Patents, according to
Shapiro confer partial property rights. These rights are an important incentive
for a company to invest in Research and Development as it gives the desired
assurance to reap benefits from these investments once a socially beneficial
product or service is produced. Intellectual Property(hereinafter referred to
as ‘IP’), also has a prominent public
good characteristic as the information so generated is of great social
relevance. However, these partial property rights can be a source of expected
monopoly power ex-ante. Informational asymmetries thus, exist at the time when
IP rights are awarded to the moment when Competition Law(in some jurisdictions
referred to as the ‘Antitrust’ Law; the term will there be used interchangeably
in our discussion) steps in. Thus, there are these tender opportune moments
when IP rights become a source of monopoly power and thereby create a dynamic
interaction between two important domains of Law: the IP and Competition Law.
An interesting case throwing light on
this dynamic interaction is the ‘Inter-operability
of servers’ as emerged in the case of Microsoft. The case is interesting for
two reasons. First, the kind of protection offered that is the software in case
of Microsoft has been protected through both patents and copyrights. Secondly, the
almost simultaneous treatment of the issue of abuse of dominant position across
two important jurisdictions of the US and EU.
Interoperability of servers is one of
the attractive and challenging domains where law and economics dynamically interact.
Microsoft was tried across both sides of the Atlantic: the USA and the EU. The
diverging approach has been succinctly summed by John Vickers when he states,
‘When contemplating Competition Law and Policy, many economists I suspect, are
somewhere in the Atlantic Ocean’. Notwithstanding, the similarity in the legal
principles across two jurisdictions, Microsoft was confronted with two
different treatments on either side. Whereas the US approach is often
criticized to be too lenient, the EU attitude was called to be too strict.
In the US, the Federal Trade Commission
started its inquiry in the early 1990’s trying to investigate if Microsoft’s
pricing policies thwarted competition. The Justice Department meanwhile in the
year 1997 charged Microsoft with trying to leverage its dominant position in
the operating system market, through Windows, by bundling its Windows OS with the Internet
Explorer. Through this bundling, it was alleged that Microsoft threatened to
wipe its competitor and the then lead player in the web browser market, the
Netscape Navigator.
Meanwhile, in the Europe, in its
September 15, 1998 letter, Sun Microsystems requested Microsoft to ‘provide
complete information’ that would aid Sun make its operating system compatible
with Window’s operating system. Microsoft’s refusal to cooperate prompted Sun
Microsystems to complain to the European Commission (hereinafter referred to as
Commission).
The Commission carried its investigation against Microsoft as regards two
issues: First, if the refusal to supply information to the Sun Microsystems was
an abuse of dominant position by Microsoft. And secondly, whether the tying of
the products, its windows operating system with the Windows media player was again
an abuse. The common thread in both the cases was the Commission’s finding that
‘Windows’ was the dominant
PC(‘client’) Operating System(hereinafter
referred to as ‘OS’) with a market share of 90% and thereby, was a defacto standard for client OS.
In the US, the dispute ended in a settlement
with namesake punishment for the Microsoft; whereas in the Europe, the
Commission concluded an abuse of dominant position by Microsoft. Microsoft went
on appeal in the Court of First Instance which was annulled by the Court and
the company finally decided not to pursue the case further. In the EU, heavy
fines were imposed on Microsoft. The software giant was also required to have a
version of Windows without the Windows Media Player. According to the decision,
Microsoft could not charge more for the unbundled version then for the bundled
version; however, Microsoft is not required to charge less for the unbundled
version then for the bundled version. To this, the Microsoft complied by
offering a ‘Windows N’ which is without the media player. As for the second
important issue of ‘interoperability’, Commission required Microsoft to license
the protocol at a reasonable and non-discriminatory royalty. Initially,
Microsoft refused to comply with the last demand; however, when the Court of
First Instance rejected its appeal, Microsoft agreed to license the protocol at
three different terms.
Commission’s insistence to make
Microsoft license its protocol reflects the partial nature of these property
rights. If exclusivity is the incentive to innovate; then the exclusivity in
certain cases can be taken away as a rationale to uphold an innovative
environment. As the Commission in its decision argued that disclosure of
information would increase the rivals incentive to innovate; while at the same
time not reducing the incentives for Microsoft. In other words, there is a need
for an economics based approach in the enforcement of Antitrust Law. Article 82
was eventually replaced by the Article 102 of the Treaty for European Union.
