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Working draft
7 August 2005
PREDATORYANDEXCLUSIONARYINNOVATION: WHICHLEGALSTANDARDFORSOFTWARE
INTEGRATIONINTHECONTEXTOFTHE COMPETITIONV INTELLECTUAL PROPERTYRIGHTS
CLASH?
Maria Lill Montagnani
University of Bocconi - Institute of Comparative Law "A. Sraffa" (IDC)
Abstract
This paper aims to address two questions: first, how to identify the
legal standard that courts use to assess a specific behavior (software
integration) commonly adopted by firms possessing IPRs. Second, whether
this standard enables us, on the one hand, to draw a line between predatory
and competitive innovation, and, on the other, to strike a balance between:
the market leaders freedom to innovate and the public interest towards the
persistence of competitive markets.
The research consists of an examination of the main hardware and
software integration cases in the US and the EU, from which a standard
echoing the predatory innovation doctrine principles and increasingly aware
of network effects and high-tech market features emerges. The conclusion is
thus that, as long as IPRs work as incentives to innovate, a system of rivalry
is to be maintained. However, when exploitation of IPRs by rightholders
becomes a means to limit competition in the market (in that it enables toprevent both competitors and rightholders further innovation); then IPRs
loose the function of innovation incentives and remedies are to be
undertaken in order to maintain competition effective in the market.
1 INTRODUCTION
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Innovation has historically been deemed a competition driver and,
therefore, rewarded through the granting of IPRs (1). However, in high-tech
markets innovation may be twofold. On the one hand, it promotes
competition and deserves reward, such as IPRs; on the other hand, it may
be a means to prevent competition due to the high-tech market specific
features, such as network, spill over, consumer lock in and winner-takes-all
effects (2).
The twofold nature of innovation in high-tech markets has been
theorized by those scholars asserting the predatory innovation doctrine,
under which innovation in network markets can be a means to predation
and, as such, can violate competition law (3).
Distinguishing good from bad innovation is not an easy task,
since the high-tech market specific features are counterbalanced by high-
tech market operators ownership and exploitation of IPRs, granted as a
result of their innovative efforts and entitling rightholders to act freely.
Both these aspects (market features and IPRs) emerge when dealing
with a specific behavior adopted in the software market: software
integration.
First, the software market is a classic example of network market in
that one product or standard tends towards dominance. In this context, the
1 IPRs are granted to foster innovation since they are an (economic) reward for creative andinventive works. Granting an exclusive right is considered an incentive to further creationand invention, and it benefits society in terms of culture, science, and economy. Such aprocess invention-IPRs- incentives to further innovate, thus, benefits competition itself bydeveloping new products and markets and suites the Schumpeterian perspective, underwhich innovation is competitive when it promotes the technological progress necessary to
produce more and better quality goods. With this regard, the market process appearssegmented in (i) introduction of a product innovation into a market; (ii) increase ofinnovators revenues; (iii) imitation of that product innovation by competitors; (iv)introduction of the imitated product into the market by competitors; and (v) decrease ofinnovators revenues [FREDERIC M. SCHERER, INDUSTRIAL MARKET STRUCTUREAND ECONOMIC PERFORMANCE 350(Rand McNally College 1970). See also JOHN M. CLARK, COMPETITION AS A DYNAMIC PROCESS 178-270(Brooking Institution 1961)]. Through the above mentioned process, technological andeconomic progress develops. However, innovators will be likely to aim at making phase (ii) asmuch longer as they can in order to postpone phases ( iv) and (v), and IPRs appear to beuseful means to stretch phase (ii) and block or slow down the innovation circle.2 ILKA RHANASTO, INTELLECTUAL PROPERTY RIGHTS, EXTERNAL EFFECTS AND ANTITRUST LAW 183 passim (OxfordUniversity Press 2003).3 Janusz A. Ordover & Robert D. Willig, An economic Definition of Predation: Pricing and
Product Innovation, 91 YALE L. J. 8 (1981). Contra J. Gregory Sidak, Debunking PredatoryInnovation, 83 COLUM. L. REV. 1121 (1983).
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utility that a user derives from the consumption of a good increases with the
number of other users consuming that good. Thus, once one product or
standard achieves wide acceptance, it becomes entrenched (4). At the same
time, such entrenchment may be temporary because innovation may alter
the field altogether (5). At least the latter is deemed to be the mechanism to
keep the software market (and, generally speaking, the high-tech markets)
competitive (6). Recent cases, such as the European Microsoft case,
however, seem to demonstrate that network effects and IPRs tend to
strengthen the innovators position.
Second, software programs are protected by copyright and this
protection has been progressively extended from source code to other
elements (7), not least communication interfaces. Besides, patents are
granted for software programs showing technical effects which further
expand these products protection (8).
Software integration can thus exemplify the issue in exam: innovative
behaviors adopted by IP rightholders generating both pro- and anti-
competitive effects. When adopted by a firm leading a forehead market
(such as the operating system market), software integration may be capable
of hampering competition in an aftermarket (such as the server or browser
markets). In this case, innovation can be considered predatory, and
predation can be challenged. On the other hand, software market operators
are rewarded for their innovation through the granting of IPRs that, in turn,
are supposed to provide an incentive to further innovate. However, in this
market and in certain circumstances, IPRs are unlikely to offer an incentive
to innovate, but, rather, a means to limit further innovation and
developments.
4 This mechanism has been defined competition for the field, instead of in the field, byHarold Demsetz, Why regulate utilities?, 11 J.L. & ECON. 55, 57 n.7 (1968).5 JOSEPH. A. SCHUMPETER, CAPITALISM, SOCIALISMAND DEMOCRACY 81-90 (Allen & Unwin 1943).6 Herbert Hovenkamp, Post-Chicago Antitrust: A Review and Critique, 2001 COLUM. BUS. L. REV.257, 332.7 For a complete overview of software protection under the US copyright law see MARK A.LEMLEYETAL., SOFTWAREAND INTERNET LAW (Aspen Law and Business 2nd ed. 2003). For a comparativeapproach, see ADRIAN STERLING, WORLD COPYRIGHT LAW (Sweet & Maxwell 2nd ed. 2003).8
On Software patentability see Micheal Guntersdorfer, Software Patent Law: United Statesand Europe Compared, DUKE L. & TECH REV 6 (2003).
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For these reasons software integration cases appear to be an ideal
scenario for finding the legal standard to distinguish good from
predatory innovation in network markets. And, too, the predatory
innovation doctrine principles constantly emerging in hardware and
software integration cases appear to be a good means towards achieving
this goal.
Hence, the aim of this paper is to find the legal standard used by case
law to assess software integration and to verify: first, whether predatory
innovation principles have therein been applied; and, second, whether this
application enables the courts to strike a balance between actors freedom
to innovate and public interest towards competitive markets. Besides, this
assessment is to be carried bearing in mind that in the software market
freedom to innovate is granted through the IPR ownership, which brings in
the clash between Competition law and Intellectual Property law.
The rest of part I will provide a definition of predatory innovation and
the terminology used herein. Part II will survey the early software and
hardware integration cases (IBM cases) since they are the early cases where
the predatory innovation principles underpinned the allegations. Part III will
survey the early software integration cases: Microsoft II and Caldera v.
Microsoft and the blurring of monopolization and tying offenses. Part IV will
address whether predatory innovation principles were applied in Microsoft III
and IV. And, finally, part V will try to work out a system to assess software
integration and, more broadly, innovative conducts generating both anti-
and pro-competitive effects in the light of predatory innovation doctrine
principles. With regard to the software market, this assessment can not becarried without considering the presence of IPRs enabling the innovator to
justify his behaviors. Innovation being counterbalanced by IPRs, software
integration needs to be addressed and inserted within the context of the
clash between Competition law and Intellectual Property law.
1.1 Predatory and exclusionary innovation in the
hardware and software markets
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Predation is that conduct which has the purpose and the effect of
advancing the actors competitive position, not by improving the actors
market performance, but by threatening to injure or actually injuring
potential competitors, as to drive and keep them out of the market, or force
them to compete less effectively (9). Such predatory behaviors can center
on prices (predatory pricing) or other elements, such as innovation,
research and development, advertising, and product designs (non-pricing
predatory practices) (10). In both cases a key element to raise competition
concerns is the actor being a monopolist or possessing a dominant position.
