United States v Microsoft (1998)- Licensing Agreements

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At the roaring apogee of the 1990’s era tech industry, Microsoft was king. Naturally, astronomical success will be with skepticism. The presumption being that such gains must result from dishonest conduct. The merits of such assumptions at times can be questionable considering the broad and preemptive nature of most antitrust legislation. Notably, the Clayton Act (1914).


The extreme amount of flexibility in the interpretation of per se antitrust violations can be problematic. We encounter the potential issue of judicial bias influencing the outcome of the case. When the ruling does not even operate as a form of consumer protection. The commonly purported function of antitrust legislation. Making the potential for top performers in the industry being targeted more probable (McKenzie & SHUGHART II,1998, P.31) [1]. To some extent, the Rule of Reason helps counterbalance any anti-market bias resonating from the misapplication of judicial digression. Some economists and jurists believe that back in the 1990’s Microsoft was being unfairly targeted for antitrust complaints due to their success. Institutional and public bias may have been potentially been reflected in the United States V. Microsoft (1998).


In my podcast, I discussed how the 1998 suit included complaints the tech giant engaging  in tying agreements. That isn’t the whole story. The case was built upon multiple complaints. I would be remiss to represent this case as being built solely on a tying agreement complaint. Per the Department of Justice’s Website:


III. Prohibited Conduct

  1. Microsoft shall not retaliate against an OEM by altering Microsoft’s commercial relations with that OEM, or by withholding newly introduced forms of non-monetary Consideration (including but not limited to new versions of existing forms of non-monetary Consideration) from that OEM, because it is known to Microsoft that the OEM is or is contemplating:
  1. developing, distributing, promoting, using, selling, or licensing any software that competes with Microsoft Platform Software or any product or service that distributes or promotes any Non-Microsoft Middleware;

  2. shipping a Personal Computer that (a) includes both a Windows Operating System Product and a non-Microsoft Operating System, or (b) will boot with more than one Operating System; or

  3. exercising any of the options or alternatives provided for under this Final Judgment. [2]


There may be some credence to the claims of a tying agreement. However, it would be more less reasonable to blindly accept the claims of Microsoft’s licensing practices. Which is why it is important to acknowledge the potential for bias in judicial proceedings. Back in the late 1990’s the media lambasted Microsoft for its business practices. Microsoft was already crowned a monopoly with quips oozing antimarket sentiment. Microsoft back then was often paralleled to Philip Morris (McKenzie & SHUGHART II,1998, P.4) [3]. Such an equation is not only hyperbolic but puts into question if popular perception influenced the outcome of the case.  Licensing agreements deployed to secure proprietary applications and coding seems like a reasonable measure. This is merely speculation on my end.

The bigger question is how a licensing agreement can constitute an antitrust violation?  Per Shenefield and Stelzer in most instances licensing agreement are perceived as being competitive market behavior.


“ Licensing arrangements, like other agreements involving intellectual property are routinely pro-competitive because they increase the rate of diffusion of new technology.” (Shenefield  & Stelzer, 1998, P. 89) [4].”


The water becomes a little murkier when we get into the royalties attached to licensing arrangements. When royalty rate is based off a factor other than use of the patent trouble can arise. Microsoft mandated a licensing fee for each computer even if  their software wasn’t installed (Shenefield  & Stelzer, 1998, P. 91) [5]. On its face, it does seem like a blatant barrier to entry. However, is it possible that Microsoft is attempting to protect their product?


The attempt to cite Microsoft’s licensing practices can be seen as more than just a misuse of licensing fees.  It could be argued that that the DOJ perceived the Microsoft operating system as an essential facility (McKenzie & SHUGHART II,1998, P.27) [6]. Essentially facility doctrine entails that firm provides access to facility at a “reasonable price” [7]. Through Microsoft requiring licensing fees for developers creating software compatible with the Windows operating system. Due to the fact developers would require the operating systems code to make their application fully compatible, this could be seen as protecting a trade secret  (McKenzie & SHUGHART II,1998, P.28) [8]. Allowing access to their own proprietary code makes it very easy to replicate Microsoft’s operating system. Depleting the value of the product that Microsoft put a significant amount of money and man hours into developing.  It may be fair to charge a fee to access such information to account for the resources spent to create their operating system. While such gate keeping measures may seem like a barrier to entry, in most instances it is the prerogative of the firm. The possibility that if Microsoft didn’t possess a large market share would they have even been prosecuted for their licensing practices? Especially, when they were only engaging in sensible recourse to protect their bottom line.

The Antitrust Exemptions for Private Conservation Collectives

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It is intellectually dishonest to frame an argument in a misleading manner. In my previous essay, I explained how antitrust laws obstruct collective conservation efforts. However, I would be remiss if I did not expound upon the antitrust exemptions for specific collective conservation arrangements. Such examples include the Fishermen’s Collective Marketing Act and harvest collectives. There is certainly a formidable argument that antitrust laws could be made less restrictive to facilitate private conservation initiatives. It is still important to acknowledge what exemptions do exist for the sake of conservation.


