‘Antitrust’ and ‘IPR’: A tumultuous tie

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.