Interoperability and competition policy – Third paper

No matter how permissive rules concerning reverse engineering are, decompilation may be too costly and too difficult not because of legal obstacles, but simply for technical reasons, and this is frequently the case. Hence, there may be cases in which it would be better, from the point of view of social welfare, to not only allow free copying of principles embedded in APIs specification, but also even to force their disclosure. (These issues usually arise when a dominant firm controls a software platform and decides to exercise a high level of control – maybe up to complete integration – on complementary products. This usually happens with respect to complementary platforms or middleware – e.g. browsers, media-players or server operating systems with respect to client ones – because these pieces of software are both technical complements and potential strategic substitutes for the platform itself).

This kind of antitrust problems will not be addressed in the first two papers. Nevertheless, especially in the field of software and communication technologies, intellectual property law and competition law share the same goal: enhancing social welfare through a high level of innovation. The same can be said about different jurisdictions devising incentive schemes and constraints to shape the action of software developers:

327 _{FLOSS is the acronym of Free/Libre Open Source Software: this definition stresses that the meaning of “free” is the one of}

the French word “libre” and not equivalent to “gratis”.

328 _{Depending on the scope of the analysis, it could also be appropriate to move to the second paper the discussion concerning}

preemption of clauses banning reverse engineering and similar contractual limits to decompilation, which I already briefly touched in this first paper.

329 _{See YVES GAUBIAC, Interopérabilité et Droit de Propriété Intellectuelle (with en. translation: Interoperability in Intellectual Property Law),}

the United States, European Union and Japan are all targeting a higher level of innovation in the field of software and information technologies.330

The fact that intellectual property law, competition law and different legislators propose different (and sometime antithetic) solutions to reach the same goal highlights the number of trade-offs that should be considered when dealing with innovation. Granting a certain degree of monopoly power may be a (relatively) efficient way to provide incentives to innovate; constraining excessive exercises of market power may be needed to maintain a high degree of innovation; giving larger incentives to pioneer-innovators can reduce the level of incentives for follower-innovators; etc.

The third paper will be devoted to these kinds of issues and – since this is an already widely debated issue – it will focus on two specific points. First of all, I will propose an interpretation of these problems as technological tying331 _{of the pieces of software implementing the APIs and CPs (into the operating system),}

so that it is possible to offer to dominant firms an alternative between disclosure and unbundling of these elements from their dominant products. In such a way the “subsidization of competitors”332 _through

disclosure is not made mandatory, but it is also possible to maintain, on an equal competitive footing, all the complementary products of a given dominant software platform. Secondly, I will analyze the more relevant point (from the point of view of interoperability policy) of the verdict (concerning the Microsoft Case) that the European Court of First Instance delivered the 17th _{of September 2007.}

Clearly, the problems addressed in this part of the thesis would be the ones related to the application of the so called “essential facility doctrine”333 _{in the field of IP (including trade secret), leaving aside the}

literature concerning regulated standard-setting activity. If needed to access a network platform, API’s and CP’s can be considered as de facto standards, but my analysis would be related to the minimal conditions needed in order to have a decentralised (market-based) system (and not to the optimal conditions for a centralised standard setting activity in the field of software platforms). In other words, I will take into account the possibility that antitrust authorities mandate the existence of a market, but not the existence of a regulating authority in this field.

330 _{EU (Commission Guidelines on the application of article 81 of the EC Treaty to technology transfer agreements 2004/C}

101/02 about Commission Regulation No. 772/2004): “both bodies of law share the same basic objective of promoting consumer welfare and an efficient allocation of resources”. US (Antitrust Guidelines for the Licensing of Intellectual Property issued by the Department of Justice and the Federal Trade Commission in April 1995): “The intellectual property laws and the antitrust laws share the common purpose of promoting innovation and enhancing consumer welfare”.

331 _{Defining predatory innovation and technological tying is a challenging undertaking (see MARIA LILLÀ MONTAGNANI,} Predatory and Exclusionary Innovation: Which Legal Standard for Software Integration in the Context of Competition v. Intellectual Property Rights Clash?, 37 International Review of Intellectual Property and Competition Law, 304 (2006)), but we should compare this solution

with the major clashes between IP and competition policy which could arise from a disclosure obligation.

332 _{As some commentators would likely describe the European Decision concerning Microsoft case.}

333 _{The “essential facility” would be the set of pieces of information needed to achieve interoperability with a dominant}

platform (and not the entire source code of the platform). Part of the literature focuses its attention on the related problem of “unilateral refusal to license” IP rights.

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SOFTWARE REVERSE ENGINEERING AND OPEN SOURCE SOFTWARE Do we need more FUD to be satiated?

Second paper of the dissertation project:

Software Interoperability: Issues at the Intersection between Intellectual Property and Competition Policy

Federico Morando ([email protected])

Ph.D. Programme in Comparative Analysis of Law, Economics and Institutions

October 12, 2009

The Interuniversity Centre for the Comparative Analysis of Law and Economics, Economics of Law, Economics of Institutions

SOFTWARE REVERSE ENGINEERING AND OPEN SOURCE SOFTWARE Do we need more FUD to be satiated?

ABSTRACT

This paper analyzes legal and economic issues related to the technical possibility of accessing interoperability information through reverse engineering (and software decompilation in particular). In this paper, I offer a critique of legal restraints on software reverse engineering in Europe and of similar restraints in the US, in particular in the context of the Digital Millennium Copyright Act.

