Intellectual Property Rights: The View from Competition Policy

Shubha Ghosh[*]

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Three propositions inform the debate over the relationship between intellectual property rights and competition policy.  The first involves concerns over how the anticompetitive uses of intellectual property will increase as intellectual property rights become stronger.  The second is that the uses of competition norms to loosen intellectual property rights will diminish the incentives for innovation.  Finally, there is the belief that the tension between competition policy and intellectual property rights can be reconciled by recognizing how market competition is consistent with innovation and by acknowledging the competition norms that shape the scope of intellectual property rights.  In this Essay, I examine these three propositions and their application to the preliminary report on the pharmaceutical industry released by the European Commission on November 28, 2008.[1]

Building Antitrust Agency Capacity in Context

Salil Mehra[*]

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Since the early 1990s, the world has seen the establishment of comprehensive antitrust regimes in the Eastern European transitional economies,[1] Latin America,[2] China,[3] and India.[4]  The growth of new and revitalized antitrust regimes around the world has focused attention on how to build effective and helpful competition law institutions.  In many respects, this is a novel challenge because the need and impulse for antitrust had previously been associated with mature market economies.[5]  Technical assistance as currently supplied in the world predominantly takes the form of experts from senior antitrust institutions in developed countries making recommendations to new or newer antitrust regimes in emerging economies.[6]  Because of the incongruity of this fit, technical assistance may be aimed at the problems it seeks to find, rather than the most pressing problems.

This brief Essay provides some context to understand why the transfer of antitrust expertise from experienced regimes such as the United States to emerging enforcement institutions elsewhere will likely not be a simple exercise.  A technocratic model of antitrust law suits the context of the United States because of the wide consensus on the goals of antitrust policy in the U.S.[7]  But emerging antitrust regimes may not have the benefit of the same underlying consensus on methods and goals that American enforcers enjoy.  As a result, technical assistance focusing on narrow questions of interpretation may elide difficult questions of first principles and institutional design in emerging antitrust regimes.

The descriptive statistics that Professor Sokol provides can help shed light on common problems with how technical assistance is provided to emerging antitrust regimes.[8]  However, as shown by the examples I will discuss, the focus on forms of technical assistance in isolation may lead to the inaccurate view that emerging antitrust regimes are part of a sterilized environment in which other issues of enforcement authority and state power in markets can be controlled.  In fact, reforming or emerging antitrust regimes may confront difficult—and contested—issues involving both the methods and institutions of competition law (“rules” of the game in Sokol’s terms) and their application to achieve goals in specific cases (“play” of the game).  Part I of this Essay sets forth an example of how competition law may involve different, intertwined goals, Part II provides an example of how competition law can hinge on the nature of enforcement authority, and Part III considers Professor Sokol’s findings in light of these issues.

The Future of International Antitrust and Improving Antitrust Agency Capacity

D. Daniel Sokol[*]

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One of the key issues in international antitrust has been how to make antitrust effective around the world.  Most antitrust laws have been adopted or significantly modified since 1990.[1]   A number of key jurisdictions are either fairly new to antitrust altogether or to an antitrust regime that effectively employs the latest in economic thinking and the legal tools necessary to promote competition.[2]   Jurisdictions that have made antitrust a new and important cornerstone to economic policy include Brazil, Russia, India, and China.  Because of the stakes involved in the ability of antitrust to foster economic development and to prevent misguided antitrust policy from operating as a regulatory tax, it is critical that the future of antitrust focus on improved capacity around the world.[3]   By capacity, I mean the ability of a given agency to undertake well reasoned and effective decisionmaking in the implementation of antitrust policy.  There are two concerns for countries in various stages of antitrust development: harmonization of domestic antitrust with international antitrust “best practices,” and implementation of an effective antitrust regime.[4]   In an effort to solve these issues, policymakers in antitrust emphasize two dynamics to shape the development of increased capacity of younger antitrust regimes.  The first is international antitrust institutions, such as the International Competition Network, that develop antitrust norms.[5]   The other is technical assistance, either from these international antitrust institutions or directly from more developed antitrust agencies or other aid providers.  By technical assistance, I mean the process through which agencies improve their capacity to undertake competition policy.

This Essay focuses on how both external (international institutions) and internal (agency capacity and technical assistance) dynamics shape the capacity of younger agencies to undertake antitrust in their jurisdictions.  Both approaches play an important role in improving capacity.  In the case of technical assistance, this Essay analyzes survey data from recipient agencies of antitrust technical assistance to determine the most effective means of improving antitrust agency capacity.  Part I explains the type of capacity building that antitrust agencies undertake themselves.  The rest of this Essay focuses upon international efforts that can assist agencies in capacity building, but it is important not to overlook capacity building efforts that can occur at the agency level.  Part II describes the work that international antitrust institutions undertake to improve agency capacity.  Part III provides an analysis of survey data that shows how technical assistance from outside providers can improve agency capacity.  Part IV concludes and offers recommendations to improve developing world antitrust agency capacity building.

