How is Microsoft protecting its intellectual property? Isn’t this just going to make it easier for competitors to steal Microsoft’s trade secrets that took years and millions of dollars to develop...? CFIF Corporate Counsel Discusses European Court Ruling Against
Microsoft with President of Association for Competitive Technology

Last week, the Center for Individual Freedom’s Renee Giachino, who hosts the radio talk show "Your Turn – Meeting Nonsense with Common Sense" on WEBY 1330 AM in Northwest Florida, spoke with Jonathan Zuck, President of Association for Competitive Technology, about the recent ruling issued by a European court against Microsoft.

What follows are excerpts from the interview.

GIACHINO: As many of know, I serve as Corporate Counsel for the Center for Individual Freedom. My organization, since inception, has been concerned with what appears to be an erosion of intellectual property rights, not only in this country but across the globe. We are equally concerned with the overreaching interpretation of antitrust laws by our courts and by international courts.

That’s why it’s hard for me to do anything other than throw my hands up when I talk about the subject of this next segment. Many of you may recall that just before the end of 2004, in mid-to-late December, a ruling was issued against Microsoft by a European court. In the ruling, the European Court of First Instance refused to delay the imposition of sanctions against Microsoft while its appeal of an earlier European antitrust judgment is being decided. What this means is that the decision forces Microsoft to immediately pay a whopping $664 million fine to the European Union and, worse yet, perhaps, it compels the company to make part of its Windows operating system available to its competitors.

The appeal itself is pending and it will address the merits of the case which essentially turn on charges that Microsoft allegedly used anti-competitive conduct for media player software and workgroup server software marketing.

Joining us on "Your Turn" this afternoon is a gentleman who is widely known and respected as a leader in the technology industry. In a former life he was a professional software developer. He is an author, speaker and frequent face and voice as a technology expert on all national media television and radio programs. He now serves as President of the Association for Competitive Technology. It’s my extreme pleasure to welcome Mr. Jonathan Zuck. Are you there?

ZUCK: I am here.

GIACHINO: Thank you again for joining us on "Your Turn." Mr. Zuck, can you first give us a little information about the Association for Competitive Technology?

ZUCK: Sure. ACT is an IT industry trade association based in Washington, D.C. It represents mostly small- and medium-sized information technology companies and their interests in Washington. So, we lobby on their behalf to prevent over-regulation of the industry; we fight both here and abroad for intellectual property protection; and we have become embroiled to some extent in this antitrust case because of the implications for businesses other than Microsoft in terms of the erosion of their intellectual property protection, and then what could happen to the platform of Windows and the effect that could have on small businesses.

GIACHINO: Alright, how did I do in describing the recent decision and on-going court battle that Microsoft has going on overseas? Can you elaborate a little bit in my explanation?

ZUCK: Sure, you did a great job even though I wish you had been the judge at the Court of First Instance – having heard your description. Basically there were two separate cases that were brought at the behest of Microsoft’s competitors here in the U.S. – essentially venue shopping over in Europe. One is Novell that is trying to replicate some software Microsoft has called Active Directory and kind of wants some of the codes to make it possible to create a clone of that software so that they can more easily compete and integrate into Microsoft clustered networks. And the other piece of it was sort of at the behest of Real – which is a company that provides the RealPlayer that people play music on their PCs and stuff like that. Their concern is that the presence of Media Player in Windows was somehow anti-competitive and made it difficult for them to compete.

So there are a lot of arguments on the merits associated with these. Real Networks, for example, has a bad case simply because their other competitors have increasing market shares so that even though their market share has been decreasing, the market share of folks like Music Match and Apple’s Quick Time have actually gone up during these so-called "anti-competitive times" of Microsoft’s Media Player. So it is clear that some of the blame for their loss of market share has to reside squarely with Real Networks themselves.

