Achieving the Right Balance

3.13 Achieving the Right Balance

The background to software interoperability reviewed in this Chapter presents a picture of suppliers using various means including IPRs and TPMs to lock customers into their own software systems. It also displays examples of remedies that can come from customers’

own action and from general market effects. The law can set a framework but it does not give all the solutions. These come from the ingenuity of the users and the commercial pressures acting on the suppliers. This however remains a rather haphazard picture of the present impact of interoperability and lock-in and does not enable the assessment of whether legal regulation is providing the optimum or even an acceptable framework.

The work on interoperability undertaken by van Rooijen makes a valuable contribution articulating a normative framework for evaluating interoperability. The normative framework takes account of the balance that must be struck between the rightsholders’

need for control to incentivise innovation with the benefits of openness, again to enable competition and encourage innovation.¹⁸⁸ Striking the right balance is important for consumer welfare. It also recognises that the benefits and disadvantages of ex ante certain regulation and ex post flexible regulation must be considered.

Rooijen argues that control over interfaces can stimulate dynamic innovation¹⁸⁹ but factors such as the extent of supplier lock-in and the market being oligopolistic will affect dynamic innovation, particularly resulting from follow on innovation.

Van Rooijen proposes that control over interfaces has a dual function, the direct and the indirect function.¹⁹⁰ The direct function is similar to that of control over any technology which gives incentives to innovate, but as the investment in interfaces is normally recouped by licensing the main computer program, the incentives are barely necessary. The indirect function is the control over interoperability and control over access to competing and

188 Ashwin van Rooijen The Software Interface between Copyright and Competition Law (Kluwer Law

International 2010), 43. Control enables the rightsholder to charge prices above marginal costs of production, which are negligible for software, to recoup the more substantial fixed costs of innovation.

189 Ibid 44

190 Ibid 45

67 complementary software, access to networks and access to consumers own data. As software industries are characterised by a substantial degree of interdependence the impact on competition and market power can be disproportionate.¹⁹¹ Again a balance must be struck but this indirect control over interface specifications, and other technical standards, cause different effects and outcomes including on static and dynamic competition. The optimal balance for interfaces is different with more emphasis on openness than control. Competition law and copyright law were found to not fully recognise the indirect effects of control but to treat all subject matter similarly. This failed to recognise the effects of control over interface specifications on interoperability and its effect on competition and innovation.¹⁹²

While the need to strike a balance is recognised and a ‘middle ground between openness and control’ advocated,¹⁹³ it is recognised that IPR regime determines the balance of control ex ante which gives certainty.¹⁹⁴ But an IPR regime is however unable to meet the requirements of specific cases and given the complex and widely differing nature of software available, it is desirable to have more substantive criteria to identify the location of the ‘pivot’ between control and openness.¹⁹⁵ Shemtov proposed a model that uses recoupment of R&D costs as a benchmark for licensing innovative software architecture to competitors when coupled with revenue generated on sales as sufficient incentive to continue and invest in original research and development.¹⁹⁶ Samuelson and Scotchmer

191 Ibid 196 et seq.

192 Ibid 196 et seq.

193 Ibid 234

194 Ibid 46

195 Noam Shemtov is unaware of empirical data on reverse engineering and decompilation, see Noan Shemtov

‘The Legal Regulation of Decompilation of Computer Programs: Excessive, Unjustified and in Need of Reform’

(PhD Thesis QML 2013) 44. Also Samuelson and Suzanne Scotchmer “The Law and Economics of Reverse Engineering” (2002) 111 The Yale Law Journal 1575; Rooijen ibid talks of ‘middle ground between openness and control’, 234

196 Shemtov ibid 44

68 proposed four criteria to assess the social welfare effects of the law’s recognition of a right to reverse engineer.¹⁹⁷

This thesis uses the normative structure and the indirect effects proposition by applying it to oligopolistic markets and software patents. It is considered in the context of a specific software industry, the 3D CAD industry, which is characterised by supplier lock-in rather than predominantly network effects. This allows the framework to be applied to a clearly identified market and to evaluate how the market addresses the control and openness provided by the legal framework for software interoperability.

3.14 Summary

This Chapter has demonstrated that the relationship between interoperability, competition and innovation is not proven or clear cut, but is complex and nuanced.¹⁹⁸ Interoperability causes network effects as compatibility within a network is demarcated by the lack of interoperability on its boundaries and this can cause lock-in, restricting consumer choice and competition.¹⁹⁹ As interfaces are not accessible the IPR protection in computer programs protection may be stronger than intended²⁰⁰ and the optimal balance between control and openness of interfaces is different with more emphasis on openness than for

197 Samuelson and Suzanne Scotchmer ‘The Law and Economics of Reverse Engineering’ 111 (2002) The Yale Law Journal 1575.

198 Commentators, including Mark Lemley ‘Antitrust and the Internet Standardization Problem’ 28 CONN. L.

REV. 1041 (1996) at page 31, recognise the benefits of interoperability while others consider the position is more ambiguous, see e.g. Mario Gil-Moto ‘Economic aspects of the Microsoft case: networks, interoperability and competition’, in Luca Rubini , “Microsoft on Trial” 344 at 359 et seq.l (Edward Elgar, Cheltenham, 2010).

Studies have found anecdotal evidence sufficient to support the claim of a link between interoperability and innovation. See Urs Gasser & John Palfrey ‘When and how interoperability drives innovation’ (31 October 2007). http://cyber.law.harvard.edu/sites/cyber.law.harvard.edu/files/interop-breaking-barriers_1.pdf [accessed 30 July 2015].