The focus is herein on those behaviors centered on innovation. This
competition driver may generate both anti- and pro-competitive effects so
as to raise the question as to when innovation stops being beneficial and
starts being detrimental.
The question becomes even more relevant in network markets, such
as software and hardware markets, for several reasons. First, lock-in,
network, winner-takes-all and similar effects together with low marginal
costs can amplify innovations anticompetitive effects (11). Second, in such
markets the actors positions is strengthened by IPRs either rewarding
rightholders for their previous innovative efforts or protecting their
freedom to further innovate. Although changing design or updating
(upgrading) of patented or copyrighted products are rightholders choices
as well as bundling two different products however, exploitation of IPRs
may higher barriers to entry.
Therefore, with regard to the software and hardware markets, the
question to pose is as to whether markets features and IPRs are to be taken
9 LAURENCE A. SULLIVAN, HANDBOOKOFTHE LAWOF ANTITRUST 108 (West 1977).10 HERBERT HOVENKAMP, FEDERAL ANTITRUST POLICY. THE LAWOF COMPETITIONANDITS PRACTICE 289 (West end ed.1999). Non-prices behaviours centered on innovation consist in: (i) manipulation of leadingfirms main technology in order to make it incompatible with competitors accessories andleverage secondary markets (so called technological or implicit - tying); (ii) constantupdating of leading firms main technology to raise competitors costs to regain compatibility(technological manipulation or design change); (iii) vapourware (on the latter practice, seeRobert Prentice, Vaporware: Imaginary High-Tech Products and Real Antitrust Liability in aPost-Chicago World, 57 OHIO ST. L. J. 1163 (1996). For a categorization of behaviours falling inthe predatory practices, see also Carlos Acuna-Quiroga, Predatory Innovation: A StepBeyond? (Understanding High-technology Markets), 15 INTL REV. OF L. COMPUTERS & TECHNOLOGY 7,8-9 (2001).11
John Temple Lang, European Community Antitrust Law: Innovation Markets and HighTechnology Industries, in INTERNATIONAL ANTITRUST LAWAND POLICY 519 (Bender 1996).
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into account in assessing when innovation stops being beneficial and starts
being detrimental. In other words, assuming that the innovations
exclusionary effects outweigh pro-competitive effects, is this boundary to be
struck according to market features and actors ownership and current or
potential exploitation of IPRs?
According to those scholars formulating the predatory innovation
doctrine, a different assessment is needed for monopolists operating in
network markets due to market power possibility of being entrenched by
innovation (12).
Both the United States and European courts have been wary of these
principles granting a different treatment to the incumbents innovation
when aiming to prevent competition in network markets. This does not
mean that courts have always been consistent in assessing behaviors
dealing with innovation, and a progressive change appears to have taken
place.
While, in the early cases, innovative behaviors at that time
hardware integrations were implicitlyper se lawful, in that an assessment
involved technical evaluations was deemed difficult to undertake and falling
outside courts competence; predatory innovation doctrine principles appear
to underpin the recent decisions involving software integrations. As markets
have changed (integration in the hardware market has been progressively
replaced by integration in the software market), courts approach has
changed either, and allegations grounded on predatory innovation principles
have progressively been accepted.
A premise is however necessary in order to clarify the wording
predatory innovation. Although this term originates from the antitrust law
doctrine stating the principles we deal with, however, in this work a slightly
different wording is adopted. Predatory innovation is used to indicate that
12 Ordover & Willig, supra note 3, at 8. In details, the Authors doctrine can be applied tovertical integration, such as the software integration in question, by a three-prong test: 1.Analysis of the likelihood and the sources of monopoly profits from exclusion; 2. Profitsacrifice; 3. Recoupment of the forgone profits. See also Laurence J. White, Microsoft and
Browsers: Are the Antitrust Problems Really New?, New York University, Center for Law andBusiness, Working Paper No. 98-018 www.ssrn.com/abstract=164499 (March 1998).
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conduct falsely innovative but exclusively aimed to drive and keep
competitors out of the market; whereas exclusionary innovation is
adopted to indicate that conduct whose effects on competition can be both
detrimental and beneficial at the same time, regardless of the actors
purpose.
A survey of cases dealing with, firstly, hardware and, secondly,
software integration can show how predatory innovation doctrine principles
have progressively emerged and, with them, the assessment of market
features and exploitation of IPRs. This survey may also provide a means to
assess software integration by eliciting the legal standard applied. Since in
the case-law predatory innovation doctrines principles are often melted
with the tying doctrine principles, a few remarks on this point are necessary.
1.2 Hardware and software integration: technological tying
between monopolization (or abuse of dominant position)
and tying
Hardware and software integration can fall under different provisions:
monopolization (section 2 US Sherman Act) or abuse of dominant positions
(art. 82 EC Treaty); and, tying (section 1 US Sherman Act and art. 82 (d) EC
Treaty). In the U.S., besides these provisions, an allegedly exclusionary
innovation conduct may also be challenged as an attempt of monopolization
(section 2 US Sherman Act). Although an attempt of monopolization claim
was accepted in the predatory innovation leading case Bard v. M3 System
(13
) this offense has little relevance in the hardware and software
13 157 F.3d 1340 (Fed. Circ. 1998).
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integration cases (14) (15). For this reason, it will not be dealt with in this
paper (16).
Monopolization (or abuse of dominant position) on the one hand, and
tying on the other hand, are rather differently assessed under the US and
the EU competition laws. These differences are worth pointing out as they
affect the legal standard to be applied.
In the US, two different legal standards can be applied depending on
whether an integration is being challenged under sec 2 or sec 1 of the
Sherman Act: the Grinnel standard andper se illegality rule, respectively.
As to the former, monopolization offense has two elements deriving
from the Grinnell case: (i) the possession of market power in the relevant
market and (ii) the willful maintenance of that power as distinguished from
growth or developments as a consequence of a superior product, business
acumen, or historic accident (17).
As to the latter, tying has traditionally been assessed the following
way: whenever four conditions are considered present (namely: (i) two
separate products; (ii) market power in the tying product market; (iii) no
consumer choice to obtain the tied product separately from the tying
product; and, finally, (iv) foreclosure of competition in the tying market), the
tying practice is deemed illegal per se (18) no matter the efficiencies the
tying could generate for consumers. However, since the legal standard to
evaluate tying in high-tech markets needs to balance the efficiencies a tying
can generates with the anti-competitive effects it can yield, a rule of reason
assessment is progressively emerging (19).
14 Herbert Hovenkamp, The Monopolisation Offense, 61 OHIO ST. L. J. 1035, 1046 (2000),stresses that, as long as its product is complement of competitors products, a non dominant
firm is unlikely to design change or integrate in that there is no incentive to limitcompatibility. Rather, a non dominant firm has incentive to maximize its profits bymaximising its compatibility. Hence, an attempt of monopolisation by a non dominant firm isless likely to happen than a monopolisation offense.15 The attempt of monopolizations three element test, deriving from Swift & Co. v. UnitedStates [196 U.S. 375, 396 (1905)], are: (i) specific intent to control prices or destroycompetition in some part of commerce; (ii) predatory or anticompetitive conduct directed toaccomplishing the unlawful purpose; and (iii) a dangerous probability of success.16 For an analysis of Bard v. M3System see Herbert supra note 6, at 327-332.17 United States v. Grinnell Corp. 384 U.S. 563, 570-571 (1996).18 For a discussion of tying arrangement assessment see HOVENKAMP, FEDERAL ANTITRUST POLICY,supra note 18, at 392.19
Amongst the several scholars criticising the tyingper se illegality rule, see David S. Evans,A. Jorge Padilla & Christian Ahlborn, The Antitrust Economics of Tying: A Farewell to per se
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Conversely, in the EU, tying is a species of the abuse of dominant
position genus, thereby sharing the same rule of reason approach applied to
behaviors falling under art. 82 EC Treaty. This tying assessment is thus
focused on four elements (the same elements the US tying assessment is
grounded on). Their presence, however, does not determine a tying per se
illegality, because a balance has always been deemed necessary to be
undertaken between pro- and anti-competitive effects.
As long as the US and the EU apply two different rules in assessing
tying, hardware and software integration assessments will be different.
However, because of the current trend in the US towards the adoption of a
rule of reason approach, differences between the US and the EU systems
are progressively being blurred. It is still worth bearing in mind, though, that
these differences did affect the early cases and, even now, parties try to
make claims or a defense under one or the other category according to the
results that they are pursuing.