GIACHINO: I turn on my computer every day, Jonathan, and everything pops up and I am happy as a lark and I get to go about my business. How will the ruling overseas affect consumers in the United States, and then let’s talk about how it will affect consumers over in Europe?

ZUCK: Well, there are sort of direct and indirect effects if you will. I think the direct impact of this decision is going to affect European consumers first because it actually means that there will be two different versions of Windows for the same price out there – one of which doesn’t have any media function in it. So a lot of software will mysteriously not work on different versions of Windows, and the consumer is not going to know why that is the case.

GIACHINO: And is that just in Europe, or could we unknowingly buy a version here – I mean I read the labels but I don’t always know what I am reading, could I end up with a European version here that won’t allow me to play my media?

ZUCK: Well, most versions of Windows actually come out through an OEM channel, out through computer manufacturers. So there probably is a possibility that you could accidentally be shipped a machine from Dell or Gateway or someone like that that doesn’t have Microsoft media functionality in it and then you will have some piece of software that won’t run – like a language learning or something like that that makes use of those media functionalities. But I think it will probably be unlikely – far less likely that that level of uncertainty is going to exist here in the U.S.

What’s at stake here is two-fold. One is because this precedent is set you still have some people here in the United States that are clamoring for something similar to happen here, and there is already an existing additional civil lawsuit that Real Networks has brought against Microsoft that could have a similar outcome to this. So certainly the precedent is in place to have this kind of confusion for American consumers as well.

The other issue though is that the people who write software for Windows have to deal with the presence or absence of this technology and so they are going to have to create multiple versions of their software as well. And so you are going to start to see increased costs to both American and European consumers because now a software manufacturer has to make two versions of their software without any additional customers. And that is all the additional testing and support associated with having multiple versions.

And, again, as a precedent, if this starts happening with every piece of technology in Windows, then every piece of software is going to have almost an infinite number of Windows’ versions to potentially address when they install their software. All those things really have the potential to raise costs for consumers both here and in Europe.

GIACHINO: And if my head was not spinning before when I went to buy something, it certainly will be spinning after all that.

ZUCK: That’s exactly right. And for no real valuable reason.

GIACHINO: That’s right. And to us non-techies, it’s a mission to go in and buy a piece of software and understand what it is suppose to do and to get it to do what it is suppose to do, let alone make sure that you are getting the right version. You know, Jonathan, I understand that Microsoft must now license parts of its software to its competitors.

ZUCK: That’s right.

GIACHINO: How is Microsoft protecting its intellectual property? Isn’t this just going to make it easier for competitors to steal Microsoft’s trade secrets that took years and millions of dollars to develop and, even worse, won’t it stifle innovation?

ZUCK: I think that is exactly right. I mean a lot of these effects are indirect but some of it is immediate too. I mean once you have been forced to share your intellectual property, it’s pretty tough to get it back in terms of your trade secrets. But basically, yes, Novell and a few others have been interested in trying to get at some of the crown jewels of Microsoft’s server operating system because what they want to do is create sort of a clone of that so they can sort of sell one cheap into a company that has Windows servers without having to do any of the R&D necessary to create their own features on their own merits. And so that situation can begin to occur as a result of this decision.

Yes, fundamentally if the regime becomes one in which intellectual property isn’t rigorously protected, you are going to see less and less innovation and the creation of intellectual property. Again that is a thing that affects the United States more than anyone else. Right now 60% of the revenues of U.S. software companies come from exports. So if there is not a belief that intellectual property can be protected, those revenues could decline sharply and our industry was responsible for about 25% of the GDP growth in the last 5 or 6 years. So there are going to be effects across the entire economy if intellectual property is not protected both here and in Europe.

GIACHINO: Obviously the Microsoft decision impacts a lot of the people who you do work for, but I have a lot of listeners who head up businesses that do business overseas and I need to impress upon them, and I need your help to impress upon them, that this decision could impact them even if they don’t operate in the technology world. Would you agree with that?

