ], we can stop discussing this. It would be a disaster for free software,” he said.

Other observers said that if the ECJ courts eventually uphold the Commission’s decision, it could create a far-reaching precedent. If left undisturbed, the decision would give the Commission a supervisory and regulatory role over Microsoft’s continuing operations in areas such as the Internet, mobile telephony and digital rights management, according to some experts.

Microsoft attorneys have suggested that revealing protocol information could expose new Windows vulnerabilities, which would be costly for the company to repair and could put the public at risk. Microsoft has also argued that the remedies aren’t necessary to allow competition, pointing to the success of rivals such as Apple, with the iTunes Music Store, and the Linux operating system.

Editor’s Note: This story was updated to include Microsoft’s decision to comply with the decision.

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