Interoperability and Innovation

As previously stated interoperability is considered to promote socially desirable goals and public benefit.⁶⁸ Interoperability encourages more use of resources and more competition which should stimulate innovation⁶⁹ which is likely to be of the “follow on” type rather than

“breakthroughs”.⁷⁰ While there is no systematic body of empirical evidence of a link between interoperability, and competition and innovation, the claim is often supported by illustrative examples.⁷¹

It is certain that lack of interoperability causes expense and wastage. The National Institute of Standards & Technology estimated that imperfect interoperability cost the US automotive supply chain at least $1 billion per year in 1999.⁷² Incompatibility between two

66 Case T-201/04 Microsoft v Commission 5 C.M.L.R. 11 [2007].

67 Cisco Systems, Inc. And Tandberg ASA (COMP/M.5669) Commission Decision of 29/03/2010 declaring a concentration to be compatible with the common market [2010] OJ L-2985 and Case COMP/M.5984 Intel Corporation and McAfee, Inc., [2011] OJ C 98-1

68 Pamela Samuelson ‘Are Patents on Interfaces Impeding Interoperability?’ (2008) Berkeley Centre for Law &

Technology 1. http://ssrn.com/abstract=1323838, Oracle America Inc. v Google Inc., Brief of Amici Curiae Intellectual Property Professors in Support of the Defendane-Cross Appellant and Affirmance 30 May 2013.;

and Urs Gasser and 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

69 Commentators including Mark Lemley ‘Antitrust and the Internet Standardization Problem’ (1996) 28 Connecticut Law Review 1041, 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. (Edward Elgar, Cheltenham, 2010).

70 Follow on innovation is dynamic rather than static competition e.g. coming within the description of dynamic competition advocated by Gregory Sidak and David Teece, ‘Dynamic competition in antitrust law’ (2009) 5(4) Journal of Competition Law and Economics 581-631, 594 et seq.

71Urs Gasser and 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 15 October 2015]

72 Smita Brunnermeier and Sheila Martin, Research Triangle Institute ‘Interoperability Cost Analysis of the U.S.

Automotive Supply Chain’ Center for Economics Research for NIST (Final Report March 1999).

37 versions of Dassault Systemes’ CATIA 3D CAD software delayed the delivery of the A380 and resulted in a $6 billion loss for Airbus.⁷³

Perhaps the earliest and most notable impact of interoperability and open systems was the driving down of the quality adjusted price of the personal computer system when IBM, perhaps by accident, first introduced a personal computer using an open architecture.⁷⁴ The industry moved from the closed business systems adopted initially by IBM and Apple to a modular structure which encouraged specialisation and innovation. Innovation in components such as disk drives and modems as well as applications software proliferated.

As IBM and Apple’s market share declined the average price of computers fell by 40 per cent in 1992 alone.⁷⁵

Interoperability has now been accepted as an essential virtue by most governments. The European Commission has accepted the benefits of interoperability in its competition law policy and policies for enterprise, industry and standardisation.⁷⁶

Interoperability is regulated by IPRs and competition law and both aim to give incentives to encourage innovation and hence competition. The rationale for competition is that it gives efficient allocation of resources. Efficiency is an important concept in the relationship

73 Mel Duvall and Doug Bartholomew ‘PLM: Boeing's Dream, Airbus' Nightmare’ (2007)

http://www.tgstech.com/releases/BoeingsDream_AirbusNightmare.pdf [accessed 10 April 2012]

74 Joseph Farrell & Philip Weiser ‘Modularity, Vertical Integration, and Open Access Policies: Toward a

Convergence of Antitrust and Regulation in the Internet Age’ (2003) 17 Harvard Journal of Law and Technology 85, also Richard Langlois ‘Modularity in Technology and Organization’ (2002) 49 Journal of Economic

Behaviour and Organisation 19, 19. IBM was vertically integrated based around its mainframe computers.

When it introduced personal computers it relied on Microsoft and Intel for key components including software and allowed them to license these to other computer makers. The specialisation that followed saw rapid innovation in chips, peripheral devices such as modems and software.

