European regulators testified here Thursday that before settlement talks with Microsoft Corp. broke down last spring, the company had agreed to antitrust sanctions that the software giant now claims would cause irreparable harm to its business and is fighting to stave off.
The testimony came on the opening day of hearings in a European court to determine whether sanctions against Microsoft for breaking Europe's antitrust laws should be put on hold pending the company's appeal, which could take years. A similar case in the United States was settled by a deal between the company and the Justice Department in late 2001.
Microsoft also attempted to reach agreement with European regulators to resolve their antitrust concerns. At one point, the company indicated it was willing to license technical data to rivals to help ensure that their network software would work with Microsoft's, according to testimony by Cecilio Madero, a staff director with the European Commission's competition bureau.
The agreement fell through and European authorities ultimately ordered such disclosure in April, after finding that Microsoft was using its overwhelming Windows dominance to muscle into the market for server software, which is used to run computer networks. By withholding certain code needed for such "workgroup server" systems to communicate with desktop machines running Windows, the commission found, Microsoft was able to hobble its server rivals.
Microsoft's tentative acceptance of a licensing agreement prompted close questioning from Bo Vesterdorf, president of the European Union's Court of First Instance, which is holding the hearings that are scheduled to continue Friday.
One of the criteria for postponing such orders is whether they would cause a company irreparable damage, a position Microsoft continued to press today. Its lead attorney, Ian S. Forrester, said giving rivals such software information would also hand them the keys to broader Microsoft technology in which it has invested heavily.
Bradford L. Smith, Microsoft's general counsel, told Vesterdorf that even had the company settled the European case, the disclosure of data would have hurt Microsoft. "But in agreeing to irreparable harm, one gets other things," such as more control over the terms of the deal, Smith said.
The testimony followed a statement by Smith earlier this week that the company was preparing a version of Windows without media-playing capability, the other major sanction imposed by the European Commission, in the event it loses the case. Previously, the company had said that doing so would render Windows unable to function properly.
For Microsoft, the battle is larger than the individual penalties, or the roughly $600 million fine ordered by the commission that the company could easily pay from its nearly $60 billion in cash.
The company is seeking to ensure that no regulator anywhere unilaterally controls the inner workings of the software business, either how products are designed or how widely technology is distributed.
In Microsoft's view, the prospect of any such regulation would chill the innovation that is critical to the information-age economy.
Forrester said the European sanctions are "intended to achieve permanent structural change in the industry," which would be especially damaging in a field that shifts and evolves rapidly.
He accused the commission of taking "the horticultural approach" to competition policy, seeking to prune Microsoft in an effort to let others grow. "That might work for shrubs," he said, but not for technology.
The company largely prevailed in this view in the United States, where federal courts rejected more aggressive sanctions, sought by several states, than those agreed to in the deal between the company and the Justice Department. That agreement did, however, provide for licensing of certain technical data, but not code that would allow a rival server system to work with Microsoft's system.
Europe, where Microsoft does roughly one-third of its business, is also critical to the company's growth, and Microsoft does not want to face differing regulations in various corners of the world.
The company also is counting on the expansion of its copyright and patent portfolios to help its business grow, and it sought to persuade Vesterdorf that the disclosure mandate would amount to stripping it of the core asset of any technology company, its intellectual property.
That view was seconded today by trade associations whose members support Microsoft's case. But European Commission lawyers and representatives of rival companies scoffed at the idea that the data Microsoft is being ordered to produce are valuable trade secrets.
"They are not kept secret because they are valuable," said Jeremy Allison, co-creator of the Samba server system. "They are valuable because they are kept secret."