Backgrounder: Compulsory Licensing and The European Commission’s Case Against Microsoft
Compulsory licensing stifles innovation and erodes protection of intellectual property in the already competitive server market.
Updated: September 2007
The European Commission’s 2004 decision against Microsoft held, among other things, that the company violated EU competition law by failing to disclose to competitors some of its most innovative technologies relating to “server” operating systems (i.e., operating systems for non-desktop computers). As a remedy, the Commission ordered Microsoft to draw up detailed technical documents describing these technologies – which are protected by copyright, patents and trade secrets – and to license these technologies to competitors. Since 2004, the Commission has broadened the scope of this compulsory license considerably by holding that Microsoft: (i) must license these technologies on a worldwide basis; (ii) must license these technologies for little or no royalty; and (iii) cannot prevent licensees from disclosing Microsoft trade secrets in their source code.
Microsoft has challenged the legality of the 2004 decision and remedy in the Court of First Instance, which is scheduled to rule on these issues on September 17, 2007. We also believe that the Commission’s compulsory license is wrong as a matter of public policy.
| • | The market for server operating systems is highly competitive and is serving customers well. The Commission’s premise that other companies need access to Microsoft’s technologies in order to compete is simply wrong. Several successful IT companies – including IBM, Hewlett-Packard, Sun Microsystems, and Novell – already offer highly competitive server operating system products. These products compete with Windows in part based on the very sorts of technologies that Microsoft is now being compelled to license. Throughout the entire proceedings, not one customer complained that their purchase of server operating systems was changed because of interoperability issues. More than 50 companies and government agencies submitted statements confirming that server interoperability is routine. While Microsoft’s competitors might like to obtain these technologies from Microsoft at little or no cost, there is simply no basis to believe that access to these technologies is necessary for them to compete effectively in the market. |
| • | The Commission’s novel compulsory licensing theory undermines incentives for innovation. In order to justify its compulsory licensing remedy, the 2004 decision adopts a novel legal theory under which compulsory licensing is justified whenever the Commission decides “on balance” that compulsory licensing will spur innovation. This vague and legally unsupported standard would authorize the Commission to order compulsory licensing of copyrights, patents and other intellectual property any time it decided that on balance it would spur innovation. This new standard will create great market uncertainty and will chill innovation and investment by leading firms operating in Europe. Well established legal rulings from the European Courts, most recently in the IMS Health case, require much higher and objective standards. |
| • | Strong intellectual property protection is essential to promoting competition and consumer welfare. Strong IP protection is at the very heart of the Information Society and the key to promoting a competitive, knowledge-based economy. When leading firms innovate, others innovate in response, and a virtuous cycle ensues. The Commission’s demand that companies like Microsoft share the valuable fruits of their R&D with competitors, effectively for free, will undermine incentives for innovation not only in the software industry but in many other innovative sectors that develop and make use of intellectual property. |
