Microsoft Corp. challenged as “unfair” a European Union penalty of 899 million-euro ($1.26 billion) it received for failing to comply with an antitrust ruling.

The world’s largest software company told judges at an appeal hearing today that the 2008 European Commission fine was “especially unfair” because the regulator failed to give it sufficient guidance to avoid the fine. The court should annul the “unnecessary, unlawful and totally disproportionate penalty,” Microsoft lawyer Jean-Francois Bellis told the court.

Microsoft is the only company in more than 50 years of EU competition policy to be penalized for failing to comply with an order. Today’s case is the last remnant of years of disputes with the commission that resulted in fines totaling 1.68 billion euros. Microsoft agreed to a settlement in 2009 in a bid to repair the company’s uneasy relationship with the EU regulator.

The Brussels-based commission said Microsoft breached an earlier ruling by overcharging for licenses that rivals needed to connect products to Windows computers. As the first appeal of such a decision, the judges at the EU General Court in Luxembourg will clarify the scope of the commission’s power.

“This case would not have arisen if the commission had been as explicit with respect to the rates which it wanted Microsoft to charge as it had been with all the other aspects of the licensing terms proposed by Microsoft,” Bellis told a three-judge panel.

Periodic Penalty

The commission, the EU’s antitrust authority, imposed the 899 million-euro fine as a so-called periodic penalty payment on Redmond, Washington-based Microsoft for failing to comply with a 2004 antitrust order.

The punishment “served no purpose other than pressuring Microsoft into coming up with an outcome” that the EU could have come up with “from the outset,” Bellis said.

Under the initial decision, Microsoft was fined 497 million euros and ordered to provide data to competitors to allow servers to connect to computers using the Windows operating system.

Microsoft was also required to limit to a “reasonable” amount the royalties it charged for the technology. An EU court in September 2007 rejected Microsoft’s appeal of that decision.

“This is a case about a gambler who doubled up on a losing bet, lost again and now wants his money back,” Nicholas Khan, a lawyer for the commission, told the court. The 2007 EU court decision “meant that the gamble failed” and “Microsoft wants to unwind the bet. These gambling instincts persist in the manner of conducting these proceedings.”

Compete With Microsoft

The only reason why competitors wanted the inter- operability information from Microsoft was not to add features to their products, it was because rivals needed to be able to compete, said Thomas Vinje, a lawyer who spoke on behalf of some of the interveners, including International Business Machines Corp. and Oracle Corp.

“In light of all of the information available to it, Microsoft must have know that the licensing terms it offered were unreasonable,” said Vinje, a lawyer with Clifford Chance LLP. “Only a few weeks after this court’s” September 2007 “ruling, Microsoft claimed it understood what was reasonable and started offering” such licensing terms.

Microsoft’s appeal is supported by industry association CompTIA and the Association for Competitive Technology. The commission’s case is supported by seven interveners, including IBM and Oracle.

488 Days

The EU assessed Microsoft’s proposals for 306 days of the EU’s 488-day periodic penalty, said the company’s lawyer Bellis, who works at law firm Van Bael & Bellis in Brussels.

“Why did it take the commission so long to review them?” asked Bellis. “How can the commission fine Microsoft for failing to apply reasonable rates from June 2006 to October 2007 when the final parameters were only determined on October 22, 2007?”

Microsoft also questions the validity of the EU’s assessment reports prepared by a trustee charged with monitoring the company’s compliance with the 2004 decision.

The trustee mechanism was the only part the EU court invalidated in its 2007 decision, saying the regulator had been wrong to force the company to give powers to an independent trustee who had access to its documents, premises and software source code.

A case at the lower court takes between 3 to 4 years from appeal to ruling date, according to court statistics. Microsoft can appeal any decision to the European Court of Justice.

The case is T-167/08, Microsoft v. European Commission.