Competition and Privacy in Web 2.0 and the Cloud

By Randal C. Picker[*]

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We are once again changing how we use computers. In the past, we moved from mainframes to mini computers to freestanding personal computers.  That was a powerful shift in control and organizational structure. Mainframes were rare and, as such, were tended to with loving care and serviced by a small caste of computing priests.  In contrast, PCs were everywhere: on every knowledge worker’s desk and eventually in the family room of many homes.  In the PC age, the computer desktop was the most valuable real estate around, and for most people, that meant Microsoft Windows.

Microsoft Windows was—and is—both product and delivery system. Product in the sense that Windows performs certain functions that all operating systems perform.  Windows tracks files, sends data through ports for printing, and tells your computer screen how to display fonts and images—all things that we expect of our operating systems. But Windows is more than that: Windows delivers software. Before the advent of the Internet, software delivery was difficult.  A consumer might find the software was pre-installed on a new PC.  Alternately, the consumer could go to a computer store—remember those?—and plunk down her credit card, and walk out with a large, almost empty box that had, buried within it, a CD with new software.

Microsoft had a special role in software delivery because it could guarantee delivery by just incorporating the new software into Windows.  With each new release of Windows—from Windows 3.1 to Windows 95 to 98 and on towards Vista—Microsoft expanded the footprint of Windows.  This expanded footprint was not just a question of taking up more hard drive space; Windows got bigger because it expanded its functionality.  In doing so, it killed off what had been separate markets in freestanding functions provided by other companies.  Disk fragmentation was once a separate product category, but it wasn’t anymore once Microsoft added that function to Windows itself.  Including a product in the next version of Windows insured its widespread distribution as each version of Windows quickly expanded its market share.

In a basic sense, Windows was fundamentally unbounded.  That is, there was no obvious boundary for the scope of functions that might be embraced in Windows.[1]  This boundlessness mattered most when we introduced ubiquitous networks to link computers together to create the Internet and the Web.  The move to networked devices created a possible inflection point, a point of churn and competition as different firms sought the upperhand in the new computing space.  In his May, 1995 Internet Tidal Wave memo, Bill Gates famously feared that Netscape would “commoditize the underlying operating system.”[2]  Gates feared that users would no longer care what operating system ran on their computers; instead, consumers would care only about the browser that sat on top of the operating system.  Windows was going to become plumbing, important to be sure, but fundamentally anonymous and only noticed when it wasn’t working right.  Microsoft moved aggressively against Netscape and relied heavily on its ability to bundle Internet Explorer with Windows at no additional charge to defeat Netscape.  Microsoft won its battle against Netscape, although it did so in ways found to be illegal by competition authorities in the United States.[3]

Bargaining in the Shadow of the European Microsoft Decision: The Microsoft-Samba Protocol License (Part II)

By William H. Page[*] & Seldon J. Childers[**]

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III.  The Microsoft-Samba Agreement

On December 20, 2007, the Protocol Freedom Information Foundation[78] (PFIF) and Microsoft Corporation agreed (the WSPP/No Patents agreement) that Microsoft would license, on terms friendly to open source developers like Samba, all of the protocols disclosed under the ongoing American and European protocol licensing programs.[79]  The Software Freedom Law Center (SFLC)[80] created the PFIF as a nonprofit Delaware corporation to hold the master license and to license the documentation to free or open source developers.[81]  The PFIF paid Microsoft a one-time royalty fee of €10,000.[82]  The agreement provides a royalty-free[83] copyright and trade secret license permitting liberal use of the protocols and documentation, subject to confidentiality and non-disclosure restrictions.[84]  In this Part, we describe the negotiations and the terms of the agreement from the perspectives of both sides.

Bargaining in the Shadow of the European Microsoft Decision: The Microsoft-Samba Protocol License

By William H. Page[*] & Seldon J. Childers[**]

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[Editor's Note: This week, we are pleased to present Professor Page's and Mr. Childers's Article on the Microsoft-Samba Protocol License.  Part I appears today.  Part II of this Article will appear later this week.]

