What is the proper legal standard for product integration involving software? Because software is subject to low marginal costs, network effects, and rapid technological innovation, the Supreme Court's existing antitrust rules on tying arrangements, which evolved from industries not possessing such characteristics, are inappropriate.
In this Article, I ask why firms integrate software products. Next, I review the Supreme Court's tying decisions in Jefferson Parish and Eastman Kodak. I propose an approach to judging the lawfulness of product integration in technologically dynamic markets that supplements the Supreme Court's current standard with four additional steps in cases of tying of computer software. Thereafter, I examine the D.C. Circuit's approach to software integration, which arose from that court's 1998 interpretation, in Microsoft II, of an antitrust consent decree between the U.S. Department of Justice and Microsoft Corporation. I argue that the D.C. Circuit's rule has general applicability and should be recognized as the appropriate standard for software integration under antitrust law.
I show how my approach imparts greater clarity to the D.C. Circuit's rule. I examine the competing product integration rule proposed in 2000 by Professor Lawrence Lessig as amicus curiae in the government's subsequent antitrust case against Microsoft, concerning the integration of Internet Explorer and Windows 98. My approach enables Professor Lessig's analysis to be reconciled with the D.C. Circuit's rule, but Professor Lessig's rule, on its own, would contain serious shortcomings. Thereafter, I evaluate Judge Thomas Penfield Jackson's April 2000 findings of law on the integration of Internet Explorer and Windows 98. I conclude that Judge Jackson's approach, in contrast to the D.C. Circuit's rule as refined by my approach, would harm consumers in the technologically dynamic market for computer software.
One of the great challenges in antitrust law today is articulating the proper rule by which to judge the lawfulness of product integration involving software. Unlike the smokestack industries that have produced most of the antitrust jurisprudence on tie-ins, software is subject to low marginal costs, network effects, and rapid technological innovation. The need for a properly tailored rule for product integration for software is manifested in the growth of the Internet and electronic commerce, which in turn is accelerating the convergence of the information-based industries that heretofore had distinct identities in the minds of consumers, managers, and government officials. Today, computing, entertainment, financial services, retailing, and telecommunications ¾ to name only the most obvious ¾ are industries whose output can be aggregated on a common electronic platform for delivery to consumers. In the "New Economy," will such aggregations of software functionalities be praised as beneficial to consumers, or will they be condemned as unlawful tie-ins?
In Part II, I examine the economic theories of why firms integrate software products. In Part III, I review the Supreme Court's most recent jurisprudence on tying-the 1984 decision in Jefferson Parish Hospital District No. 2 v. Hyde1 and the 1992 decision in Eastman Kodak Co. v. Image Technical Services, Inc.2-and consider why those decisions are inadequate to address tying in technologically dynamic markets. In Part IV, I propose an approach to the law of tying arrangements, the overarching purpose of which is to instill within tying doctrine a filter that discriminates between technologically mature and technologically dynamic product markets. In Part V, I explain why my proposed rule is consistent with the leading case on product integration for software, the 1998 decision by the U.S. Court of Appeals for the District of Columbia Circuit in United States v. Microsoft Corp. (Microsoft II).
In Part VI, I shift to the 1999 antitrust trial of Microsoft, which dealt with the company's practic esconcerning the design and marketing of the Windows 98 operating system and the Internet Explorer Web browser. I briefly summarize the portions of Judge Thomas Penfield Jackson's findings of fact that are relevant to the question of whether Microsoft engaged in unlawful tying of Internet Explorer to Windows 98 in violation of § 1 of the Sherman Act. An understanding of these factual findings is essential to understanding how different outcomes would result from different possible product integration rules.
In Part VII, I consider, as an alternative to the rule of Microsoft II and to my proposed approach, the product integration rule that Professor Lawrence Lessig, then of Harvard Law School, advocated in the amicus brief that he filed in the government's current Microsoft case at the request of Judge Jackson after the judge issued findings of fact.4 Professor Lessig's analysis helps to clarify the D.C. Circuit's product integration rule in Microsoft II, and it is potentially reconcilable with the approach that I propose. However, Professor Lessig's rule does not provide a basis for departing from an application of Microsoft II in the current Microsoft case or in general.
In Part VIII, I analyze, as a second alternative to the rule of Microsoft II, Judge Jackson's April 2000 conclusion of law in the Microsoft case as it pertains to the integration of Windows 98 and Internet Explorer. Judge Jackson declined to apply Microsoft II and, indeed, said that it is inconsistent with Supreme Court precedent. To a lesser extent, he relied on elements of the reasoning underlying Professor Lessig's proposed rule. I explain why Judge Jackson's rule would be less likely to maximize consumer welfare than the rule of Microsoft II, as refined by my proposed approach.
J. Gregory Sidak is an Expert Economist in the fields of Antitrust, Telecommunications Regulation, Commercial and Investment Arbitration, and Intellectual Property Law. Prof. Sidak is the Ronald Coase Professor of Law & Economics at Tilburg University and the Chief Economic Expert at Criterion Economics in Washington, DC. The focus of his research has been regulation of network industries, antitrust policy, the Internet and electronic commerce, intellectual property, and constitutional law issues concerning economic regulation.
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