75 David Angel and James Engstrom, ‘Manufacturing Systems and Technological Change: The U.S. Personal Computer Industry’ (1995) 71 Economic Geography 79, 81. IBM and Apple’s market share fell from 52% to 21%

between 1984 and 1992 to firms such as Compaq and low-cost system assemblers such as Dell who took advantage of the modularisation of the personal computer market.

76 For example the ISA Interoperability Solutions for European Public Administration programme and decision in merger cases including Case COMP/M.5669, Cisco Systems, Inc. And Tandberg ASA., [2010] OJ L-2985.

38 between IPRs and competition law.⁷⁷ Efficiency can mean “static efficiency”, in which competition between existing technologies puts downward pressure on prices. In contrast

“dynamic efficiency” is competition from new technology and products.⁷⁸

This means that competition comes from new technologies rather than cost cutting. This requires substantial upfront investment in research and development and increased risk taking which must be recouped. Rational firms must expect sufficient profits to justify the investment. IPRs are essential to this process and are not separate from competition policy.

IPRs are not protecting “their owners from competition ... but...should be seen as encouraging firms to engage in competition”.⁷⁹ Nevertheless as a reward and incentive for innovation it might be acceptable for firms to enjoy “monopoly” profits for a period of time.

Competition law does not prevent dominance, provided there is no abuse of that position.

Computer programs have low unit costs so the social benefit of the monopoly profits is to reward the firm for the “up front” investment and risk of entering the market and thereby encourage others to innovate and enter the market.⁸⁰ This pattern only works if barriers to entry are not permanent. IPRs give barriers to entry, with patents giving 20 years and software 50 years or longer. In practice in the new economy existing technology is often superseded by the next generation of technology within a much shorter space of time. This relies on IPRs only protecting copying and not substitutes so the new technology can enter the market.

77 Thomas Barnett 'Interoperability between antitrust and intellectual property' (2007) 14 Geo. Mason L. Rev.

859 - 870, 859.

78Dynamic efficiency was defined by Schumpeter as: competition from new technology, the new source of supply, the new type of organisation... competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firm but at their foundations and their very lives, JosephSchumpeter, Capitalism, Socialism and Democracy (Allen and Unwin 5th ed. 1942)

79 Thomas Barnett 'Interoperability between antitrust and intellectual property' 14 Geo. Mason L. Rev. (2007) 859, 860

80 Richard A Posner 'Antitrust in the New Economy' (2001) 68 Antitrust LJ 925

39 3.6 Reverse Engineering

The Software Directive gives literary copyright protection to “the expression in any form of a computer program”⁸¹ while recognising that the “function of a computer program is to communicate and work together with other components of a computer system and with users”⁸². For this to happen a particular piece of software must interoperate with other pieces of software. One way of achieving this is to “read” the interface of the software - however the software user cannot see the rules and codes of the software in the same way that the reader of a book can see the text of the book. To gain this information he needs to take steps which would otherwise be reserved to the rightholder.

The Directive has explicit exceptions to enable this to happen. These exceptions do not require the rightholder’s consent and cannot be contracted out of. The exceptions include the right to make a back-up copy and “to observe, study or test the functioning of the program in order to determine the ideas and principles which underlie any element of the program”.⁸³ This latter exception is known as “black box” analysis and is not limited to interoperability. When black box analysis is insufficient to achieve interoperability, reverse engineering is permitted if, in order to achieve interoperability of an independently created computer program with other programs, it is necessary to reproduce the code and translate its form.⁸⁴ This converts the machine readable object code, which is the version normally supplied to the public, back into a higher level language, resembling the original source code which can be read by humans.

This exception allows for the decompilation of the object code, in other words the user is allowed to look at and understand the basic building blocks of the program. This exception is subject to certain conditions which emphasise that the exception can only be used to

81 Software Directive, Article. 1(2)

82 Ibid recital 10

83 Ibid Article 5(3)

84 Ibid Article 6

40 achieve interoperability, and not to create a computer program substantially similar in its expression,⁸⁵ or for any other act which infringes copyright.