2 EARLY LEGAL STANDARDS FOR EXCLUSIONARY INNOVATION IN THE HARDWARE AND
SOFTWAREMARKETS: THE IBM CASES
In the late 70s and beginning 80s the first relevant claims underlying
predatory innovation doctrine took place in the hardware market and
involved IBM, challenged of using innovation to monopolize and attempt at
monopolizing, in violation of section 2 of the Sherman Act.
Even the early cases show concern over the twofold nature ofinnovation: as triggering competition and, at the same time, harming
competition. However, courts awareness that the markets at hand
presented specific features capable of altering the competition mechanism
did not modify the very conservative approach adopted in assessing IBMs
behaviors under the monopolization legal standard. Therefore, that
Illegality, 49 ANTITRUST BULL. 287 (2004). See also David S. Evans, A. Jorge Padilla and Michele
Polo, Tying in Platform Software: Reasons for a Rule-of-Reason Standard in EuropeanCompetition Law, 25 WORLD COMPETITION 509 (2002).
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approach did not take into consideration market features and IPRs as means
to raise barriers to entry (20).
2.1 IBM hardware integration cases
At the time that IBM cases took place, computers were rather
different from now. What we now call a computer was a minicomputer,
while computers occupied an entire room or office, where the central unit
machine and its accessories not only printers but also memories and tape
drives and the like were located. Conversely, software was not that
important and was often given free to customers buying a central unit.
In this context, IBM was manufacturing both central unit machines
and its peripherals. However, accessories were also manufactured by IBM
competitors, and, although not being original, they were IBM compatible as
well. IBM then started to integrate these accessories (peripherals) or to
change the design of interfaces between the main frame machine and
peripherals, thereby making the competitors accessories incompatible with
its main frame machines.
By doing this IBM was innovating. We would probably not have the
machines we have now if IBM had been prevented from doing it. However,
this same innovative behavior was alleged to limit competition in the
accessories markets since precluding the compatibility of competitors
peripherals, thereby forcing them to move to another product or seek
compatibility again.
20As to IPRs in the hardware and software markets, it is to bear in mind that copyright on
software was introduced in the 1980 in the US and later in EU [on this point, see MananderGrewal, Copyright protection for computer software, 18(8) E.I.P.R. 454 (1996)]; while the suigeneris rights on microchip is slightly more recent, at least in the US [ see Jay A. Erstling, TheSemiconductor Chip Protection Act and Its Impact on the International Protection of ChipDesign, 15 RUTGERS COMPUTER & TECH. L.J. 303 (1989)]. Therefore, in the earlier IBM cases, morerelevance was given to trade secret law, since IBM, after having integrated accessories, usedto refuse to disclose the new interfaces by claiming a secret on them. The courts, however,tended to affirm the principle that trade secret, even though granted as an incentive toinvent, should not prevent competitors reverse engineering [as an example of the
mentioned conduct and courts reasoning, cf. ILC Pheripherals Leasing Corp. v. IBM, 458F.Supp. 423, 437 (N. D. Cal. 1978).
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No claim brought against IBM was accepted by the American Courts,
though. Its interesting to examine the outcomes because every case adds a
bit more information on the courts reasoning.
2.1.1 IBMs behaviors
More specifically, IBMs challenged practices were: (i) design changes
for the interfaces between central processing units and certain peripherals,
such as tape drive (21); (ii) integration of disk functions, such as disk
controller (22) and disk driver (23), into the central processing unit; (iii)
behaviors not directly related to innovation rather to contracts,
advertisements and prices.
The practices were challenged under the section 2 of the Sherman
Act stating unlawful for a firm to monopolize (monopolization offense) and
to attempt at monopolizing (attempt of monopolization offense) (24).
2.1.2 The courts decisions
The courts reasoning on exclusionary innovation conducts have in
common the adoption of a generalized standard applicable to all types of
behaviors adopted by monopolists regardless of the relevant market
features and IPRs.
Although all the decisions rejected the predatory innovation claims,
they still present a slightly different approach to the issue which is worth
pointing out.While the early decisions state that innovation was always good;
the later ones started out by refusing to admit that innovation could both
harm and benefit competition, but ended up by affirming that, from a
21 Transamerica Computer Company Inc. v. IBM, 698 F.2d 1377, 1382 (9th Cir. 1983).22 California Computer Products Inc. v. IBM, 613 F.2d 727, 743-744 (9th Cir. 1979).23 ILC Peripherals Leasing Corp. v. IBM, 458 F.Supp. 423, at 438-439.24 For a complete overview and analysis of the IBM case, see also Lawrence A. Sullivan,Monopolization: Corporate Strategy, the IBM Cases, and the Transformation of the Law, 60
TEX L. REV. 587 (1982); Robert E. Barkus, Innovation Competition: BeyondTelex v. IBM, STAN. L.REV. 285 (1975-1976).
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theoretical point of view, innovation could unreasonably restrict
competition, and, thereby, violate the Sherman Act sec. 2. On the other
hand, however, a product improvementcould never be restrained, even
when its effect would severely injure competitors (25).
The point, therefore, was and, partially, still is to figure out when a
product improvement was occurred. Even on this issue the courts
reasoning was still theoretical. A balance between the level of superiority
and the effects on competition was invoked but never explained. An
improvement was deemed to possibly harm competition whenever that
level of product superiority was, with respect to the former product, not
compensated for by the harm done to competition.
In the IBM cases, the courts never moved from theory to practice
since the challenged integrations did always constitute an improvement,
and, before than that, IBM was deemed not to have market power. In other
words, time was unlikely to be ripe for accepting an exclusionary innovation
claim since network effects were not that worrisome and IPRs on hardware
products were hardly considered.
2.2 IBM software integration cases
The last case involving IBM took place, rather than in the hardware
market, in the software market; and dealt with IBMs having integrated a
proprietary software in its operating system (26). Such a behavior was
alleged to harm competition in the software market since it could have
driven out all the software manufacturers competing with IBM.
2.2.1 The IBMs behaviors
IBMs challenged behavior was the tying of an application software
program and the operating system. This software had two functions:
transferring data between the computer disk into the operating system, and
loading for the first time IBMs operating system (27).
25 In re IBM Peripheral EDP Devices Antitrust Litig. Transamerica Computer Co. Inc. v. IBM,481 F.Supp. 965, 1004 (N. D. Cal. 1979) (emphasis added).26 Innovation Data Processing Inc. v. IBM, 585 F. Supp. 1470, 1472-1473 (N. J. Dist. Ct. 1984).
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A little background information is necessary to understand the case
facts and the outcome. At that time IBM was marketing two different
versions of its operating system: the former had integrated the software
performing the above mentioned functions; the latter had kept it unbundled.
However, even in the case of the integrated software, it could have been
used to upload the operating system and, after that, removed without
paying fees within thirty days (28).
Since an IBM competitor was manufacturing a software program
performing the same functions of the software IBM had integrated in its
operating system it challenged IBMs integration claiming that it
constitutes tying under sec. 1 of the U.S. Sherman Act. This integration was
thus alleged as being illegalper se (29).
2.2.2 The courts decision
Although at that time, and under the American antitrust law, tying
assessment was quite strict, in this case the court decision stated that the
integration was lawful since the users were not coerced into buying the
integrated version of IBMs operating system. And, even when they bought
it, they were still free to unbundle it.
The courts reasoning expressly grounded on (i) the presence of these
two different versions of IBMs operating system; and (ii) the possibility of
either licensing the software without the operating system (in the
segmented version), or removing it from the integrated version whenever
the customer wanted (and without paying any fee if removed within thirty27 Of some interest, even for the following, is the definition of operating system that the courtgave in Innovation v. IBM (id. at 1472): An operating system is a set of computerprograms which guide and control the basic function of a computer. These operating systemprograms also provide the necessary link between the physical hardware and the variousapplications programs software, designed to perform specific tasks, such as accounting,world-processing, payroll or even video games.28Id., at 1474.
29Differently from the current legal standard for tying (see supra p. 6 and note 18), at that
time, the elements of the test to affirm a tying illegal per se were: (i) an agreement to by aparty to sell the tied product provided that the tying one is bought; (ii) market power in thetying product market; (iii) harm of competition in the term of not insubstantial amount of
interstate commerce affection(Id., at 1475), since the coercion was implicit in the concept ofleverage (while in the later standard it will be explicitly required).
