In an earlier note, I posed a question whether RIAA may have crossed a line in antitrust law by its recent combination of lawsuits and "Clean Slate" program regarding users of P2P file sharing networks. In a later posting, I sketched the outlines of the concept of copyright misuse, including reference to a thought-provoking article by Professor Gifford in which he opined that the courts will eventually agree that "exercise of intellectual property rights cannot violate the antitrust laws."
One case in which that statement may be too broad is United States v. Microsoft, 252 F.3d 34 (D.C. Cir. 2001)(en banc). Earlier decisions against Microsoft dated back to United States v. Microsoft, 56 F.3d 1148 (D.C. Cir. 1995) ("Microsoft I") and United States v. Microsoft, 147 F.3d 935 (D.C. Cir. 1998 ("Microsoft II"). Microsoft 2001 makes clear that antitrust law still constrains the exercise of intellectual property rights when the rights holder has dominant market power.
In June 2001, the U.S. Court of Appeals for the D.C. Circuit upheld the decision that Microsoft possessed monopoly power in operating systems for Intel-compatible personal computers. Monopoly power is not by itself illegal under U.S. antitrust law as long as it was obtained through competition or product excellence. The United States charged that Microsoft had violated the Sherman Antitrust Act §2 by going farther, to the offense of monopolization. Through restrictive provisions in its licenses for Windows, Microsoft worked to maintain its monopoly position, using methods other than competition on the merits of its products and services.
A violation of Section 2 of the Sherman Act requires that one with monopoly power engage in "exclusionary conduct." Mere growth or development resulting from a better product, business skill or market accident doesn't qualify. To qualify as "exclusionary," acts must have "anticompetitive effect" -- harm to the process of competition and thereby to consumers. Harm to competitors is not sufficent.
The Court found that Microsoft negotiated provisions in its licenses of Windows that interferred with the process of competition in the market for Internet browsers. In particular, Microsoft used its rights to withhold licenses of its Windows operating system in order to prevent Netscape's Internet browser from gaining enough market share to be a competitive threat to Microsoft's Internet Explorer ("IE"). The Court found that those restrictions were "exclusionary," and when combined with Microsoft's market power, a violation of Section 2 of the Sherman Act.
Microsoft argued that as a holder of a valid copyright, it had the right to impose even those restrictions found to be "exclusionary." That argument "borders on the frivolous," said the Court of Appeals. "Intellectual property rights do not confer a privilege to violate the antitrust laws," said the Court, citing In re Indep. Serv. Orgs. Antitrust Litig., 203 F.3d 1322, 1325 (Fed. Cir. 2000) (the "Xerox Case").
The Court rejected other attempts by Microsoft to justify its actions, and found that Microsoft used its market power to protect its monopoly, without legitimate justification, violating the Sherman Act.
The Court also found to be exclusionary certain "exclusive dealing" clauses in Microsoft license agreements. Such clauses can be used by a dominant firm to harm the process of competition. See generally Dennis W. Carlton, "A General Analysis of Exclusionary Conduct and Refusal to Deal -- Why Aspen and Kodak are misguided," 68 Antitrust L.J. 659 (2001). Microsoft struck deals with major potential distributors that they would distribute only Microsoft's Internet Explorer or else make it the default browser. These restrictions had the effect of keeping the usage level of the competing Netscape browser below the critical threshold at which it would be a viable threat to Microsoft's extension of its operating system monopoly into the market for Internet browsers.
The Microsoft 2001 outcome was quite different than those in the cases (such as those cited by Gifford) in which a copyright holder was allowed to impose similar restrictions on the licenses of its copyrighted products. The principle difference lies in the existence of market power, the existence of a monopoly in the Sherman Act sense. Cases allowing copyright holders to exclude competitors from access to their product (such as in the Kodak case and others cited by Gifford) involve sellers that had valuable, desireable products, but which lacked a "monopoly" in the true, Sherman Act sense of the word.
What does Microsoft tell us about the current controversy over peer-to-peer (P2P) sharing of copyrighted recordings? It appears that no one artist or publishing house commands sufficient market share to constitute a monopoly under the meaning in the Sherman Act. Yet the Sherman Act has a Section 1, that is potentially applicable: the prohibition against "combinations and conspiracies" in restraint of competition. If two or more separate parties act in concert to interfere with the competitive process, they may violate Section 1, even if none of the parties separately possess enough market power to constitute a monopoly.
Cases like Microsoft, Kodak and Xerox each address a situation in which a single copyright holder imposed license restrictions that negatively affected competition. In Microsoft, "exclusionary" restrictions were violative of the Sherman Act because it had monopoly market power. In Xerox and Kodak, the copyright holders had market power over their particular product, but less than a monopoly in the relevant market in which their product was but one competitor, making the Sherman Act inapplicable. Their imposition of conditions on licensure of their products were lawful because they fell short of "copyright misuse."
A different outcome might result if facts reveal concerted action among competing copyright holders, in restraint of trade or commerce, which action interfered with the process of competition. Concerted action among competitors is not by itself illegal. For example, competitors can compare notes on best practices, can agree on industry standards, can form joint ventures to undertake projects not practical for individual firms and cooperate in other ways, all within the antitrust laws.
Some concerted actions are prohibited by the Sherman Antitrust Act §1 and can be the subject of civil or criminal suits and penalties. The most well-known is the operation of a cartel, the fixing of prices by express or tacit agreement among competitors. Mergers that result in the combined firm having more than a threshold level of market power can also lead to Section 1 liability. Yet another is a concerted refusal to deal, or boycott, about which the Supreme Court has written in recent years.
It is to such forms of concerted action that I'll turn in the next of this series of notes.
Comments and TrackBack, please ...
Posted by dougsimpson at September 21, 2003 08:11 AM | TrackBackGreat comments guys. Peter FDA
Posted by: Peter at November 11, 2003 01:58 AM