Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Microsoft’s E.U. antitrust problems attract derivative suit, (Apr 15, 2014)

By Matthew Garza, J.D.

A shareholder filed a derivative suit against current and former Microsoft Corp. directors and officers for breaches of fiduciary duties stemming from the company’s failure to adhere to an agreement reached with European antitrust regulators that required Microsoft to provide a choice of web browsers to users of Windows (Barovic v. Ballmer, April 8, 2014).

The shareholder claimed the company “blatantly and continuously” violated the terms of the settlement, which required Microsoft to allow users a choice of 11 rival web browsers, including browsers made by Apple, Google, and Mozilla, as opposed to allowing only the installation of Microsoft’s browser, Internet Explorer. Microsoft failed to provide this choice and allowed only installation of Internet Explorer on at least 15 million copies of Windows 7 sold in Europe. Failure to abide by the agreement drew a $732.2 million fine from European Competition Commission, announced March 6, 2013.

Pre-suit demand. The complaint said a demand on the board was issued on March 22, 2013, and refused in its entirety on January 28, 2014. The demand refusal, issued by the attorneys for two board members who served on Microsoft’s demand review committee (DRC), said that the DRC had looked at tens of thousands of documents and conducted witness interviews before concluding that the demand did not support a viable claim. The DRC also provided to the shareholder a resolution of the whole board of directors that adopted the conclusions of the DRC and noted that the company had undertaken significant remedial measures before receiving the demand.

The complaint called the 3-page resolution and demand refusal letter “conclusory” and a “wholly improper” attempt to insulate the DRC’s investigation from scrutiny. The fact that Microsoft accepted full responsibility for the violation, which the company called a technical error, but then found no viable claim for a breach of fiduciary duty, was astounding, according to the shareholder. The committee’s witnesses were not named, she said, but it was “readily apparent” that European Competition Commissioner Joaquín Almunia was not interviewed, nor was anybody else familiar with the European Competition Commission’s investigation. The shareholder complained that the lack of detail in the refusal provided to her counsel was essentially asking her to “take their word for it.”

The complaint stated that Microsoft’s troubles with the E.U.’s antitrust regulator began in 1998 when officials probed the company’s inclusion of Microsoft’s media player with Windows. The board caused Microsoft to fight the charges but eventually abandoned the effort and paid penalties and fines. The E.U. then began to focus on Internet Explorer and eventually required the company to agree to provide users with a choice of browsers in exchange for dropping an antitrust suit. Microsoft was given responsibility to monitor its own compliance with the settlement over a 5-year period.

Violations. The complaint specified that Microsoft’s board caused it to eliminate the choice in millions of installations “in direct violation of the settlement.” The board had a duty to disseminate accurate, truthful, and complete information to shareholders, but a Form 10-K filed by the company in 2011 did not disclose that the board was causing the company to violate the agreement. The board members also failed to maintain internal controls and failed to properly manage the company, according to the complaint.

The case is No. 2:14-cv-00540.

Attorneys: Duncan Calvert Turner (Badgley Mullins Turner PLLC) for Kim Barovic.

Companies: Microsoft Corp.

News: Antitrust