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days from the hardware purchase). Given this context, the coercion
implicit in the concept of leverage, and, at that time, not explicitly required
was not deemed present, and the tied product as such was always
remaining a possibility of licensing.
2.3 The European perspective on IBMs behaviors
In the late 90s there was a European IBM case as well (30), and it
never reached the courts since it was settled through the Commissions
intervention.
In Europe, IBM was selling a series of hardware and software products
designed to complement one another. And, like in the US, IBM was
horizontally integrated, whereas its competitors each sold some, but not all,
of the same range of products, for use with IBM products. At a certain point
IBM started (i) selling its main frame machines coupled with main memory
and basic software; (ii) refusing to sell certain proprietary software to users
of non-IBM main frame machines; and, finally, (iii) advertising new products
long before the technical details and interfaces were disclosed. By doing
this, IBM was challenged for tying its products and, thereby, preventing the
compatibility of competitors products.
The Commission stated that IBMs behaviors were creating, firstly, an
artificial advantage for itself by (i) delaying disclosure of interface
information on its new products while taking orders for them; and by (ii)
denying the competitors an opportunity to adapt their products to IBMproducts. Secondly, IBMs behaviors were creating a disadvantage for its
competitors by refusing to supply software to users of non-IBM machines.
Finally, IBMs behavior was tying-in because software or memory could only
be purchased with the mainframe machine.
Although the Commission never elaborated the legal reasoning
behind its Statement of Objection, IBMs behaviors would likely have been
30
Case 60/81, International Business Machines Corp. v. Commission, 1981 E.C.R. 2639(1984).
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fallen under art. 86 (now art. 82) of the EC Treaty because it placed
competitors at a competitive disadvantage (31); a settlement was duly
reached when IBM undertook to disclose the interface information, and to
supply the software to users of non-IBM machines.
Even though it not involved a technological tying like the American
IBM cases, the European IBM case was worth mentioning so as to have a
complete overview of what was happening in both the EU and the US
systems with regard to hardware and software integration.
2.4 Summation
IBM cases are a good starting point on the issue of hardware and
software integration for several reasons.
Firstly, they show the development of the courts reasoning and the
increasing awareness of the anti-competitive effects that innovation can
generate in the high-tech markets.
Secondly, a progressive openness towards economics appears to
progressively emerge due the more in-depth knowledge of high-tech market
specific features.
Thirdly, the courts seem to be consistent in keeping technological
tying separate from traditional tie-in practices. Such separateness makes a
relevant difference on the standard to apply in assessing the challenged
behavior lawfulness (32
). In this context, however, it is to stress the changingapproach in the tying assessment. Even though, when tie-in claims are
raised to challenge software integration, decisions on these allegations are
to be adopted under the tying standard, instead of the monopolization one;
in Innovation Data Processing v IBM, the court expressly stated that as a
31 John Temple Lang, Defining Legitimate Competition: Companies Duties to SupplyCompetitors, And Access To Essential Facilities, in INTERNATIONAL ANTITRUST LAWAND POLICY 245, 258(Bender 1994).32
Dustin Rowles, Is a Tie-In or an Integration? U.S. v. Microsoft Weighs In, 6 B.U. J. SCI. & TECH.L. 12, 15 (2000).
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general rule we hold that the development in introduction of a system of
technologically interrelated products is not sufficient alone to establish a per
se unlawful tying arrangement even if the new products are incompatible
with the products then offered by the competition and effective use of any
one of the new products necessitates purchase of some or all of the others
(33).
3 MICROSOFT II AND CALDERA V MICROSOFT: LEGAL STANDARDS FOR EXCLUSIONARY
INNOVATION INTHESOFTWAREMARKET
The early integration cases involving subjects other than IBM are
Microsoft II and Caldera v. Microsoft. The former needs to be analysed since
some scholars believe it to be the leading case in assessing software
integration (34), and since it tells us what the courts thought level of
superiority was. The latter is to be examined since it gives an interpretation
of level of superiority different from the one given in Microsoft II.
3.1 Microsoft II (35): a leading case for software integration
conduct?
Microsoft II involved the practices adopted by Microsoft in marketing
the operating system (OS) Windows 95 in the primary market of original
equipment manufacturers (OEMs); and the proper interpretation of a 1994
consent decree.
In the following some background information is provided to
understand the differences between this case and the subsequent Microsoftcases, and the affirmation that Microsoft II is the leading case to assess
software integration.
3.1.2. Microsofts behaviors
33 Innovation Data Processing Inc. v. IBM, 585 F. Supp. at 1476 [quoting Foremost Pro Color v.Easterman Kodak Inc., 703 F. 2d 534, 542-543 (9th Cir. 1983)].34 J. Gregory Sidak,An Antitrust Rule for Software Integration, 18 YALE J. ON REG. 1, 34 (2001).35 United States v Microsoft Corp., 147 F.3d 935 (D.C. Cir. 1998).
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Before Windows 95 was released, Microsoft used to manufacture DOS
and graphical user interfaces separately. The former being the central
nervous system of the computer, controlling the computers interaction with
peripherals such as keyboard and printers (36); the latter being the
technology by which the operator performs functions not by typing at the
keyboard but by clicks of his mouse (37).
DOS products and graphical user interfaces were not directly offered
to end users, rather, they were marketed through OEMs. The latter were in
charge of making computers; installing operating systems and other
software that they licensed from vendors such as Microsoft; and selling the
packages to end users either individual consumers or businesses. In this
context, it is to point out that Microsofts graphical interfaces were
compatible with DOS manufactured by Microsofts competitors.
Complaints were lodged with both the U.S. Department of Justice and
the European Commission vis--vis Microsofts tying its DOS to its graphical
user interfaces so as to limit the latters being used with non-original DOS
products. In detail, Microsoft was accused of creating economic incentives
for OEMs to preinstall Microsoft interfaces and Microsoft DOS, thereby
influencing OEMs choices in the DOS market, and preventing competitors
DOS being installed and marketed in this market.
In 1994 the U.S. Department of Justice filed a complaint against
Microsoft, claiming that its license agreements with OEMs and software
developers contained anticompetitive terms aiming to unlawfully maintain
its monopoly in the OS market. The complaint was accompanied by a
proposed consent decree intended to regulate those practices andnegotiated amongst Microsoft, the Department and the Commission. In this
context, an anti-tying provision was included whereby Microsoft was
prohibited from entering into any licensing agreement on its products so as
to leave OEMs free to license, use, and distribute any non-Microsoft
products. At the same time, the same consent decree stated out that this
36Id., at 938.37Id., at 938.
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provision in and of itself should not be construed to prohibit Microsoft from
developing integrated products.
After the consent decree was signed by the parties (38) thus pre-
empting a trial on the merits Microsoft released Windows 95 with
integrated graphical user interfaces without raising competition concerns
and the new version of its browser Internet Explorer 3.0 which, on the
opposite, raised competition concerns as to the above mentioned consent
decrees violations.
The concerns over both Internet Explorer 3.0 and its subsequent
updated versions integration into the OS centered on Microsoft requiring the
OEMs to shortly shift to the latest service release for Windows, as soon as it
was publicly released. The OEMs had to do this by installing the OS copies to
be distributed to end-users. The question thus arose as to whether such an
obligation was infringing the consent decree.
3.1.2. The Courts decisions
In 1997 the anti-tying agreement condition was alleged to have been
infringed by the Microsoft integration, and an injunction was sought by the
Department of Justice. Although Jackson J. deemed the 1994 consent decree
decision to be too vague to be enforceable, he granted an injunction due to
the high probability of Microsofts behavior constituting monopolization
under Section 2 of the Sherman Act. Integration was thus not deemed to
infringe the consent decree, but to constitute a monopolization offense.
However, in 1998 the Court of Appeal for the District of Columbia
Circuit reversed the injunction and gave the interpretation on the consent
decrees anti-tying provision that the Court of First Instance had not
provided. In this respect, the Court of Appeal stressed the difference
between a combination offered by the manufacturer (integrated products)
and a combination created by the purchaser through OEMs from separate
products. In other words, Microsoft integrations (even though installed by
38 United States v. Microsoft Corp., 56 F.3d 1448 (D.C. Cir. 1995).
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OEMs) differed from installations by OEMs, which were based on purchasers
requests, but had often been conditioned by Microsofts license agreements.
