June 29, 2011

U.S. v. Microsoft Was A Decade-Long Education On Antitrust In The New Economy

The end of the decade-long federal court supervision of Microsoft’s licensing practices last month provides an opportunity to reflect on the impact that case has had.  A lasting legacy of the U.S. v. Microsoft case is that monopolists in dynamic and rapidly changing high-tech industries do not receive special treatment under the Sherman Act.  There is no presumption that high market shares will be counteracted by the possibility of innovation by competitors, without convincing proof.

In an article for Law360, Constantine Cannon’s Mitch Stoltz reflects on the long-term impact on antitrust in the software industry of the Justice Department’s 1999 monopolization suit against the software giant.

The historic case was resolved in 2001 with a settlement that provided for a decade of government oversight of Microsoft, which ended in May 2011.

The DOJ and state attorneys general had claimed that Microsoft’s use of contracts with PC manufacturers to control which programs could appear on the Windows “desktop” violated Section 2 of the Sherman Act as a form of monopolization or attempted monopolization.  They also claimed that Microsoft’s commingling of the computer code for the Windows operating system and the Internet Explorer browser was a form of tying that illegally excluded other browsers, such as Netscape Communicator, from the market. 

Microsoft and its supporters claimed that its restrictive contracts were not anticompetitive because, despite its very high market share in the PC operating system market, the possibility of rapid innovation by competitors like Netscape effectively checked any Microsoft attempt to wield market power.  They also argued that combining the browser with the operating system was innovative and that to punish it as tying would bring the courts into the business of judging technological merit.

After a bench trial and appeal, the Court of Appeals for the D.C. Circuit ruled that Microsoft possessed and abused monopoly power in violation of Section 2 through its manufacturer contracts.  The court also ruled that the “tying” of two software programs technologically must be evaluated under the rule of reason, taking into account procompetitive and anticompetitive effects, rather than being declared per se illegal.

In other words, the court held that lower courts can and should look into the technological merit of combining two software programs to see if the combination truly benefits consumers rather than simply locking out competitors.

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Categories: Antitrust Enforcement, Antitrust Law and Monopolies, Antitrust Litigation

    June 27, 2011

    Microsoft Clears Regulatory Hurdle For Skype Acquisition

    The Federal Trade Commission (“FTC”) has approved Microsoft’s $8.5 billion purchase of Internet telephone giant Skype. 

    Opponents of the deal have pointed to several aspects of Microsoft’s purchase of Skype that they claimed would negatively impact competition.  They expressed concern about greater horizontal integration because Microsoft already offers a similar service through its Windows Live product.  Industry experts and Skype users alike also worried that the deal would mean Microsoft limiting Skype support to its own platform.

    While the FTC does not publish the reasoning for these decisions, its swift approval of the deal indicates that it did not find these concerns compelling. 

    Microsoft had a number of factors working in its favor, most importantly the robust competition in the Internet telephone market.  Industry heavyweights Google and Apple both have services that directly compete with Skype.  Google and Apple rival Microsoft in resources and market power, making it less likely that Microsoft’s control of Skype would enable it to dominate the market.  Microsoft’s plan to keep Skype as a separate division and its promise not to limit support to its own operating system were also important in allaying fears of anticompetitive practices.  

    Microsoft says that it hopes to complete all further regulatory procedures by the end of the calendar year.

    The FTC reviewed the acquisition under the Hart-Scott-Rodino Act of 1976, which requires the FTC and the Department of Justice (“DOJ”) to investigate mergers valued at more than $65.2 million to avoid anticompetitive outcomes.  Because it is often exceedingly costly or even impossible to restore a market to a healthy, competitive condition, the FTC and DOJ are tasked with preventing anticompetitive effects through the merger approval procedure.  The agencies examine more than 1,000 such cases each year, the vast majority of which are approved.

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    Categories: Antitrust Enforcement

      June 22, 2011

      Feds Eyeing Bids In Historic High-Tech Auction

      Antitrust concerns are causing the U.S. Department of Justice to eye an unprecedented auction of a mother lode of digital-communication technology warily.

      Bankrupt telecom equipment maker Nortel Networks plans to auction off a treasure trove of more than 6,000 high-tech patents next week.  The patents cover vital parts of the new 4G LTE wireless protocol, wireless video, Wi-Fi, and many other wired and wireless communications technologies.

      The Justice Department has expressed concern that the new owner of these patents could use them to create barriers to entry in digital communications.

      The first company to announce a bid was Google, which began the public positioning for the auction with an $800 million “stalking horse” bid that others are expected to top.  The winning bid may easily exceed $1 billion.

      While the Justice Department has approved Google’s bid, it is also reported to be investigating some others.  Apple, Intel, RIM, and Ericsson are expected to bid before the auction concludes next week.

      According to the Justice Department’s guidelines on antitrust issues with intellectual property, a patent owner can generally license or refuse to license its patents to anyone, if it acts unilaterally.  Refusing to license a patent is considered an exercise of the rights inherent in a patent, to exclude others from using or selling an invention.  This rewards innovation and creates an incentive to disclose new inventions instead of keeping them secret.