ZUCK: I would agree completely. I mean not all businesses are IT businesses, but many of them are and many of them need to be because it is becoming the chief export in the United States. We are not a manufacturing economy any more and our principle export is our expertise at this point and if that cannot be protected we are going to have disastrous economic results. Airbus, for example, joined in opposition to this decision at one point because they became concerned that it could affect them.

GIACHINO: What does Airbus do? Is that the plane company?

ZUCK: That’s right. Anybody that is developing intellectual property or trying to expand on a product – if your product happens to be the market leader, even in a small market, you could fall subject to these kinds of regulations, and so that is something that affects all businesses, both directly and indirectly. If you have a reliance on technology, you have an indirect effect, but if you are in a business that involves intellectual property and patents and trademarks that you need protection for, then it could have a direct effect.

GIACHINO: The lines are lighting up, John. If you don’t mind, I would like to take a call?

ZUCK: Of course.

GIACHINO: Go ahead, Caller, it’s "Your Turn."

CALLER: I’m a little bit confused. Was Microsoft marketing directly in Europe or was it through the U.S. that it was marketed into Europe?

ZUCK: Well Microsoft sells directly in Europe but as I said for Windows, particularly, most of those sales actually come through hardware manufacturers.

CALLER: That’s where I am going with this. As far as the court decision is concerned, if Microsoft did not market it directly in Europe and they strictly said "alright, phooey on you Europe, you are going to have to rely on sources within the U.S.," and Microsoft marketed it only within the United States, would that not have protected and continue to protect Microsoft?

ZUCK: Well, yes at a certain level Microsoft has the capacity to do something drastic along those lines, but in practical, sort of political terms, they can’t afford to. The European Commission still has significant power over what Microsoft does and that is a lot of what is in question here – whether they should have the power to dictate how software gets designed and stuff like that, and that is the complexity of it. If they just pulled out of Europe altogether, and just forced European consumers to buy from the United States, there would be tariffs and things like that and certainly large political problems associated with it.

CALLER: But as far as the tariffs, wouldn’t NAFTA and GATT enter into it in that circumstance?

ZUCK: Yes, you’d start to have GATT and things like that, but it would be an inefficient way for European consumers to get at the technology as opposed to getting it through European computer manufacturers or the European outlets of the U.S. Manufacturers like Dell and Compaq that also sell in Europe. I mean these businesses are no longer just American versus European; they are really becoming global in scope. And that is what is going to make antitrust enforcement around the world particularly problematic if every jurisdiction comes up with a different set of rules.

CALLER: And I agree with that. I don’t have a problem with that. I just mean that sooner or later someone needs to step up to the plate and say "okay, if this is how you want to treat us and we are a U.S. based company, then fine we are not going to sell it to you. We will sell it to our people over here in the United States and we will, in effect, isolate ourselves, but you all deal with the people who are going to sell it to you indirectly from us and now we don’t have to worry about your Mickey Mouse stuff. And oh, by the way, you are going to get inferior products and it will take you out of the loop."

ZUCK: Believe me that has come up. That suggestion has been raised. The political consequences are just enormous, that’s all. The governments themselves actually buy products from Microsoft and other U.S. vendors, and you don’t want to create a situation in which those sales are lost.

CALLER: Well, if you have the only bat and ball in town, then sooner or later somebody is going to come around to play your game.

GIACHINO: Caller, I think you segue nicely to my next question, which is – I want to make sure that people understand that the latest ruling from the European Court does not deal with the merits of the case. As I understand it, Jonathan, not everything in the most recent ruling is bad news for Microsoft. What I mean is I think the judge hinted that the antitrust case – the case on its merits – may have some serious problems. And what I don’t understand is if he really felt that way, why did he go ahead and impose sanctions?

