Microsoft vs EU: Anti-Competitive Behaviour or Competitive Advantage - Essay Example

?Microsoft vs. European Union: Anti-competitive Behaviour or Competitive Advantage? By Microsoft vs. European Union: Anti-competitive Behaviour or Competitive Advantage? Introduction The theoretical basis of anti-competitive behaviour is to support the contention that consumers benefit from having choices among products on the market and competition is good for creativity and innovation (Canetti, 2004). On the other side of the argument, intellectual property rights confer on the owner a high degree of autonomy over the subject property (Canetti, 2004). These were the arguments debated in Microsoft v EU (Commission decision relating to a proceeding under Article 82 of the EC Treaty, Case COMP/C 3/37.792 (24 Mar. 2004) See also Case T-201/04, Microsoft Corp. v. Comm’n 2007 ). This paper analyses the EU’s decision in Microsoft v EU and its implications for EU’s anti-competitive policies and laws relative to whether or not anti-competitive laws and policies take precedence over the competitive advantage implicit in intellectual property rights. This paper is therefore divided into two parts. The first part of this paper sets out a brief description of the Microsoft v EU case and the second part of this paper analyses the court’s decision. Microsoft v EU In March 2004, the European Commission the EU’s executive body determined that Microsoft’s combining of Windows Media Player with Windows was a violation of Article 82 of the EC Treaty as amended in 2006, known as “tying case” (Ahlborn & Evans, 2009, p. 2). The Commission also found that Microsoft had violated the EU’s anti-trust laws by virtue of work group server operating system which essentially amounted to a refusal to supply information (Commission decision relating to a proceeding under Article 82 of the EC Treaty, Case COMP/C 3/37.792 (24 Mar. 2004)). On the facts, Microsoft held a 95% share of the personal computer operating systems market and was therefore designated as occupying a dominant market position. A majority of personal computers are entrenched in networks under the control of servers. Interoperability, which is the personal computer’s ability to communicate with the server, enables computers to form and operate networks. Thus communications between the operating systems in personal computers and in the server are pivotal for interoperability to work. Microsoft’s competitors need the interoperating information and software so that they can develop server operating systems which can communicate with the Microsoft Windows, the dominant personal computer’s software. Sun Microsystems lodged a complaint alleging that Microsoft’s refusal to disclose the necessary interoperability information amounted to anti-trust behaviour Commission decision relating to a proceeding under Article 82 of the EC Treaty, Case COMP/C 3/37.792 (24 Mar. 2004). The Commission, having found Microsoft guilty of anti-competitive behaviour fined Microsoft up to 497.2 million Euros with daily fines accumulating when Microsoft did not entirely adopt the remedies directed by the Commission (Vives, 2010). Microsoft appealed with a final judgment given by the ECJ’s Court of First Instance (CFI) which essentially confirmed the Commission’s decision (Case T-201/04, Microsoft Corp. v. Comm’n 2007 ECR 11-3601 (CFI Decision 2007)). Case Analysis Ultimately, the question was whether intellectual property rights conferred upon the registered owner a competitive advantage or exploitation of that advantage was anti-competitive behaviour. Thus the tensions between intellectual property rights and fair competition were tested in the Microsoft v EU case (Graham, 2008).Under EU law, anti-competitive behaviour centres on collusion and exploitation or abuse of a dominant market position to such an extent that it amounts to a monopoly (EC Treaty 2006, Article 82). Microsoft argued that its intellectual property rights conferred it upon it the right to guard and exploit its property for its own advancement. The Commission responded that the right to exclusivity in terms of intellectual property rights was limited to the consumers’ right to choose among diverse products and the public good relative to the promotion of innovation and creativity the primary underpinnings of fair competition (Commission decision relating to a proceeding under Article 82 of the EC Treaty, Case COMP/C 3/37.792 (24 Mar. 2004)). The ruling in Microsoft v EU implicitly calls for the mandatory sharing of interoperability information based on the theoretical concept that by sharing that information with competitors, innovation and technical development will be enhanced (Subramaian, 2010). Article 6 of the EU Software Directive 2009 provides for the sharing of interoperability information in circumstances where the information is necessary for achieving “the interoperability of an independently created computer program with other programs” where certain “conditions are met” (EU Software Directive 2009, Article 6). The conditions are related to the legal right to use the program, the