The social welfare benefits of reverse engineering have been described as complicated and ambiguous.⁸⁶ Reverse engineering provisions did not appear in the first draft of the Software Directive and were only inserted after a battle between various factions of the software industry and user representatives.⁸⁷

The Commission and Council’s objective for including the reverse engineering provisions are said to give an incentive to both rightholders and potential decompilers to avoid reverse engineering. The rightholder can deter the reverse engineering of its software by making information available for interoperability which obviates the need for other developers to explore his program in detail. Those developers receive detailed and up to date information and do not need to incur the cost and risk of decompilation. The dialogue and co-operation should accelerate the progress to standard interfaces and open systems.⁸⁸ Unfortunately the hard won provisions on reverse engineering have severe practical limitations, and they do not always give a complete answer to the problem of

85 Similar in expression prevents use of the same code but should not prevent the creation of a competing program. There has been no definite ruling on this point in Europe but in Navitaire Inc v easyJet Airline Co Ltd., (No.3) EWHC 1725 (Ch) [2004] and SAS Institute, competing software emulating the “look and feel” was allowed under the Software Directive. See also the USA case of Sega Enterprises Ltd. v. Accolade Inc., 977 F.2d 1540 (9^th Cir. 1992), where Accolade used reverse engineering to create a competing video game, an

application, and also Sony Computer Equipment Inc. v Connetix Corp., 203 F. 3d 596 (9^th Cir 2000) , concerned operating software. These exercises in reverse engineering were permitted under the US “fair use” exception.

86 See Pamela Samuelson and Suzanne Scotchmer ‘The Law and Economics of Reverse Engineering’ 111 (2002)The Yale Law Journal 1575, 1621. Incentives to invest in platforms will be reduced as it allows unlicenced entry but this does not necessarily mean reverse engineering should be illegal. It probably increases the incentive to develop application software.

87 Dominant American companies established a group called the Software Action Group for Europe (SAGE) which opposed reverse engineering while others promoted more interoperability through the European Committee for Interoperable Systems (ECIS), see Meyer C & Colombe M, ‘Interoperability still threatened by EC Software Directive: a status report’ (1990) 12 (9) E.I.P.R. 325 – 329, 327

88 B Czarnota and R Hart The Legal Protection of Computer Programs in Europe – A Guide to the EC Directive (Butterworths 1991)

41 interoperability.⁸⁹ In its decision on Microsoft, the Commission found as a matter of fact that reverse engineering would not constitute a viable solution for companies wanting to compete in the work group server operating system market.⁹⁰ The volume of interfaces that would have to be reverse engineered in a program as large as Windows would require considerable effort with uncertain prospect of success. The viability of products developed using reverse engineering depends on the rightholder not altering its software so that it is no longer compatible with the new software developed by reverse engineering. Such alterations frequently occur when upgrades are issued. Reverse engineering is an inherently unstable basis for a business model. The Commission’s decision referred to software developed by reverse engineering by the Samba group. More than two years after Windows 2000 had appeared on the market, the SAMBA software still had severe shortcomings.⁹¹ Also, software developed by Novell to interface with Windows NT was not compatible with Windows 2000. Microsoft would not release vital interface information to Novell, but used the lack of interoperability to discourage customers from using Novell’s product.⁹² In the more recent decision on the merger of Intel Corporation and McAfee Inc.⁹³ the market investigation revealed that most respondents considered that reverse engineering Intel’s CPUs would take months if not years, be prohibitively expensive, and still be incomplete and vulnerable to subsequent changes to the CPU.⁹⁴

During the formation of the Directive there was recognition that while it is technically possible to decompile a program, doing so is lengthy, costly and inefficient.⁹⁵ However at

89 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

90 Microsoft (Case COMP/C-3/37.792 Microsoft), Commission Decision of 24 March 2004 relating to proceedings under Article 82 EC, para 683 et seq.

91 Ibid para 293 et seq.

92 Ibid para 686

93 Case COMP M.5984 Intel / MCAFEE [2011] OJ C 98 – 1

94 Ibid para 145

95 See also Pamela Samuelson and Suzanne Scotchmer ‘The Law and Economics of Reverse Engineering’ 111

42 the time it was said that “the problem of access to information may have to be addressed by other means which are outside the scope of the Directive.”⁹⁶ One efficient solution is for the parties to voluntarily disclose information on agreed terms.