The Precedence of Antitrust Exemptions


Antitrust exemptions for various collective arrangements run across many industries. Ranging from Major League Baseball [1], agricultural collectives, to even labor Unions (Adler, 2004, P.37) [2]. Per Adler (2004) the structural architecture of most antitrust exempts stems back to the Capper-Volstead Act.  This act originally provided small-scale farmers with more leverage against large distributors. Enabling them to engage in collective efforts that were mutually beneficial to collective members (Varney, 2010, P.2-3) [3]. The Capper-Volstead Act was oriented towards agricultural collectives but did influence legislation such as The Fishermen’s Collective Marketing Act. Which allowed members to :


“Specifically, the FCMA authorizes “persons engaged in the fishing industry” to “collectively catch, produce, prepare for market, process, handle and market… such products of said persons so engaged…”


The act does not allow associated firms to initiated prohibited boycotts or refusals to deal. Due to the specified nature of the above exempt activities (Adler, 2004, P.39) [4]. The market behaviors permitted under FCMA are to the benefit of collective members. Unfortunately, there aren’t any terms to enforce catch quotas (Adler, 2004, P.41) [5]. Presents a major problem pertaining to the ability of the FCMA to reduce the environmental impact of over fishing. The facts are once the prices rise the temptation to breach a cartel agreement increases over time.



Harvest Collectives:


Due to the lack of formal property rights and quota enforcement legally acknowledged harvest collectives prove to be effective alternatives. The Pacific Whiting Conservation Cooperative and North Pacific Pollock fishery being fine examples. Often legislation can be easily circumvented. For example, Magnus Act attempted to impose catch limits through a licensing system (Adler, 2004, P.42) [6]. A natural consequence of such measures is the creation of a “race to fish” scenario. Limited licenses, pushed producers to exhaust quotas within 14 days (Adler, 2004, P.42) [7]. Clearly not aligning the incentives of fishing companies with conservative harvesting practices.


On the other hand, the Pacific Whiting Conservation Cooperative has achieved greater success.  The cooperative operates by “… allocating portions of the catch among its members, creating informal property rights in the harvest..” (Adler, 2004, P.43) [8]. The allotments were easily determined due to the “coordination costs” being low enough to do so with little hassle (Adler, 2004, P.43) [9]. Per Adler, the implementation of the PWCC increased the recovery of saleable fish by approximately 20%.  Beyond that, it has reduced the number of operating vessels and increased overall fish volume and quality (Adler, 2004, P.43) [10]. The implementation of such collectives not only are more ecologically congenial but are more economically productive. Making it a winning solution and preserving the balance between free markets and environmentalism. Striking the balance that most assume to be unattainable.


Does the question now become how do collectives such as PWCC fair under the scrutiny of antitrust laws?  Better than you might think. The Department of Justice (DOJ) found the practices of PWCC to be lawful despite the broad nature of current antitrust laws. The participating companies agreed to “… continue processing, marketing, and selling their products…” in a competitive manner. It was deemed by the DOJ that such coordinated efforts would not substantially reduce supply nor inflate prices (Adler, 2004, P.43) [11].





Free-market Capitalism and conservation efforts do not need to be adversarial. The PWCC is proof. The interaction between private conservation cooperatives and antitrust laws can contemptuous. Depending on the agreed-upon parameters of the collective it may still be legal. While the ambiguous quiddity of antitrust statues can be an obstacle they are not necessarily a brick wall. Unfortunately, you are somewhat held hostage by another individual’s interpretation of vague laws.


Navigating antitrust laws much like another aspect of the law is far from cut-and-dry. It can be mildly tainted with subjectivity. My natural inclination is to abolish such statues. Such a hasty reaction ignores the potential impact on the consumer. There certainly should be a great deal of nuance when addressing the issue of antitrust laws alone. Never mind the extra layer of complexity by examining how these laws interact with conservation initiatives. While such statutes can be restrictive, depending on the circumstances they may not impede the privatization of conservation efforts.




How Antitrust Laws Impede Conservation Efforts

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Quite often capitalism and environmentalism are viewed as being at odds. The very word “industry” conjures up images of factories releasing caustic smog into the air. Filling our waterways with toxic sludge. This perpetuated image is somewhat anachronistic. Stringent environmental regulations strongly discourage such wanton disposal of production byproducts. It should also be noted that the majority of industrial production has shifted overseas.

Despite the persistence of such misconceptions, business interests, and conservation efforts are not antithetical. The proliferation of the “Green” Business movement solidifies this point exquisitely. Environmental consciousness is absolutely imperative for anyone in the business of harvesting natural resources. That includes fishermen, loggers, and even recreational hunters. All groups that have it within their own interest to conserve finite resources. Limited resources in which access is not constrained by definitive property rights.

Due to resources being scant and access unfettered we soon are faced with the Tragedy of the Commons. This concept was first postulated by William Foster Lloyd back in 1833. Then was revived in the modern era and applied to population ethics by Garrett Hardin. Hardin elaborates upon Lloyd’s grazing rights example by stating:

“… the rational herdsman concludes that the only sensible course for him to pursue is to add another animal to his herd. And another; and another…. But this is the conclusion reached by each and every rational herdsman sharing a commons. Therein is the tragedy. Each man is locked into a system that compels him to increase his herd without limit-in a world that is limited. Ruin is the destination..” (Hardin, 1968, P.2) [1].