Although in both cases OEMs were installing OSs and software together, in
the former Microsoft had innovated and installation was grounded on that
in the latter Microsoft had not innovated and it was just seeking to impose
a tie on OEMs in order to sell more products. In the Court of Appeals
opinion, since integration is the creation of the design that knits together
two separate products, it had to occur at Microsofts level, in that OEMs
cannot do it. Once two products had been integrated, OEMs could just install
what Microsoft had given them according to Microsofts instructions.
The Court of Appeal, thus, deemed that the consent decrees anti-
tying provision could not limit Microsofts freedom to innovate, and
innovation was not a net plus but merely a question of whether there is a
plausible claim that it brings some advantages (39). Therefore, as long as
consumers gain advantages from the integrated versions of the OS, there is
no room for competition concerns and no need to bring in IPRs to strengthen
Microsofts position.
To sum up, the software integration rule underpinning Microsoft IIs
decision is somewhere in the middle between predatory innovation and
tying principles, tilting more towards the latter.
Although software integration itself is more likely to be included in a
predatory innovation behavior and judged under the section 2 Sherman Act
standard, the Court of Appeal expressly rejected the idea of both
technological tying and balance between integrated product synergies
and distinct market evidence. Rather, it applied a plausible consumerbenefit rule deriving from antitrust law principles and deemed
Microsofts practice lawful since the software integration was producing a
plausible benefit.
However, this interpretation was given in the context of an alleged
infringement of a consent decrees provision, and, in a subsequent decision,
39 United States v Microsoft Corp., 147 F.3d at 950.
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the same court remarked the analysis provided had not been sufficiently in-
depth (40) (41).
3.2 Caldera v Microsoft (42): a comparison between two
different texts
The same reasoning as in the Microsoft II case underlay the courts
decision in rejecting Calderas claim against Microsofts having integrated
DOS and Windows in a single product: Windows 95.
Although the reasoning and outcome were the same, a relevant
difference between Caldera v Microsoft and Microsoft II cases lies in the
interpretation of level of superiority, and, therefore, in the criterion
adopted to make a balance between product superiority and anti-
competitive effects.
3.2.1. Microsofts behavior
In Microsoft v Caldera, Microsoft was challenged vis--vis
technological tying since it integrated MS-DOS and Windows 3.0 in a new
and innovative product: Windows 95 OS (an early version of the Windows
operating system as we know it). By doing this, Microsoft took two functions
belonging to two different products and combined them into one new and
innovative product, thus limiting competition in the DOS market. IBMs
competitors could not have effected the same combination because, while
IBM was horizontally integrated, they were only producing DOS products.
IBMs integration, therefore, was to drive them out of the market.
3.2.2. The Courts decision
40 United States v. Microsoft Corp., 253 F.3d 34, 92 (D.C. Cir. 2001).41
Basically, the consent decrees anti-tying provision was related to a contractual tyingMicrosoft had previously undertaken. Therefore, having Microsoft adopted a technologicaltying, the court deemed it not to infringe that anti-contractual-tying provision. Moreover, bytechnologically integrating, Microsoft was innovating. And, asking Microsoft not to innovatewould have meant limiting its freedom and harming innovation.42 Caldera Inc. v. Microsoft Corp., 72 F. Supp. 2d 1295 (Utah Dist. Ct. 1999).
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In Caldera v Microsoft the courts reasoning relied on the same
concepts emerging in Microsoft II, specifically the idea that technological
innovation is an important defense in defending antitrust allegation (43).
Even though the court rejected Calderas antitrust claim, it recognized,
however, that product innovation can be stifled if companies are allowed to
dampen competition by unlawfully tying products together and escape
antitrust liability by simply claiming a plausible technological advance
(44). The court did not apply Microsoft II cases plausible advantage claim,
rather, it required a valid, not insignificant, technological improvement has
been achieved by the integration (45). A rejection of the previous standard
is clear when the court stated that the technological improvements must
have demonstrated efficiencies. This is more than just a plausible claim
that brings some advantage (46).
However, since this Microsofts integration was highly innovative, it
represented a net plus compared with the prior art. Therefore, Microsofts
behavior was deemed lawful even in the light of the standard adopted.
3.3 Summation
Although outcomes were the same, these two decisions differ widely
in defining how those integrations were deemed innovative and what was
meant for level of superiority.
The Microsoft II court affirmed that no a net plus was needed, but,
rather, a plausible claim that integration will bring some advantages.
Therefore, a product is superior every time its latest version generates a
plausible advantage. That is, it is superior whenever it is better in somerespect. This plausible advantage, thus, is what has to be weighed against
the effects on competition in the market. In this context, consideration of
market features such as network effects and IPRs as amplifier of the anti-
competitive effects of innovation, is almost negligible, in that a complex
analysis was unlikely due to the limited scope of the courts decision in
43Id., at 1323.44Id., at 1324.45Id., at 1325.46Id., at 1325.
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Microsoft II. In fact, even though Microsoft II is supposed to be the leading
case in assessing software integration, this decision stopped at an
interpretation of a consent decrees anti-tying provision, and did not seem
to have provided a possible legal standard for software integration.
In Caldera v Microsoft case, instead, the court rejected the plausible
advantage claim. Rather, it stated that a valid, not insignificant,
technological improvement was to be effected by the integration of two
products. This difference in the definition of level of superiority is quite
relevant since it affect the competition balance. In the plausible advantage
claim standard the balance is tilted towards the pro-competitive effects
that the integration can generate; instead, the net plus standard appears
to be more aware of all the factors affecting the competition balance.
This balance is the central point of the later cases. In particular, what
emerges in these cases is the progressive relevance of market features in
striking a balance between anti- and pro-competitive effects of software
integration, and, in the latest case, the increasing consideration of IPRs and
the need for a regulated exploitation of them.
4 RECENT SOFTWARE INTEGRATION CASES: A NEW LEGAL STANDARD FOR TECHNOLOGICAL
TYING?
Since the IBM cases, integration has been a common practice in both
the hardware and software markets. With specific regard to the latter the
software market leading firms, such as Microsoft, have constantlyintegrated applicative software programs into operating systems to innovate
and improve their products. This behavior has not always raised competitive
concerns (not every integration has been challenged). However, recent
integration practices have been challenged in the US and the EU courts in
order to address their anti-competitive effects. In these cases, the outcomes
have not always been consistent with the earlier legal standards applied in
the IBM, Microsoft II and Caldera v Microsoft cases, while a more economic-
oriented standard seems to have progressively emerged.
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The recent cases all involving Microsoft as the software market
leader present common features absent in the previous ones: the
assessment of IPRs and network effects in the relevant markets, whose
potential anti-competitive effects appear to be increasingly acknowledged.
4.1 Microsoft III (47)
Microsoft III involved the integration of a new version of Microsofts
Internet Explorer (IE) browser in the Windows 98 OS. Although Microsofts
challenged behaviors in Microsoft III were substantially similar to those of
the Microsoft II case, both outcome and reasoning are remarkably different.
4.1.1 Microsofts behaviors
Among the several challenged behaviors, such as withholding crucial
technical information, predatory prices, contractual restrictions on OEMs in
order to affect distribution channels, and so forth, the software integration
at issue was IE integration in the Windows 98 OS. The integration was
further protected by contractual provision at the distribution level so as to
prevent the purchase of OSs and browsers separately.
To end-users this did not constitutes a burden since it did not really
affect Windows 98s purchase price. However, it mattered to Microsoft
competitors. In particular, Netscape and Sun Microsystems found the
integration a means of (i) preventing their products namely, Netscape web
browser and Java class libraries from competing with the Microsoft
products in the OS and browser markets; (ii) preventing them from enteringthe OS market; and (iii) driving them out of the browser market.
Specifically, Microsofts behaviors were challenged for (i)
monopolization; (ii) attempt of monopolization; and (iii) tying. While all the
complaints were accepted by Jackson J. (48) who even required Microsoft to
submit a proposed plan of divestiture in order to split the company into an
47 United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001).48 United States v. Microsoft Corp., 87 F.Supp.2d 30 (D.D.C. 2000).
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OS business and an applicative software business (49) the Court al Appeal
upheld the sole monopolization offense.
4.1.2 The Courts decisions
Before entering the merits of Microsoft III and in order to understand
both the District and Appeal Courts reasoning (as well as the reasoning in
Microsoft IV), some technical information is to be mentioned.