ZUCK: Well, unfortunately, there are three criteria that he uses to make this decision. One is whether or not there is a prima facie case on appeal. In other words, does Microsoft have a decent case on appeal? The second is whether there will be immediate and irreparable harm to Microsoft if these remedies are imposed. And the third is a kind of balancing test which is where we were most involved because it has to do with the effect on folks other than Microsoft. And really the law forces the judge to focus mostly on the immediate and irreparable damage, and that is where Microsoft was not able to be persuasive enough. In other words, it became a "why not?" question – if there is not an immediate and irreparable harm to imposing these sanctions, if they get rolled back later by an appeals court, then why not impose them now? The presumption if you will is with the Commission and not with the defendant. And so Microsoft needed to prove that it would cause irreparable damage to have these restrictions placed on them immediately and they just failed to do that.

GIACHINO: Well, you know I do a little political commentary on television on Monday evenings, and yesterday Microsoft was the subject of my monologue and I closed it by saying that if in the end Microsoft should prevail, what this really turns out to be in part – other than a technology grab which certainly it is – but also it turns out to be a forced non-interest bearing loan to the EU.

ZUCK: That’s true too.

GIACHINO: What kind of odds do you give Microsoft? Do you think the decision signals that Microsoft might yet prevail?

ZUCK: I think that there are still opportunities for them to prevail, and I think those opportunities will help bring both parties back to the settlement table. I think that ultimately is going to be the best solution to this because then both sides come away with some kind of a framework for addressing these issues down the road. Microsoft’s biggest problem is that they are going to want to add functionalities to their operating systems going forward, and if every time they add new functionality they are going to face this kind of problem that would be disastrous. So fundamentally they need to actually need to meet an agreement with the Commission so that they actually have rules for the road that they can go and continue to innovate their products as opposed to having to litigate every new feature. For example, when they add voice recognition technology to Windows XP, are they going to be back in to having this fight all over again?

GIACHINO: You mention parties, and I believe that I read that several of the parties supporting the European antitrust case have withdrawn from the case. So who is still pressing the case against Microsoft?

ZUCK: Well right now it is just the Commission, in theory on behalf of European consumers. You still have folks like Nokia who are pushing forward.

GIACHINO: So the Commission acts sort of as an attorney general?

ZUCK: That’s right.

GIACHINO: When will the case be over – assuming it is ever over?

ZUCK: Well, like I said, I hope that the positive indicators that came out of the Court of First Instance on the case on the merits will drive the Commission back to the settlement table, in which case the whole thing could be over in six months. Absent that, in a full sort of litigation on appeal on the merits, it could be a couple of years.

GIACHINO: Spring boarding a little from our Caller’s viewpoint, I understand that in a former life you set up U.S. operations for a French software firm and helped build the company into an $11 million business. How do you think the French company or any foreign company would take a decision from a United States court like the one issued against Microsoft in Europe?

ZUCK: Probably not well. Unfortunately, we all do this stuff to each other way too much. The Europeans have accepted a considerably more regulatory environment over there and probably expect it more here than they see. It is the wrong way to go. The way to best serve consumers both here and in Europe is by letting players in the market compete vigorously for their patronage. When the government starts picking winners and losers, it is almost always a disaster.

GIACHINO: I know my organization is a strong proponent of the free market, and we have expressed our outrage with this decision and we have written about the case. What, if anything at all, can the average citizen do if he or she is equally as outraged by the decision in the Microsoft case, and do you think it will make a difference?

ZUCK: Well, I think it is always a good idea if you are willing to speak up to put a call in to your local member of Congress. We have these kinds of issues here in the U.S., as well. As you start to see the kinds of effects this can have on your business, it is important to get involved and speak up. If folks come to our website and sign up, we will help them find the outlets for making their voices heard.

GIACHINO: Can you please give people the address for your website so if they want to learn more about this or your organization they can visit the site?

ZUCK: Sure,

GIACHINO: That’s the Association for Competitive Technology. Thank you, Jonathan Zuck, for your time and all your energy devoted to this important effort. We appreciate it.

ZUCK: Thank you.

January 13, 2005
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