      On the other hand, licensing patents with conditions can harm competition outside the rights granted by the patent itself, and can violate the Sherman Act, according to the Justice Department’s guidelines.  While not per se illegal, patent licenses that require the licensee to license its own, unrelated patents to the original licensor, or to transfer any follow-on patents to the licensor, may diminish other companies’ potential to profit from their own inventions, which could suppress innovation in general.  Licenses that dictate the pricing of goods that use the patent are more likely to be found illegal.

      One worry that some technology companies have expressed about the Nortel auction is that the winner could change the terms of their licenses to the patents going forward.  Where a patented technology is vital to a company’s business, demanding new terms when renewing a longstanding license in a way that would significantly raise their costs of doing business could possibly violate Section 2 of the Sherman Act, based on the Supreme Court’s decision in Aspen Skiing Co. v. Aspen Highlands Skiing Corp.

      However, the Supreme Court has since said that Aspen Skiing represents the “high-water mark” of liability for refusing to deal with a competitor.  It may well be that no liability would arise for a licensing change, even with a long-term relationship between owner and licensee.

      Given that the Justice Department has already cleared a major bid in the Nortel auction, the auction is likely to proceed without any formal antitrust challenges.  But the Justice Department’s positions on patent licensing – not to mention the courts’ – have certainly had an impact on the content of the bids and the conduct of the auction itself.

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      Categories: Antitrust and Intellectual Property Law, Antitrust Enforcement

        June 20, 2011

        Feds Open Antitrust Inquiry Of Airlines And Ticket Distributers

        The Antitrust Division of the U.S. Department of Justice is investigating whether third-party sellers of airline tickets have violated antitrust law

        The federal investigation opens a new front in the legal battles involving several U.S. airlines and the companies that aggregate and distribute flight and booking – the practices known as global distribution systems (“GDSs”).  GDSs serve as intermediaries between airlines, online ticket sellers, and travel agents by providing airlines’ flight information to the ticket sellers and booking information to the airlines.

        Several airlines, including American Airlines, Delta, and U.S. Airways, and the major GDSs, including Sabre, Travelport, and Amadeus, have confirmed that they have received civil investigative demands from the Antitrust Division.  According to several reports, the Justice Department is investigating “the possibility of anti-competitive practices in the global distributions industry.” 

        In April, American Airlines sued Orbitz Worldwide Inc. and air fare data provider Travelport, one of the leading GDSs, for allegedly making American’s fares wrongfully appear more expensive than the fares of other airlines.  Also in April, U.S. Airways filed an antitrust suit against Sabre, another major GDS.

        American claims that Travelport was retaliating against American’s Direct Connect network, which directly connects online ticket sellers and travel agents to the airline’s reservation system.  Such a system circumvents GDSs and their associated fees.

        GDSs typically charge about two percent of total tickets costs.  In 2008, GDSs sold 64 percent, or $81 billion, of U.S. airline tickets.

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        Categories: Antitrust Enforcement

          June 17, 2011

          Supremes Raise Hurdle For Invalidating Patents And For Antitrust Counterclaims

          Antitrust counterclaims are going to be more difficult to prove in patent cases as a result of the Supreme Court’s recent ruling that all court challenges to the validity of a patent must be proved by clear and convincing evidence.

          In Microsoft v. i4i Partnership, the Court held that although the Patent Act is silent on the standard of review that courts should apply to patent defenses based on invalidity, the common law standard of “clear and cogent evidence” must apply. 

          The plaintiff is i4i, a software company that sued Microsoft for infringement of a software patent.  Microsoft argued that i4i should not have received a patent in the first place because the invention claimed in the patent was in use more than a year before the patent application, in another i4i software program that wasn’t disclosed to the Patent and Trademark Office (the “PTO”).  Microsoft’s evidence was disputed and uncertain because the source code for the earlier program had been lost.  The Supreme Court affirmed the long-held position of the Court of Appeals for the Federal Circuit and held that the clear and convincing evidence standard applies to all invalidity defenses.

          The court also rejected Microsoft’s alternate argument that a lower (preponderance of the evidence) standard should apply when the patent plaintiff failed to disclose material information to the patent examiner.  Although the court ruled that nothing in the statute or prior cases justified a variable standard of proof, it also held that new evidence that the PTO didn’t consider should be given more weight in deciding whether to invalidate a patent.

          Supporters of Microsoft argued in amicus briefs that the PTO faces a shortage of skilled patent examiners while applications have proliferated, and that internal rules favor granting a patent if an examiner is unaware of prior art or other factors that might sink an application.  They asserted that considering the limited time and information available to examiners, the presumption that an issued patent is valid is weak and should not require a heavy burden to overcome.  In that sense, the Supreme Court’s decision can be seen as a missed opportunity to align the law with the administrative reality of the patent examination process.

          A likely consequence of the Court’s ruling is that antitrust claims based on enforcement of an invalid patent will become harder to bring.

          A defendant in a patent suit may bring an antitrust counterclaim, alleging that the patent holder is litigating an invalid patent to gain monopoly power that is not actually justified by the patent laws.  But the defendant must overcome the Noerr-Pennington doctrine, which provides First Amendment protection to litigation unless the litigation is a sham.  In patent suits, showing that the patent is invalid is the most common way of establishing that the litigation is a sham and that the patent holder can be liable for an antitrust violation.  By establishing a universally high standard of proof for patent invalidity, the Supreme Court has also raised the hurdle for a successful antitrust counterclaim.

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          Categories: Antitrust and Intellectual Property Law, Antitrust Litigation

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