information is necessary for achieving interoperability for the first time and that the information is only used for interoperability (EU Software Directive 2009, Article 6). Thus, the EU Software Directive 2009, which amends the Software Directive 1991, confirms the ruling in the Microsoft case. Subramanian (2010) argues that the consequences of both the EU Directive and the Microsoft case are counterproductive to their stated intentions. The stated intentions are to promote innovation and the proliferation of investments and incentives in IP. Subramanian (2010) argues that the compulsion to share interoperability information will have a significant negative impact on dominant software businesses and their propensity to invest substantially in IP. Arguably, the dominant software companies incur the greatest loss by virtue of their investment and it is therefore only fair that they reap the benefit of that investment. After all the rationale for intellectual property rights protection is to protect the owner’s investment and ensure that the owner benefits from the use of the copyright or patent (Besen & Raskind, 1991). However, the EU has consistently taken the position stated in Article 82 of the EC Treaty as subsequently amended in 2006 to attack monopolies. The list of potentially abusive practices are left to the courts of member states to determine whether the conduct of a dominant position is anti-competitive behaviour. The ECJ has described abuse as an “objective concept relating to the behaviour of the undertaking” (Case 85/76 Hoffmann La Roche & Co. AG v Commission, 1979). The ECJ has also previously ruled that companies or individuals holding a dominant position has a particularly onerous responsibility for ensuring that it does not “allow its conduct to impair genuine undistorted competition on the common market” (Case 322/81 NV Nederlandsche Banden-Industrie Michelin v Commission,1983). It was also held that : A course of conduct adopted by a dominant undertaking with a view to excluding a competitor from the market by means other than legitimate competition on the merits may constitute an infringement of Article 82 of E.C. (T-210/01 General Elective Company v Commission, 2006). Given the broad application of Article 82 in terms of abusive conduct of those occupying a dominant position in the market and the exclusivity of intellectual property rights, there is an uneasy co-existence between fair competition and intellectual property rights. Intellectual property rights arguably facilitate anti-competitive behaviour although it is intended to confer upon the owner a competitive advantage. Turner (2005) argues that the potential for conferring upon the owner of intellectual property rights a dominant market position and abuse obviates the need for “temporal limitations” such as those contained in anti-competitive laws and policies (Para. 10). One of the well-known temporal limitations is referred to as the “essential facilities doctrine” (Gitter, 2002, p. 217). The essential facilities doctrine essentially holds that when a dominant undertaking refuses to provide goods or service or refuses access to an essential facility, such refusal can constitute abuse of an undertaking’s dominant market position (Blankart et al, 2007). The Microsoft case essentially confirms and extends the essential facilities doctrine to such an extent that it impedes upon the competitive advantage typically associated with intellectual property rights protection. The essential facilities doctrine however and its application in the Microsoft case is particularly problematic not just from the perspective of intellectual property rights but also from the perspective of open market economies. First and foremost, it is a fundamental tenet of open market economies that businesses are at liberty to negotiate and execute contracts autonomously. As a result, mandatory licensing goes against this assumption. Secondly, there is no uniform or universal rule of thumb defining the circumstances in which a dominant undertaking should supply essential facilities/services. Moreover, the defence of objective justification is not applied uniformly and in open market economies, the test must necessarily be applied objectively. Finally, mandatory licensing may not be compatible with the overall economic growth and development in that free riders may deliberately abuse the advantages derived from the investments of other businesses (Whish, 2003). The Microsoft decision has significant consequences for the open market economy in that it compromises each of these underlying foundations of the open market economy. It also demonstrates the limitless application of the essential facilities doctrine in that it has now expanded far beyond its original reach. Originally, the essential facilities doctrine was used in the ports (see Commission Decision 94/119/EC, Port of Rodby,1994). Increasingly the EU has been using the essential facilities doctrine to allow competition where access to essential facilities is considered an essential aspect of entry to a specific market. The essential facilities