Through an analysis of entry conditions for late comers and of the comparative costs of developing programs in the first place or reverse engineering them, the paper shows that limitations on decompilation imposed by article 6 of the Software Directive were mostly superfluous and basically non-binding at the time of drafting. What is more, the paper shows that nowadays, new – and largely unanticipated – developments in the models of software development make these restraints an obstacle to competition against dominant incumbents controlling software platforms. In fact, limitations on the freedom to decompile obstruct major reverse engineering projects performed in a decentralized way, as in the context of an open source community. Hence, since open source projects are the most credible tools to recreate some competitive pressure in several crucial software markets, the paper recommends creating a simpler and clear-cut safe harbor for software reverse engineering.

Existing limits to software decompilation are not likely to cause major failures in software applications markets, but they risk increasing the already high stickiness of relative positions in these markets, de facto protecting market leaders against potentially dangerous (frequently open source) competitors, which could bring significant innovation and dynamism into the market. Hence, this paper argues for a simplified and clear-cut safe harbor for software reverse engineering. Such a safe harbor should apply, at least, to any decompilation project aiming at the achievement of interoperability, but legal certainty would benefit from a more general, clear-cut rule and no major, negative effects on innovation may be expected. The claim that a simpler safe harbor for decompilation would not create market failures is supported through the aforementioned analysis of entry conditions in software markets, complemented by references to the literature on decompilation. This literature demonstrates that the cost of software reverse engineering is likely to be very high (even as a proportion of the development cost of the reverse engineered product). The discussion of some case studies, proposed in the first part of the paper, supports these findings.

Of course, the paper confirms that some limitations to the use of the products of reverse engineering are appropriate, but these limitations can derive from a quite traditional analysis of copyright infringement and substantial similarity in expression (economically speaking, verifying that there is no – or very limited – free riding on the sunk development costs of the original creator). In other words, an application of copyright, following the recommendation of the first paper of this dissertation, would offer a sufficient stimulus for innovation also in presence of a clear-cut safe harbor for software reverse engineering.

PAPER 2-TABLE OF CONTENTS

1. Introduction... 90 1.1. An anecdotal introduction to the open source model of software development ... 91 1.2. Summary of relevant points (and definitions) discussed in the first paper... 94 1.3. Direct (or vertical) and indirect (or horizontal) interoperability... 95 1.3.1. Direct (vertical) interoperability... 96 1.3.2. Indirect (horizontal) interoperability... 97 2. Open source projects pursuing interoperability with commercial software... 99 2.1. Projects using black box analysis and similar techniques ... 99 2.2. Project using (also) decompilation... 100 2.2.1. Wine... 100 2.2.2. ReactOS and TinyKRNL... 103 3. The simple economics of decompilation... 106 3.1. The simple economics of decompilation before open source... 107 3.1.1. New entrants after the first one... 112 3.2. Evidence concerning the cost of software reverse engineering ... 112 3.2.1. If the cost of reverse engineering dropped... 114 3.3. Why competitors reverse engineer at all ... 116 3.4. Considering risk... 117 3.5. The (still simple) economics of decompilation after open source ... 118 4. Decompilation in the EU... 120 4.1. Vertical and horizontal interoperability... 126 4.1.1. Does article 6 allow the disclosure of source code? ... 127 4.2. “The movement is everything, the ultimate aim is nothing” ... 129 4.3. Forbidden, but potentially welfare enhancing, uses of decompilation ... 130 4.4. Concluding (critical) remarks about the Software Directive... 132 5. Decompilation in the US ... 132 5.1. The “clean room” process ... 133 5.2. Critique of purpose-bound exception in DMCA ... 134 5.3. A more general critique: per se legality would be better... 138 6. Drawing some preliminary conclusions... 140 6.1. A generalized (and not purpose-bound) safe harbor for software decompilation ... 140 6.2. If they are working only because they are secret, TMPs are not so “effective”... 142 6.3. Coordination with Patent Law ... 143 6.4. Legislative developments taking into account some of the arguments of this paper... 144 6.4.1. Failure of the directive proposal on software implemented inventions ... 145 6.4.2. The Loi DADVSI (interoperability among DRM systems) ... 146 7. If uncertainty is significant only for open source projects, should we really care?... 149 8. Conclusions... 151

1. Introduction

Reverse engineering, software patents, the legal status of interfaces: in all these fields a certain degree of fear, uncertainty and doubt (FUD)1 _{is spread across the market (and sometimes among scholars, both in the}

field of intellectual property and competition policy2_{). Given the economic relevance of the software industry}

(both in itself and as a tool for other productive sectors) this is already quite worrying, but what should worry us more is that the expression “FUD” was already used in this context about twenty years ago3_{, and there is}

no foreseeable end to its appropriateness in the field of legal protection of software, especially for issues related to interoperability.

If we survived twenty years with FUD, one could argue, this problem must be a quite manageable one; after all, we have been able to coexist with it, while the software industry, in its various components, was flourishing. That, in fact, is true: the software industry will not stop growing and producing impressive technological advances just because of some legal uncertainty. However, one should also consider that – during the last two decades – the leadership in this industry has been increasingly taken by a few players and one in particular in the field of operating systems (namely: Microsoft), which has been facing – with increasing frequency – antitrust challenges all over the world (apparently without worrying too much about them).4 _{All that may be the effect of historical accidents; however, I suggest that it may also dependent on the}

fact that legal systems are hindering late comers, trying to use self-help in order to surpass the formidable barriers to entry that protect established software platforms. In other words, in the paper at hand, I will try to show that legal systems and intellectual property law in particular, do not completely do their job in making self-help a viable option for potential entrant in any highly concentrated software market.5

My analysis will start showing how relevant reverse engineering is in posing a relevant competitive threat to