OSs and software programs interact through Application Program
Interfaces (APIs) which also enable software developers to write programs
compatible with an OS. However, OSs are not the only software programs
exposing APIs. Other non-OS programs do the same, among them: Netscape
and Sun Mycrosystem products. Programs like this are called middleware
since they rely on an OS and its APIs, but, at the same time, they expose
their APIs to software developers.
While the Microsoft III controversy was taking place, no middleware
exposed enough APIs to offer a full range of applications. Users still needed
to rely on an OS. However, a middleware such as Netscape would have been
capable once program developers had written enough middleware
applications to satisfy all user needs. Had this happened, users might have
chosen less expensive middleware compatible applications rather than OS
direct compatible applications. For this reason, Jackson J. stated that: The
growth of middleware-based applications could lower the costs to users of
choosing a non-Intel-compatible PC operating system like the MAC OS (50).
Both District and Appeals courts grounded their analysis on the
above technological background. However, the only complaint that theCourt of Appeal upheld was the monopolization offense; while the attempt
of monopolization in the browser market was reversed; and the tying
remanded to a lower court.
49 United States v. Microsoft Corp., 97 F.Supp.2d 59 (D.D.C 200).50 United States v. Microsoft Corp., 83 F.Supp.2d 9, 18 (D.D.C. 1999).
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As to the monopolization offense, the Court of Appeals upholding of
Jackson J.s opinion was grounded on the application of the Grinnell test (51).
Microsoft was deemed to possess monopoly power in the relevant market
and to adopt an anti-competitive behavior in order to maintain its position.
The existing monopoly power was derived not only from Microsofts
market share, but also from the OS market structure. In this regard, entry
barriers were deemed to increase Microsofts market power so as to make
entry to the market difficult. It is worth pointing out that the Court of
Appeals structural approach considered software market features only with
respect to their network effects and their capacity to raise barriers to entry.
The recognition that the network effects raised barriers to entry constituted
a step toward a more complex standard in dealing with software and
network markets.
Microsofts anticompetitive behavior derived from the exclusionary
practices it engaged in so as to maintain its monopoly by preventing the
effective distribution and use of products that might threaten it. In detail,
these practices were: (i) the way in which it integrated IE in Windows 98; ( ii)
its various dealings with OEMs and IAPs; (iii) its efforts to contain and to
subvert Java technologies; and (iv) its course of conduct as a whole.
A relevant point here is the test that the Court of Appeal used to
assess whether the IE integration was an exclusionary practice. Did the
Court of Appeal consider the software market features and Microsofts
owning IPRs? Or, rather, did it apply the standard that the courts had
applied in the IBM cases?
The test applied consisted in balancing the pro- and anti-competitive
integration effects. Once the anticompetitive effects i.e. the competitionharm were deemed present; a lack of pro-competitive justification for the
integration, or, alternatively, the anticompetitive effects outweighing pro-
competitive effects, was to be proved to establish an exclusionary practice.
Although, in principle, the Court of Appeal was skeptical about an
integration having anti-competitive effects since integrations were still
considered mainly pro-competitive in this case, even the second instance
court showed concern for the way the integration could affect the
51 United States v. Microsoft Corp., 87 F.Supp.2d at 46.
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emergence of products alternative to Microsoft OS (i.e. middleware). Since
IE was bundled into the OS code, it was deemed to prevent OEMs from pre-
installing other browser programs, thereby reducing rivals usage share and
developers interest in rivals APIs as an alternative to the API set exposed
by the Microsoft OS. In other words, both Courts appear to be aware of the
integrations refraining middleware potential competition to OSs.
In this context, Microsoft provided a general justification about
substantial benefits to customers and developers which the Court of Appeal
did not deem sufficient to overturn the monopolization offense. It is here
worth noting that software and network market features appear be relevant
to the Court of Appeal decision since it asserted that judicial deference to
product innovation () does not mean that a monopolists product design
decisions are per se lawful (52) in such markets. This was stated by the
Court of Appeal as to say that not only a net plus was needed in order to
the pro-competitive integration effects outweighing the anti-competitive
ones, but also that behaviors of monopolists lawfulness is to be more
carefully considered according to the relevant market in exam.
As to the attempt of monopolization, the Court of Appeal overturned
Jackson J.s decision because of a pervasive flaw: the same behavior (IE
integration in Windows 98) had been challenged for both monopolization in
the OS market and attempt of monopolization in the browser market.
However, the events that formed the basis for the monopolization offense
could show additional liability to Microsofts behavior, but not prove an
attempt of monopolization (53). Therefore, relying on the monopolization
liability, attempt of monopolization standards were not proved as to the
relevant market and the barriers to entry.
As to the tying, the facts underlying the monopolization offense were
deemed to partially overlap this allegations facts as well, with particular
regard to the way in which Microsoft had integrated IE. In particular: (i)
Microsofts refusal to allow OEMs to uninstall IE or remove it from Windows
desktop; (ii) IE entry removal from the Add/Remove Programs utility in
52 United States v. Microsoft Corp., 253 F.3d at 65.53Id., at 80.
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Windows 98; (iii) IEs overriding consumers choice as to the browser; and
(iv) the predatory prices allegation.
While Jackson J. applied the per se illegality rule and condemned
Microsoft practices with regard to the IE tying (54), the Court of Appeal
remanded the decision to the District court. It called for: (i) the application
of a rule of reason, instead of a per se illegality rule, and (ii) a
reconsideration of the remedies. In the meantime, the parties reached a
consent decree whose alleged violation was the starting point of Microsoft
IV thereby preventing the lower court decision from being adopted. The
Court of Appeals reasoning on tying is relevant in that it explains the
rationale for a rule of reason application through the analysis of: (a)
dynamic market features; (b) the test to adopt in these markets; and (c) the
relationship between monopolization and tying offense when they rely on
the same facts.
Firstly, the Court stressed that, in dynamic markets, integration is
more likely to bring innovation and benefits for consumers (even though a
strong consumer demand for the tied product is present). Therefore, an in-
depth analysis of the integration effects needs to be developed in order not
to stunt innovation. When two products are prima facie separate, this
analysis is not necessary and a per se illegality rule can be
straightforwardly applied. Software and hardware integrations being in
question, a more cautious approach is to be adopted so as not to stifle
welfare-enhancing innovation.
Secondly, the Court recalled the four elements necessary to allege
tying conduct, namely: (i) the tying and the tied goods are two separate
products; (ii) the defendant has market power in the tying product market;
(iii) the defendant affords consumers no choice but to purchase the tiedproduct from it; and (iv) the tying arrangement forecloses a substantial
volume of commerce.
54In the first instance decision, even though Microsoft invested financial and labor resources
to develop a browser as efficient as Netscape was, the court was aware that users would nothave easily switched to IE unless Microsoft employed other devises to induce users to use itsbrowser instead of Netscape. Therefore, in addition to improve its browsers quality, Microsoftstarted giving away its browser for free and in many cases even coupled with other valuablethings (at substantial costs) in exchange for their commitment to distribute and promote IE.At the same time Microsoft sought to exclude Navigator from important distribution channelssuch as the OEMs and IAPs (Internet Access Providers). Thus, Microsoft required OEMs to pre-
install IE, and IAPs to bundle IE with their own proprietary software so that subscribers would,by default, use that browser whenever they connected to the web.
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In particular, the Court focused on the separate-product-enquiry test
because of the difficulties it presents in itself and in the software market. In
fact, the two items being complements (one is useless without the other)
does not make them a single product, rather, the tying anticompetitive
effects on the consumer demand are still relevant and need to be
considered. At the same time, even when there are distinct consumer
demands for each individual component, efficiencies from the tying could be
expected. For this reason the consumer-demand test needs to be assessed
under a rule of reason aiming at a comparative in-balance of separate
demands for the tied product, on the one hand, and welfare efficiencies, on
the other hand (55). This is even truer in the software market, where
assessing such a balance with regard to the current asset may jeopardize
innovation if the benefit-consumer demand comparison is only focused on
the historic consumer behavior so as to ignore integration potential
efficiencies (56).
Finally, the Court stated that, even though a more accurate approach
was needed when dealing with tying in the software market, the integration
at hand did not show these high efficiencies when evaluated under the
monopolization offense (57). However, this lack of demonstration not being
sufficient to apply a per se illegality rule, the assessment was to be
remanded to a lower court for further analysis.