199 Michael L. Katz & Carl Shapiro ‘Systems Competition and Network Effects’ (Spring 1994) 8 J. Econ Persp. 94.

The utility provided to each individual user of a specific platform or system increases with the total number of users, so the higher the number of users the higher the demand.

200 Daniel J. Gifford, and Robert T. Kurdrie ‘Antitrust approaches to dynamically competitive industries in the United States and the European Union’ (2011) 7 (3) J C L & E 695-731 at 705 - 706. Gifford and Kurdie consider that the competition between differentiated products contemplated by copyright law does not work in network markets as the combination of copyright, trade secrets and the inaccessible code gives a much stronger protection than was probably intended by both the US and EC copyright initiatives

69 other software.²⁰¹ Software users are not necessarily passive victims of lock-in but can ameliorate the impact of lock-in.²⁰² Network effects and lock-in do not necessarily justify intervention²⁰³ and forces in the market can bring pressure on suppliers to increase interoperability. To increase market share it may be necessary for the suppliers to make interfaces available.²⁰⁴

The Commission, CJEU and member states look favourably on interoperability, not only in the Software Directive but also in Article 102 and mergers.²⁰⁵ Article 102 is however only available for dominant suppliers and is an unattractive remedy as ex post and prone to error.²⁰⁶ There remains uncertainty about the legal status of interfaces although certain aspects amounting to ideas and method of operation are not copyright protected.²⁰⁷ The Software Directive does not require suppliers to make interface information available

although it permits reverse engineering including decompilation in certain circumstances.²⁰⁸ Reverse engineering is essential and used frequently but is complex and time consuming

201 A van Rooijen, The Software Interface Between Copyright and Competition Law (Kluwer Law 2010)

202 IanLarkin ‘Bargains-then-Ripoffs : Innovation, Pricing and Lock-In in the Enterprise Software’ (2008) Academy of Management Annual Meeting Proceedings, 1-4

203 Network effects are common but do not always involve externalities. S J Liebowitz & Stephen E. Margolis 'Network Externalities : An Uncommon Tragedy' (1994) 8 Journal of Economic Perspectives, 135. But compare Joseph Farrell & Paul Klemperer 'Coordination and Lock-in: Competition with Switching Costs and Network Effects' in M Armstrong & R Porter (eds.) Handbook of Industrial Organization (Vol 3, Elsevier 2007) who cautiously favour some intervention in the form of pro-compatibility public policy.

204 Ann Walsh, ‘Microsoft v Commission: interoperability, emerging standards and innovation in the software industry’ in Rubini, L, (ed) Microsoft on Trial (Edward Elgar 2010)

205 It appears that the economic assessments carried out in Microsoft have influenced the Commission’s opinion to look more favourably on interoperability than was apparent at the time the Software Directive was introduced.

206Frank H. Easterbrook ‘The Limits of Antitrust’ 63 TEX. L. REV. 1 (1984)

207 Art. 9(2) of TRIPS and Art. 2 of the WCT

208 Art. 6 of the Software Directive

70 and a poor business plan.²⁰⁹ Interface information obtained by reverse engineering cannot be disseminated although this restriction does not apply to information obtained by

observation.²¹⁰

The landscape is complex but a vital aspect is not just the interfaces or network of the software but the data that is created, collected and stored by the software. The emphasis should not be on the ‘plumbing’ of the software systems and their direct network effects but on the secondary or indirect effects caused by the data created by and stored in those systems. This data can include both information collected from users by the platform owners and the users’ proprietary data stored in the software.

While it is possible that the dominance of Google’s search engine may be eclipsed by a

‘platform shift’ what Google has, that others before it have not, is the ability to mine and accumulate data and “its unparalleled ability to exploit that data.”²¹¹

It is the existence of users’ proprietary data that is stored in the software’s particular format that prevents the switching between platforms, such as in 3D CAD software. This causes the type of lock-in that may have a substantial effect on both static and dynamic competition and which it is said, may justify intervention.²¹²

By contrast users of software have restricted access to information on interfaces and are unable to disseminate information obtained by decompilation even where it is not copyright protected. This lock-in means they are unable to access their own proprietary

209 For a full account of how reverse engineering is essential but complex and time consuming see Andrew Johnson-Laird ‘Software Reverse-Engineering in the Real World’ (1994) 19 U Dayton L Rev 843

210 Art. 6 (2) (b) of the Software Directive

211 Briefing Internet Monopolies ‘Everybody wants to rule the world’ The Economist (London 29 November 2014), 24

212 Joseph Farrell & Paul Klemperer 'Coordination and Lock-in: Competition with Switching Costs and Network Effects' in M Armstrong & R Porter (eds.) Handbook of Industrial Organization (Vol 3, Elsevier 2007) who cautiously favour some intervention in the form of pro-compatibility public policy

71 data that is stored in the software without the software rightholders permission. Due to this and other restrictions and costs, such as retraining, they are locked-in and competition in markets such as the 3D CAD industry is restricted. As the market is oligopolistic there is no effective competition law remedy. What is required is an improvement in the ex ante IPR regime to improve the access to interface information. This thesis explores the existing legal regime in the context of the 3D CAD industry, paying particular attention to the regulation of access to the interface information, and recommends improvements and methods of implementation.

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