doctrine has now been extended to the telecommunications, gas, electricity, postal, oil and gas pipelines, airports, railways, computer systems, international networks in payment transfers services among many others (Whish, 2003). Ultimately, the Microsoft case is demonstrative of the contention that conferring assess to essential facilities can promote competition in downstream markets, but it can reduce the intellectual property holders motivation relative to investments in innovation. Even so, the theory relative to the tensions between competition policies and intellectual property rights is that both policies have a mutual goal: promotion of the welfare of consumers and efficiently allocating resources. The rationale is founded on the assumption that intellectual property rights: ...promotes dynamic competition by encouraging undertakings to invest in developing new or improved products and processes. So does competition by putting pressure on undertakings to innovate. Therefore both IPR and competition are necessary to promote innovation and ensure competitive exploitation thereof (Commission Notice – Guidelines on the Application of Article 81 EC to Technology Transfer Agreements, 2004). It can be argued however, that the exclusive right to the use and allocation of rights to use one’s own intellectual property is conducive to competition and thus does not have to be subjected to temporal limitations. Arguably, it is the exclusive use of intellectual property and the exclusion of other’s right to use the intellectual property that motivates innovation and thus spurs competition. It would therefore appear that the ruling in Microsoft runs counter to this assumption. The Microsoft case essentially held that the technology subject to intellectual property rights protection could not prohibit sharing that technology. This ruling thus assumes that contrary to the concept and rationale for intellectual property rights protection laws, an intellectual property rights holder can abuse his/her dominant market possession by exercising his exclusive intellectual property rights. As stated by the Commission Notice (2004) the aim of both intellectual property protection and competition laws is to promote innovation and fair competition. It therefore raises the question of whether or not the Microsoft ruling and like rulings supporting the essential facilities doctrine was necessary as it only created tensions between two laws aimed at creating the same result. Arguably, competition law and intellectual property rights protection laws are just two different methods of achieving the same objectives: innovation and competition (Govaere, 1996). Conclusion The Microsoft case expands the temporal limitations of intellectual property rights and the tensions between anti-competitive behaviour and competitive advantage. Arguably, competition laws seek to prevent and prohibit anti-competitive behaviour and thus have implications for the competitive advantage that comes from owning intellectual property rights. Intellectual property rights protection implies that the holder of those rights has an exclusive right to use that property to his or her advantage to the exclusion of others. However, the Microsoft decision ensures that the exclusive use of intellectual property will be loosely interpreted to abrogate those rights if there is a danger of monopolizing the market if the property owner occupies a dominant position in the market. Arguably, the owner who does not occupy a dominant market position may however corner the market without consequences. Confirmation by the CFI has emboldened the Commission to take a stance against powerful companies with dominant market positions and anti-competitive behaviour. The Commission has since commenced investigations pursuant to Article 82 of the EC Treaty against multinational companies like Intel, Rambus, Apple, Qualcomm and has started two other investigations against Microsoft (Larouche, 2008). Bibliography Ahlborn, C. and Evans, D. S. (2009). “The Microsoft Judgment and its Implications for Competition Policy Towards Dominant Firms in Europe.” Antitrust Law Journal, Vol. 75(3): 1-31. Besen, S. M. and Raskind, L. J. (Winter 1991). “An Introduction to the Law and Economics of Intellectual Property”. The Journal of Economic Perspectives. Vol. 5(1): 3-27. Blankart, C. B.; Knieps, G. and Zenhausern, P. (2007). “Regulation of New Markets in Telecommunications: Market Dynamics and Shrinking Monopolistic Bottlenecks.” European Business Organization Law Review, Vol. 8: 413-428. Canetti, B. 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(Spring 2005). “Defining the Limits of the EU Essential Facilities Doctrine on Intellectual Property Rights: The Primacy of Securing Optimal Innovation.” Northwestern Journal of Technology and Intellectual Property, Vol. 3(2). http://www.law.northwestern.edu/journals/njtip/v3/n2/5/#note3 (Retrieved 19 November 2011). Vives, X. (2009). Competition Policy in the EU: Fifty Years on from the Treaty of Rome. Oxford, UK: Oxford University Press. Whish, R. (2003). Competition Law. UK: LexisNexis. Read More