Despite the exceptions in the Software Directive to permit reverse engineering, full interoperability between programs has not been achieved. With certain types of complex software there appears to be a low level of interoperability. Compulsory disclosure of interface information under Microsoft is only available where the supplier is dominant, and the disclosure remedy is flawed as it is ex post and prone to error. Interoperability causes network effects as interoperability encourages users to adopt a network. Conversely, a lack of interoperability creates boundaries to the network and intensifies its effects. Users can become locked-in to the market, in that they must use software that is compatible with the de facto standard, and they can also be locked-in to particular software due to switching costs. It appears there are shortcomings to the extent of interoperability available under the Directive but other solutions have arisen, some of which appear to be caused by market effects. Interface information is frequently made available, particularly by operating systems software, to encourage the development of compatible application software.

Commercial translators and standards have also been developed with varying levels of success.

One shortcoming of the reverse engineering provisions is the practical challenge of carrying out the process and keeping up with subsequent changes. Article 6 of the Software Directive prevents the decompiler giving the information obtained to others.⁹⁷ This means that all software developers must independently carry out the same process. In Chapter 8 the effects of this restriction will be explored and analysed to see if relaxation of this restriction will improve the effectiveness of reverse engineering and improve the access of software developers to interface information.

(2002)The Yale Law Journal 1575 - 1663, 1614 describing the considerable intellectual work and high costs involved in software reverse engineering and see also Andrew Johnson-Laird ‘Software Reverse-Engineering in the Real World’ (1994) 19 U Dayton L Rev 843 - 902, 843

96 Proposal for a Council Directive on the legal protection of computer programs [1989] OJ C 91/4, para. 3.14

97 Software Directive, Article 6. 2 (b)

43 Despite all these shortcomings reverse engineering of software is widely practiced. It is as standard in the software industry as it is in traditional engineering.⁹⁸ About one third of the respondents to a public web-based consultation use some form of reverse engineering to gain interoperability information as licensing. For reasons not explained, licensing is seen as more inconvenient. Small or medium-sized organisations or open source developers are more likely to reverse engineer than larger organisations who appear to prefer to license.⁹⁹

Reverse engineering can be made more difficult by the deployment of Technology Protection Measures (TPMs) ¹⁰⁰ but only 16% of respondents to the public web-based consultation had used any form of TPM to protect their software. ¹⁰¹ TPMs such as passwords and encryption systems can be deployed as a protective shell around software and need to be circumvented before decompilation can take place. They are protected by legislation but fortunately for reverse engineering the anti-circumvention regime in the Information Society Directive does not apply to the protection of computer programs.¹⁰² The Software Directive does not prohibit the act of circumvention itself but only the act of trafficking in the circumvention tools which provisions are specifically stated to be without prejudice to Articles 5 and 6. Where technology protection measures applied to a

98 Samuelson & Scotchmer ‘The Law and Economics of Reverse Engineering’ 111 (2002) The Yale Law Journal 1575, 1607; Andrew Johnson-Laird ‘Software Reverse-Engineering in the Real World’ (1994) 19 U Dayton L Rev, 843

99 Commission Staff Working Document (2103), Appendix 1, 19

100 Directive 2001/29/EC on the harmonisation of certain aspects of copyright and related rights in the information society (2001) L167/10 (hereinafter the Information Society Directive’.

101 Commission Staff Working Document (2103), Appendix 1, 19

102 The Information Society Directive’ Article 1 (2) (a). This is fortunate as there has been a degree of lack of harmonisation in implementing the Information Society Directive which has given rise to legal uncertainly.

Guildbert, Study on the Implementation and Effect in Members States’ Law of Directive 2001/29/EC on the Harmonisation of Certain Aspects of Copyright and Related Rights in the Information Society 2007, 75 http://ssrn.com/abstract=2006358

44 computer program circumvention of those measures is not restricted by the Software Directive.¹⁰³