4.1.3 The Final Judgments remedies for the monopolization offense
Unfortunately the lower court never entered into the merits of the
remanded points since the parties signed a consent decree (58) which put an
end to the proceeding and imposed many obligations on Microsoft, amongstwhich is worth recalling: (i) the disclosure of the new APIs in use between OS
and browser (59), and (ii) the compulsory licenses of Microsofts IPRs to
enable licensees (i.e. OEMs) to promote non-Microsoft middleware (60).
55 Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 12-18 (1984).56 United States v. Microsoft, 253 F.3d at 89.57Id., at 89.58 United States v. Microsoft Corp., 231 F.Supp.2d 144 (D.D.C.2002).59Id., at E.60Id., at I.
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As to the former, although protected under copyright and trade secret
laws, the new API disclosure was deemed necessary so as to enable
software developers to create new browser versions competitive with the
new IE version.
As to the latter, Microsofts past behaviors had showed how IPRs
could be a means to refrain OEMs from promoting non-Microsoft products.
Therefore, compulsory licenses could be a viable solution to this.
It is worth pointing out that the IPR issue emerges only at this stage
and not at the stage of the competition balance. In principle, IPR ownership
itself does not amplify the anti-competitive effects of an incumbent
behavior, such as Microsoft. Rather, it is the way in which IPRs are exploited
that can possibly harm competition. Therefore, IPRs consideration seems to
emerge whenever their ownership and exploitation are claimed as a means
to limit courts intervention.
4.2 Microsoft IV (61)
Microsoft IV involved the integration of other middleware Windows
Media Player (WMP) in a new version of Microsoft OS. The starting point for
Microsoft IV is the above mentioned consent decree, as implemented in
Kollar-Kotelly J.s final judgment (62), and its alleged violation. Although the
Microsoft III and IV decisions are often compared, and the Microsoft IV
decision is deemed stricter than the Microsoft III one (63), they do not appear
to involve identical practices, rather, to address different aspects of a
similar behavior. In other words, we could say that the reasoning underlined
the Microsoft IV decision starts where the reasoning of the Microsoft III
decision left off.
4.2.1 Microsofts behaviors
61 Commission Decision of 24.03.2004, relating to a proceeding under Article 82 of the EC Treaty (Case COMP/C-3/37.792 Microsoft), C(2004)9 final (Brussels 21.4.200) (unofficialpublication).62 United States v. Microsoft Corp., 231 F.Supp.2d 144.63
Rudolph Peritz, Re-Thinking U.S. v. Microsoft in Light of the E.C. Case, NYLS Legal StudiesResearch Paper No. 04/05-4 http://ssrn.com/abstract=571803 (22 March 2004).
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Microsoft was challenged for abuse of dominant position under art. 82
of the EC Treaty with regard to both the OS and work group server markets.
As to the latter, Microsoft refused to comply with the disclosure obligation.
Whereas, with regard to the media player market, in 1999 Microsoft started
to integrate Windows Media Player into Windows OS and, since 1999, it
persisted in bundling it in all subsequent versions (64). This practice, alleged
to constitute tying under art. 82(d) of the EC Treaty, and to harm
competition in the OS market, falls under the software integration category,
and therefore it needs to be dealt with.
4.2.2 The European Commissions decision
WMP integration was addressed under art. 82(d) prohibiting the
making contract conclusions subject to acceptance by the other parties of
supplementary obligations, which, by their nature or according to
commercial usage, are not connected to the subject of such contracts.
The following elements are to be present in order to claim an art.
82(d) violation: (i) dominance in the tying market; (ii) product separateness;
(iii) no consumer choices in obtaining the tied product separately from the
tying one; and (iv) foreclosure of competition.
As to Microsofts dominance in the OS market, the proof of it was
deemed reached not only by Microsofts market share, but also by the fact
that Microsoft did not dispute it in appeal (65).
As to the products distinctness, the Commission assessed it through
the consumer demand test. The presence of consumers demand for mediaplayer on its own, independently of the OS, was deemed to prove they were
distinct products and they were so perceived by consumers (66).
The Commission (as well as the Court of Appeal in Microsoft III)
recognized that a test should not focus on historic consumer behavior
64 Integrations of WMP previous versions were not challenged in that it was in the 1999 thatWMP reached both the functions of streaming over the Internet and local playback of content.Instead WMP previous versions could just perform local playback (see, Commission Decisionof 24.03.2004 at 819).65 Case T-201/04, Microsoft Corp. v Commission, 4 C.M.L.R. 5, 397 (Ct. First Instance 2005).66 Commission Decision of 24.03.2004 at 807.
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which, considering consumers behavior at that moment, may ignore the
efficiency benefits deriving from new product integration (67). In the case at
hand, even after years of Microsofts integrating WMP in its OSs, there was
still significant demand for alternative players (68). This showed that
consumer behavior had not changed despite constant integrations.
It is worth pointing out that the WMP versions Microsoft integrated
before 1999 did not present the current WMP functionalities since they just
offered local playback functionality; while the WMP under discussion offered
both streaming over the Internet and local playback functionalities. The
Commission stressed the competitive advantage that the integration of the
last WMP version was giving to Microsoft, regardless of whether the two
were distinct products or not.
A different position was maintained by the Court of Appeal in
Microsoft III and the Commission in Microsoft IV on the question of consumer
choices being prevented by the integration.
In Microsoft III, this condition appears to be satisfied whenever a
consumer has the choice to uninstall the middleware (in that case IE) and
launch alternative middleware programs. What Microsoft could not do was
to prevent consumers (and OEMs) from doing this by removing such a
functionality and the add/remove tool from the desktop, or select its own
middleware as the default program. The unlawfulness of such behavior was,
thus, stated in Kollar-Kotelly J.s consent decree.
In Microsoft IV, instead, the Commission asserted that complying with
that consent decrees provisions as to the uninstall choice did not fully
restore consumers choices as to whether to acquire WMP without the OS.
This was because the Microsoft III decision did not deal in-depth with thetying allegation (it only considered the monopolization offense) (69).
Therefore, integration itself still affected consumers choices, even though
67Id., at 808.68 This argument appears to be in contrast whit what previously recalled (supra n. 55) toassert that Microsoft behaviour challenged started in 1999 as at that time WMP could offer afull array of functions. Consumers demand for alternative player, at the time in whichMicrosoft integrated a WMP not performing streaming functionality, is not likely to indicatethat this test does not have an historic perspective. The WMP after which integrationconsumers demand for alternative products remained is rather different from the WMPintegrated in 1999. The former did not offer streaming functionality, while the latter does.69 Commission Decision of 24.03.2004 at 828.
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the tied product did not affect the tying products price and did not coerce
consumers to use it. Insofar as consumers were likely to use the tied
product, there would be competition foreclosure in the Commissions
decision, the most relevant element of the tying allegation.
Consequently, as to the competition foreclosure the Commission
deemed it not only to be a matter of consumer choices but also of
producers access to the market. Even when consumer choices might not be
completely stifled, effects on the tied product market might be such as to
eliminate potential competition in that market, thereby making consumer
choices impossible because of the absence of alternative products (70). For
this reason, art. 82 EC of the Treaty was deemed applicable even when
Microsofts behaviors affected consumer choices only indirectly by
affecting access to the market and behaviors of stakeholders, such as OEMs,
content providers, and software developers.
As to OEMs, WMP bundling into WOS was deemed to limit their
incentives to bundle an additional media player for two main reasons: first,
an additional player would use up hard-drive capacity to offer essentially
similar functionalities; second, users would be unlikely to pay higher prices
to have an additional player when they could have one at the standard price
(71).
As to content providers, in the presence of a widely disseminated
media player, such as WMP, they were deemed to encode their content for
access by end-users through the most widespread technology in order to
maximize the potential reach of their own products. Moreover, the more
content available for a given media player, the higher the consumer
demand for this media player would be. Network effects were, thus,considered to play a significant role in content providers choice of
technology (72).
As to software developers, being WMP a program for which
applications are being developed, the same above mentioned mechanism
was deemed likely to occur. The more a platform, such as WPM, spread, the
70Id., at 835.71Id., at 849.72Id., at 883.
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more incentives software developers would have to write for it. The
presence of WMP APIs in every PC carrying WOS was thus deemed to make
software developers to write applications for it (73) (74).
