UPDATE 3-Microsoft suffers stunning EU antitrust defeat

By David Lawsky and Michele Sinner

BRUSSELS/LUXEMBOURG, Sept 17 (Reuters) - Microsoft suffered
a stunning defeat on Monday when a European Union court backed a
European Commission ruling that the U.S. software giant
illegally abused its market power to crush competitors.

The European Union's second-highest court dismissed the
company's appeal on all substantive points of the 2004 antitrust
ruling.

Microsoft shares traded in Frankfurt (MSFT.F) were down 2
percent at 20.40 euros at 1021 GMT, underperforming the European
technology index .SX8P which was down 0.4 percent. About
15,000 shares had changed hands, roughly the 30-day average
daily trading volume.

The court said Microsoft, the world's largest software
maker, was unjustified in tying new applications to its Windows
operating system in a way that harmed consumer choice.

The verdict, which may be appealed only on points of law and
not of fact, could force Microsoft to change its business
practices.

It also gives EU Competition Commission Neelie Kroes a green
light to pursue other antitrust cases and complaints involving
Microsoft, Intel (INTC.O), Qualcomm (QCOM.O) and Rambus
(RMBS.O), and to issue draft new antitrust guidelines that were
put on ice pending the ruling.

"Microsoft must now comply fully with its legal obligations
to desist from engaging in anti-competitive conduct. The
Commission will do its utmost to ensure that Microsoft complies
swiftly", Kroes said in a statement.

The court upheld a record 497 million euro ($689.9 million)
fine imposed on the company as part of the original decision.

More importantly, it endorsed Commission sanctions against
Microsoft's tying together of software and refusal to give rival
makers of office servers information to enable their products to
work smoothly with Windows, used by 95 percent of computers.

It annulled only the EU regulator's imposition of a
Microsoft-funded independent trustee to monitor compliance.

"The Court of First Instance essentially upholds the
Commission's decision finding that Microsoft abused its dominant
position," a court statement said.

DOWNBEAT

Microsoft General Counsel Brad Smith was downbeat in speaking
to reporters at the courtroom, promising the company would obey
the ruling in full. He said there was no decision yet on whether
to appeal to the European Court of Justice.

"It is clearly very important to us as a company that we
comply with our obligations under European law," Smith said. "We
will study this decision carefully and if there additional steps
we need to take in order to comply with it, we will take them."

Microsoft has used every recourse open to it in every case
brought against it by governments and regulators.

The company has weathered a series of defeats in antitrust
cases in the last decade and sees legal setbacks as almost part
of its business model and a price for its near-monopoly.

Microsoft has already moved to new battlegrounds such as
seeking acceptance of its technical standards across the
industry, while continuing to bundle new features into its new
Vista desktop software.

Rivals welcomed the EU court decision as a signal that
authorities do not intend to allow Microsoft to pursue
anti-competitive practices with impunity.

The Commission ordered the company to sell a version of
Windows without the Windows Media Player application used for
video and music, which few have bought, and to share information
allowing rivals' office servers to work smoothly with Windows.

NO OBJECTIVE JUSTIFICATION

"Microsoft has not demonstrated the existence of objective
justification for the bundling, and ... the remedy imposed by
the Commission is proportionate," the court statement said.

A spokesman for Microsoft opponents, the European Committee
for Interoperable Systems, said the ruling confirmed Microsoft
had abused its near-monopoly in computer operating systems and
set ground rules for the company's behaviour.

"This decision establishes principles for the behaviour of
this company. Microsoft should now finally comply with the
Commission decision on operability," lawyer Thomas Vinje said.

Another winner was the Free Software Foundation, which makes
free, open software for work group servers. "Microsoft can
consider itself above the law no longer," said Georg Greve,
president of the FSF Europe.

The judges ordered Microsoft to pay the costs of FSF and
those of the software giant's business rivals, which had
supported the Commission's case. By contrast, Microsoft's allies
were forced to bear their own costs.

The Commission must pay 20 percent of its own costs and 20
percent of Microsoft's while Microsoft must pay 80 percent of
its own costs and 80 percent of the Commission's.

The ruling was made by the 13-judge Grand Chamber of the
Court of First Instance in Luxembourg, the first time such a
matter has been broadcast on live television.

Since the original decision, the Commission has fined
Microsoft a further 280.5 million euros, saying it had failed to
comply with the interoperability sanction. The EU regulator is
considering a further fine for non-compliance.
(additional reporting by Mark John in Luxembourg, Sabina
Zawadzki and William Schomberg in Brussels)