Introduction

On March 24, 2004, the European Commission (EC) held that Microsoft had abused its dominant position under Article 82 of the European Community Treaty[1] by, among other actions, refusing Sun Microsystems’ request for information that Sun needed to interoperate with Windows workgroup server products[2]  The EC ordered Microsoft to disclose “complete and accurate specifications for the protocols used by Windows work group servers in order to provide file, print, and group and user administration [i.e., directory] services to Windows work group networks.”[3]  On September 17, 2007, the European Court of First Instance (CFI) affirmed the EC’s liability ruling and its remedial order.[4]  About a month later, Microsoft’s CEO, Steve Ballmer, reached an agreement with the head of the EC’s competition authority, Neelie Kroes, on the terms under which Microsoft would license the protocols.[5]  In December 2007, with the active encouragement of the EC, Microsoft reached a licensing agreement for the covered protocols with Samba, an open-source development project that produces server software that emulates the behavior of Microsoft’s server operating systems.[6]  The parties have begun to implement the agreement.[7]

The Microsoft-Samba agreement is by far the most important tangible outcome of the European Microsoft case.  The EC’s other remedial order in the case, which required Microsoft to create a version of Windows without Windows Media Player, was an embarrassing failure.[8]  Immediately after the Ballmer-Kroes agreement, some anticipated a similar fate for the remedial order addressing Microsoft’s refusal to supply rivals in the workgroup server market.[9]  The Samba agreement, however, is significant because it requires Microsoft to provide, to its most important rival in the server market, detailed documentation of its communications protocols, under terms that allow use of the information in open-source development and distribution.  There is good reason to believe that Samba will be able to use the information to compete more effectively with Microsoft because Samba’s development methods depend specifically on analysis of communications protocols.  In a closely related development, Microsoft has now published all of the covered protocols on its website.[10]  While these actions will certainly enhance interoperability, they may also facilitate cloning and thus devalue Microsoft’s intellectual property. Thus, it remains unclear whether the license will enhance or inhibit dynamic, innovative competition in the long run.

In this short Article, we assess what the Microsoft-Samba license might mean, both for the market and for antitrust policy.  In doing so, we rely on published sources and on interviews with some of the key players in the negotiations.  On the Microsoft side, we spoke to David Heiner, Microsoft’s lead in-house antitrust counsel, and to Craig Shank, its lead negotiator for the Samba license.  On Samba’s side, we spoke to Eben Moglen, a professor at Columbia Law School, whose Software Freedom Law Center provided legal representation for Samba.  In Part I, we briefly describe the function of servers and communications protocols in computer networks. We then discuss the special significance of the Samba project in the server market.  Part II summarizes the reasoning of the EC and CFI in the workgroup server side of the European Microsoft case.  Part III describes the negotiations that produced the agreement and spells out the terms of the resulting license.  In Part IV, we consider the possible implications of the license and the disclosure process for Samba, Microsoft, and competition policy.

Antitrust Issues Raised by the Emerging Global Internet Economy (Part II)

By David S. Evans[*]

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II.  The Economics and Technology of Web-Based Businesses

A.  The Economics of Multi-sided Platforms

Many of the key businesses that have arisen on the web are what economists call “multi-sided platforms.”[30]  A multi-sided platform provides goods or services to two or more distinct groups of customers who need each other in some way and who rely on the platform to intermediate transactions between them.[31]  Multi-sided platforms usually lower transactions costs and thereby facilitate value-creating exchanges.  They tend to arise when there is some value available from getting multiple sides together but transactions costs or other obstacles stand in the way.  eBay, for example, drastically lowered the cost of exchange between buyers and sellers of second-hand goods.

Multi-sided platforms usually perform each of three interrelated core functions to some degree.[32]  First, they serve as matchmakers to facilitate exchange by making it easier for members of each group to find each other.  That can be for love (matchmaker.com) or money (eBay).  Second, they build communities (or audiences) because this makes it more likely that members of a group will find a suitable match.  Facebook provides value in part because people are more likely to find people they want to meet and because advertisers can reach a large audience. The value of the platform grows as the audience grows.  Third, they provide shared resources and reduce the cost of providing services to multiple groups of customers. This is an especially important characteristic of software platforms discussed below.

One key feature of multi-sided platforms is the presence of the “indirect network effects” mentioned earlier.[33]  That means that the value that a customer on one side realizes from the platform increases with the number of customers on the other side.  Consumers looking to buy something value a search engine more if it provides advertisements that are more relevant to their search, while companies value advertising on a search engine higher if they are more likely to reach potential consumers.

Another key feature is that multi-sided platforms must cater to multiple, distinct customer groups simultaneously.  To establish a two-sided platform, for example, the founders must solve a chicken-and-egg problem: customers on Side A will not participate without customers on Side B, but customers on Side B will not participate without customers on Side A.  YouTube had to pursue people who want to post videos, people who want to watch videos, and advertisers who want to reach these viewers.  These features make the profit-maximizing calculus for a multi-sided platform more intricate than for a traditional business.  A firm operating one of these platforms must consider the demands of all sides, the interrelationships between these demands, the costs directly attributable to each side, and the costs of running the platform.

