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Intellectual Property, Antitrust And The Justice Department

August 1995

This article looks briefly at two areas of recent activity by the U.S. Justice Department: new antitrust licensing guidelines and the Justice Department’s investigation into the Microsoft Network, the on-line service that Microsoft plans to launch when it releases Windows 95 in August.

The Antitrust Guidelines. U.S. antitrust and intellectual property laws are in a state of constant tension. The antitrust laws seek to eliminate monopoly and encourage competition, while the intellectual property laws (particularly the copyright, patent and trade secret laws) reward creators and inventors with a limited monopoly. This tension has been balanced in different ways historically, depending on the prevailing political and economic winds.

In the 1970s almost any licensing restraint was viewed with suspicion. However, because intellectual property has become a critical determinant of U.S. economic growth and competitiveness in the 1990s, the prevailing winds today blow generally in favor of the owners of copyrights, patents and trade secrets.

In April the U.S. Department of Justice and the Federal Trade Commission issued new Guidelines for the Licensing of Intellectual Property. While the Guidelines are not binding on the federal courts that enforce the antitrust laws, they are an important indication of the thinking of these two important federal agencies, and are an authoritative statement of the current administration’s antitrust policy. The new licensing Guidelines suggest that the Department of Justice is generally in tune with economic realities in the 1990s. While all aspects of the Guidelines cannot be discussed here, there are a couple of points worth noting. For example, the Guidelines establish a “safety zone” within which many licensing practices are deemed permissible. The safety zone is entered if the licensor and its licensees collectively account for no more than 20 percent of the relevant market affected by the restraint. As a practical matter, this gives small companies the knowledge that common licensing practices — such as exclusive dealing and cross-licensing arrangements — can be pursued without serious concern for illegality. Our principal disagreement with this aspect of the Guidelines is that the Justice Department was not sufficiently generous in defining the safety zone. We believe that the percentage of licensees collectively affected could easily be set higher — perhaps in the range of 30% — without concern for anti-competitive harm.

It may be too much to expect the antitrust agencies to be perfect, and we believe that they have indeed shot wide of the mark in some areas of the Guidelines. Most notably, in describing the markets that may be affected by licensing agreements, the Guidelines reference the traditional antitrust markets for goods and services. However, they also identify markets for research and development, which the agencies call “innovation markets.” In our view, and as we set forth in detail in an article published in our newsletter in October 1991, Technical Innovation, Cooperation and Antitrust, joint research, including necessary licensing, should be encouraged in order to create a hospitable environment for collaborative innovation in the U.S. It appears that the Guidelines do not represent a significant step in this direction, and therefore an important opportunity has been missed.

The Microsoft Network. While the Antitrust Division may view a 20% market share as de minimis, Microsoft Corporation’s share of the desktop operating system market lies far in excess of that number, and the Justice Department clearly has Microsoft squarely in its sights. After a rocky settlement with Microsoft over Microsoft’s licensing practices and a lawsuit which persuaded Microsoft to drop its acquisition of Intuit, the Justice Department has now turned its attention to Windows 95 and the new online service known as Microsoft Network (“MSN”).

In August Microsoft is scheduled to release Windows 95, an important upgrade to Windows that has the computer industry and Wall Street holding its breath with anticipation. This product is expected to be the engine that will drive the next stage of growth in the desktop computer industry. Microsoft has announced that Windows 95 will include an icon that will permit access to MSN, a new online service that will compete with the likes of CompuServe, America OnLine and Prodigy.

As of this writing, the Justice Department is aggressively investigating the possible impact of MSN, and there is a real possibility that it will challenge Microsoft’s right to bundle access to MSN in each copy of Windows 95. Apparently, the Justice Department is pursuing the theory that by making the service available to the tens of millions of users who are expected to purchase Windows 95, Microsoft will gain an unfair advantage in the market for online services.

There are two sides to the economic debate surrounding this controversy. Microsoft argues that it is increasing competition by making MSN available and that the success or failure of the new online service will be based on quality and price, not access. Microsoft’s competitors argue that Microsoft has a near monopoly in the desk-top operating systems market, and it is using its dominance in this market to give it an unfair advantage in a different market, online services.

What is disturbing to us in this controversy is that the Justice Department is acting before MSN has even debuted. The Justice Department has: ignored the fact that purchasers of Windows 95 have a choice as to whether they wish to join MSN; ignored the fact that there are at least three very strong competitors already entrenched in the market; ignored the likelihood that the entry of a strong new competitor may greatly benefit competition; and ignored the possibility that MSN may not perform as successfully as they fear, rendering all of the Justice Department’s concerns irrelevant.

With all of the near-hysteria over Microsoft’s power and the fears of its soon-to-be rivals in the on-line world, the legal principle at issue seems to have been lost. The law is that a company may not use market power in one market to gain an unfair competitive advantage in a different market. However, there is as yet no evidence that Microsoft’s actions are going to lead to a competitive advantage – only speculation. By jumping the gun in this manner the Justice Department has done a disservice to Microsoft, the computer industry and possibly the users of online services which the government ostensibly is trying to protect.