The Commission recognized, however, that tying can generate
efficiencies but, in the case at hand, these efficiencies were deemed to have
been reached even without the integration. Neither the fact that the
transactions costs of tying outweighed its anticompetitive effects (75), nor
the fact that the tying benefited software developers by exhibiting WMP APIs
in all PCs, were deemed generating sufficient efficiencies (76). Such a result
could have been reached only through showing net efficiencies (77).
Again, the Commission seemed to apply the net plus standard
established in the Caldera v Microsoft case, as did the Court of Appeal in
Microsoft III.
4.2.3. The Commissions remedies to tying
With regard to the WMP integration, the main remedy adopted was
the obligation to offer to OEMs two WOS versions: one with WMP unbundled
and one with WMP bundled.
At the same time, Microsoft was not allowed to: (i) hinder the APIs in
use between WOS and WMP or select preferential APIs, thereby privileging
compatibility with Microsoft programs; (ii) give favorable treatment to WMP
on WOS (i.e. providing a link for an easier download); (iii) affect or otherwise
condition OEMs freedom to choose WOS without WMP; (iv) otherwise tie
Microsofts application to WOS.
4.3 Summation
73 Id., at 892.74
Id., at 897. In reason of this integration, thus, WMP was deemed to be as ubiquitous asWOS was no matter it could be uninstalled in compliance with the U.S. consent decree (orbetter final judgment) since its binary code would still be pre-installed together with the OSon every PC. Moreover, spill-over effects were deemed to possibly alter other marketsstructure, such as media player on wireless devices, on set-top boxes or DRM solutions andon line music delivery (so called complementary business areas).75Id., at 956.76Id., at 962.77Id., at 969.
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Although both Microsoft III and IV involved middleware integrations,
the decisions appear to assess different aspects of this behavior, and, with
regard to the legal issues discussed, the Microsoft IV decision seems to
complete Microsoft III.
As to similarities, even though the integrations were evaluated under
different provisions belonging to different systems in Microsoft III, IE
integration was assessed only under the monopolization offense, while a
definitive assessment under the tying offense was not provided; in Microsoft
IV, instead, WMP integration was assessed under tying offense (thereby
falling in the overall category of abuse of dominant position) the reasoning
followed by the Commission and Court of Appeal seems similar. A common
standard, too, appears to be adopted to assess the integrations in question.
However, this standard can be identified as mutual only between
monopolization offense, on the one hand, and tying as a subset of the abuse
offense, on the other hand, in that the standard used to assess IE
integration as a tie-in in the US system was never expressly formulated (the
remanded decision was not issued due to the settlement amongst the
parties) (78).
In both decisions, market power and exclusionary practices form the
test for the section 2 of the Sherman Act and art. 82(d) of the EC Treaty
violations; the focus is on the balance between anti- and pro-competitive
integration effects; and the level of superiority required tends more toward
the net plus benefit criteria than the plausible advantage claim (79).
Moreover, in both cases, a thoroughly examination of network effects shows
the outcomes of monopolization and abuse similar. In this context, networkeffect consideration severely amplified the threat to current and potential
competition in the OS market that middleware integration can generate, to
the extent that both IE and WMP integrations were deemed to enable
Microsoft to possibly prevent any non-Microsoft middleware from efficiently
competing with WOSs. In fact, a middleware program can be compatible
78 It is however known that that a rule of reason approach was called for by the Court ofAppeal which rejected theper se illegality rule applied by the District Court (United States v.Microsoft Corp., 253 F.3d at 81).79See supra paragraphs 3.1 and 3.2.
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with every OS, thereby providing incentives to write middleware-compatible
applications instead of specific OS compatible applications. Even though, at
the time WMP and IE were integrated, neither player nor browser exposed
such a high number of APIs to effectively compete as a platform, both Court
of Appeal and Commission believed that this might occur in the future.
Therefore, preventing the development of browser- or player-compatible
applications not only yielded anti-competitive effects in the browser and
media player markets, and the above categories of stakeholders operating
there, but also prevented potential general platform substitutes from being
developed in the future.
In spite of the similarities, it is important to bear in mind that
Microsoft IV starts where Microsoft III ends and it completes the analysis
started therein.
Even though, in both cases, the behavior in question was defined as
software or better middleware integration, this behavior can be split (or
at least it seems to have been split in Microsoft III decision) (80) into
technological integration (or technological tying) and contractual tying (the
latter appearing to be a means to strengthen the former in both American
and European cases). Thus technological tying was the focus of the
assessment carried out in Microsoft III, and, in this respect, the behavior was
evaluated under the monopolization offense (the tying not having been
assessed but remanded). In Microsoft IV, instead, since the technological
tying complied with the consent decree as to disclosure obligations (i.e. the
new APIs in use between WOS and WMP were disclosed) (81), the assessment
dealt more broadly with other non-technological components of that tying
80
The distinction between technological and contractual tying is quite evident HOVENKAMP,FEDERAL ANTITRUST POLICY, supra n. 303, where the Author stresses that the most obviousdifference between the 2 tying () and the traditional 1 or Clayton Act 3 offenses consistsin the lack of any agreement requirement in the former. Monopolization is a unilateralpractice. So when a dominant firm unilaterally imposes tying () under circumstances wherea qualifying agreement cannot be proven, the practice may still constitute an antitrustviolation. To be more precise, in Microsoft III the Court of Appeal identified four behaviors:two of them namely, preventing OEMs to uninstall or remove IE from WOS desktop; anddesigning WOS so as to withheld from consumers the ability to remove IE by use of theAdd/Remove Programs utility in Windows constituting technological tying, thereby assessedthrough the monopolization offense test; and the remaining two namely, Microsoftsrequiring WOS licensees to license IE as a bundle at a single price; and Microsofts designingWOS so as to override the users choice of default web browser in certain circumstances constituting tying and needing for a rule of reason analysis by the remanded court. On the
difference between technological and contractual tie-ins, see also David S. Evans, A. JorgePadilla and Michele Polo, supra note 19, at 509.
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practice that is contractual tying (those same practices remanded to the
lower court in Microsoft III and never assessed due to the settlement).
The different approach adopted within the European framework can
be justified by: (i) use of same provision (and common standard) to assess
both technological and contractual tying i.e. art 82 of the EC Treaty (82);
and (ii) no need to assess the technological integration of WMP since the
consent decrees obligations were complied with. The European decision can
thus be deemed a logical complement to the US one, in that it assessed
those aspects not covered in the US case because of the settlement.
In the analysis of the US and the EU decisions on Microsoft
integrations, other issues come up, however, different from those emerging
in the strict comparison of those decisions. These issues, related to the
coherence of the assessment of software integration behaviors, need to be
examined herein.
Firstly, the question arises as to whether to maintain the distinction
at least in the US system between tie-in and monopolization (under which
technological tying should rationally fall), since tying (whether contractual
or technological) can be considered as one possible mechanism of
predation (83). In the US, maintaining the distinction causes different
standards to be used to assess predatory behaviors: monopolization, on the
one hand, and tying, on the other hand (the latter also giving rise to wide
debate on the tying being per se legal or illegal or needing a rule of reason
approach). Whereas, in the EU, the abuse offense test is common for both
81 The obligation of disclosure, deduced form United States v. Microsoft Corp., 231 F.Supp.2dat E, was complied with by Microsoft when it integrated WMP (Commission Decision of24.03.2004 at 315).82 It is here worth recalling that, in the US system, technological tying falls under themonopolization offense i.e. section 2 of the Sherman Act; whereas, in the EU system,technological tying falls under the abuse provision, contractual tying being a subset of it. Forthis reason, in the European decision the difference between technological tying andcontractual tying does not emerge, both behaviors falling under the same provision.83 Jean Tirole, The Analysis of Tying Cases: A Primer, 1 COMPETITION POL. INTL 1,2 (2005). TheAuthor expressly asserts that Like many other corporate strategies that make onesproducts attractive to consumers, tying has the potential of hurting competitors, andtherefore is just one in a range of strategies that can be employed to prey on them.
Competition policy therefore should analyze tying cases through the more general lens ofpredation test.
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contractual and technological tie-ins. This distinction, likely to lead to
different outcomes, depending on the system under which a tying is
assessed (84), does not even consider that tie-ins (whether contractual or
technological) may be a perfect legitimate strategy, even for dominant or
monopolistic firms; it is only the extent that they turned into predatory tools
that they became a concern (85). Therefore, whenever these behaviors turn
out to be means to predation, they need to be asse
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