Further complicating this calculus is the fact that the profit-maximizing prices for multi-sided platforms can result in users on one side getting a price that is less than the incremental cost incurred by a customer on that side, and even less than zero.[34]  The side that is “needed more” or that is “harder to get” may receive a price break; conversely, the side that gets the most value out of access to members of the other side likely bears more of the cost.[35]  As an empirical matter, many multi-sided platforms make their money from one side and make access to the platform available to another side for a price that does not cover the cost of provision.[36]  Facebook, for example, is free to users and makes money by selling advertising.[37]

There are several major classes of industries in which most if not all of the businesses are based on multi-sided platforms.  These include advertising-supported media including newspapers, magazines, radio, television; payments including credit and debit cards; exchanges including auction houses, commodity exchanges and financial exchanges; and dating and matchmaking such as singles bars and matchmaking services.  Another major class consists of industries that have software platforms as their underlying technology.[38]  These include computer operating systems, mobile telephones, personal digital assistants, and video game consoles.[39]  They also include many web-based businesses.

Antitrust Issues Raised by the Emerging Global Internet Economy

By David S. Evans[*]

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[Editor's Note: This week, we are pleased to present Part I of Professor Evan's Essay on antitrust issues in the global internet economy.  Part II of this Essay will appear next week.]

Introduction

Web-based businesses are increasingly the subject of antitrust concerns. Plaintiffs in the United States have sued eBay for tying its online payments service to its transaction service.[1]  Multiple jurisdictions in the European Community have claimed that Apple has violated the competition laws by limiting the ability of its music player to play music from competing music stores and limiting the ability of competing music players to play music purchased from its music stores.[2]  During 2007, although the U.S. Federal Trade Commission decided not to block Google’s acquisition of DoubleClick after a lengthy investigation, it expressed its intent to “closely watch these markets” involved in online advertising.[3]

Of course, competition policymakers have not just discovered the web.  In 1998, shortly after the start of the commercial internet three years earlier, the U.S. Department of Justice and various states filed an antitrust case against Microsoft for engaging in various practices related to web browsers.[4]  The European Commission started an investigation of Microsoft’s practices related to media players that stream music over the internet in 2001.[5]  However, the Microsoft cases mainly involved the use of the company’s market power in personal computers to influence competition in web-based markets that threatened it.  The matters involving Apple, Google, and eBay concern market power in web-based products and services themselves.

The internet economy is likely to raise antitrust concerns—and possible demands for regulation—for years to come. Global gargantuan firms have emerged, which will likely attract scrutiny by competition authorities and by policymakers concerned with competition issues.  The companies mentioned above, for example, have shares in putative antitrust markets that rival those held by Microsoft.[6]  Apple has more than a 70 percent share of paid music downloads in the European Union,[7] Google has more than an 80 percent share of search queries in Europe,[8] and eBay has more than a 90 percent share of auction site page views in France, Germany, Italy, Spain, and the UK.[9]

Pleading Standards Should Not Change After Bell Atlantic v. Twombly

By Keith Bradley[*]

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Bell Atlantic v. Twombly was an antitrust case.  This description would have seemed obvious to the parties, their counsel, and all the courts considering the case, including the Supreme Court that ultimately decided it this May.  Alas, however, Justice Stevens, in dissent, portrayed Twombly as a sweeping revision of the standards for civil pleadings and dismissals in general.[1]  Six months later, his view seems to have prevailed[2] and language like the following is now common:  “[Twombly] clarified the pleading standards concerning what is necessary to defeat a 12(b)(6) motion. . . . However, Twombly does not appear to have changed the substantive antitrust law . . . .”[3]  This statement has it backwards.

This Colloquy Post argues that Twombly changed antitrust law by modifying the elements of an antitrust conspiracy claim, but did not rework pleading rules across the board.  Although the Court briefly discussed Conley v. Gibson, its language differed only superficially from the existing law of civil procedure.  Meanwhile, the concept of “plausibility,” which attorneys and courts have begun to apply to all pleadings,[4] is actually antitrust jargon.  The Court used “plausibility” in its antitrust context, to resolve an existing problem in antitrust law, and it is a misreading of Twombly to extend “plausibility” beyond that context.

What Tool Works Tells Us About Tailoring Patent Misuse Remedies

By David McGowan[*]

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Abstract 

This essay argues that the reasoning of the Supreme Court’s opinion in Illinois Tool Works, Inc. v. Independent Ink, Inc. undercuts the reasoning behind the default remedy for patent misuse, which is that the patent in question may not be enforced against any party, not merely against the victim of the alleged misuse, until the misuse ceases and its effects are dissipated. Because the remedy is not tailored to any probable harm from misuse, courts should take advantage of the Tool Works reasoning to pare back misuse remedies. 

Circuit courts now have authority to tailor misuse remedies to actual harm in cases where the misuse involves a tying arrangement that meters the use of a patented good. In cases involving other forms of misuse, reform must await further Supreme Court action. Hopefully, that action will come soon.