It only stands to reason that consumption limits need to be placed upon commonly shared resources. Typically, such restrictions take the form of government regulations. Couldn’t private fishing firms merely mutually agree upon daily catch quotas? Per researcher Bruce Yandle “… Ronald H. Coase has taught us, every firm is a transaction-cost minimizer..” (Yandle 1998, P.7) [2]. Another way of putting it is that private firms could more efficiently and effectively coordinate such measures. Private enterprises face one large obstacle and that is antitrust laws. Frequently antitrust laws hamper conservation efforts made by private businesses (Yandel, 1998, P.4)[3]. In this essay, we will examine how mutually agreed upon conservation efforts qualify as antitrust violations.

Per the Law Conservation Collectives = Collusion

Coordinated efforts among private enterprises to conserve a commonly shared resource may be a novel solution. Unfortunately, under current antitrust statues could be defined as a collective effort to constrain competition.  Collusive behavior among competitors is explicitly prohibited under the Sherman Act (1890). Section 1 of the Sherman Act states:

“… every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce…” (Shenfield & Stelzer, 1998, P. 15) [4].

The emphasis on cooperative efforts is considered a major legislative flaw in the Sherman Act (Shenfield & Stelzer, 1998, P. 16) [5].  However, it is broad enough to encompass privately formed conservation collectives. Restricting supply can be construed as an indirect form of pricing fixing. One of the more salient behaviors associated with cartel arrangments (Shenfield & Stelzer, 1998, P. 43)[6]. It seems like such an effort would qualify as an antitrust violation.

The Conspiracy or Cooperation?

The broad interpretation provides some malleability to the application of the law. Which can be a double-edged sword. Above all the intent of Antitrust laws is to act as a form of consumer protection. Insulating patrons from inflated prices and artificially reduced supply (Alder, 2004, P.20) [7].  A laudable goal that could, unfortunately, conflict with other genuine interests such as environmental conservation. For this reason, the courts need to carefully access any potential benefit of the anticompetitive behavior (Adler, 2004, P.21) [8].

Unless protected by statutory exemptions most agreements that seem anti-competitive can be prosecuted under the Sherman Act (Alder, P.10) [9]. The problem becomes that in most cases intentions of the participating businesses are not taken into consideration.  In the case of Manaka v. Monterey Sardine Industries (1941)reflects such a misstep.  Frank Manaka was prohibited from fishing in Monterey Bay by the Monterey Sardine Industries. To make matters worse the local canneries wouldn’t purchase fish from  Manaka. The efforts of the collective were clearly “.. to conserve fish stocks..” (Adler, 2004, P.4) [10].  The court wasn’t on the same page:

“Such an association as that of the boat owners is not freed from the restrictive provisions of the anti-trust act, because they profess in the interest of conservation of important food fish to regulate the price and the manner of taking such fish “unauthorized by legislation and uncontrolled by proper authority.” (Adler, 2004, P.31) [11].

Unless there is clear documentation intentions are subject to speculation. Even there is still the threat of a Per se antitrust violation. Defined as “… the rule permits the court to make a categorical judgment as to the permissibility of a given business practice..” (Adler, 2004, P.22) [12]. Leaving individuals at the mercy of a judge’s digression.  Incredulity towards the claims of colluding businesses seems reasonable. The waters muddied by the faults of human nature.  Cases such as Hawaiian Tuna Packers Ltd. v. Int’l Longshoremen’s & Warehousemen’s Union (1947) the motives were much murkier. The plans to manipulate prices of fish sold to the Hawaiian Tuna Packers cannery by members of Local 150 were not overtly environmentally minded (Alder, P.13) [13].

Have Conservation Regulations Failed?

Informal restrictions in a resource “commons” are far from a new concept. Gentlemen’s agreements managed rights to hunting grounds in medieval Europe. Native tribes indigenous to Pacific Northwest established customary rules for managing salmon fishing (Yandle,1998, P. 9) [14]. It wasn’t until nascent years of the Progressive era that such arrangements became problematic.

In theory, antitrust laws are aimed to protect the customer. However, aren’t “… high-priced fish are preferable to no fish at all?” (Adler, P.11) [15]. This question may sound exaggerated but does hold some merit. Circling back to the case against the Monterrey Sardine Industries, overfishing decimated the fish population in the area (Yandle, 1998 P.14) [16]. Despite the implementation of regulations restricting fishing quotas, 65% of all fisheries are either “.. fully exploited or overexploited…” (Adler, 2004, P.6) [17]. Regulations have made a meager recovery to nearly depleted fish stocks globally. Overall, government initiatives to replenish fish stocks globally have failed (Adler, 2004, P.7) [18].

It is only natural to questions why such efforts end up falling short. It is expected that in the absence of property rights formal restrictions would aid resource conservation. As Bruce Yandle would put it governments often adopt a “one-size-fits-all” solution. When the Canadian government implemented a system of fishing permits, even individuals not actively fishing purchased them. Reducing the fisheries once again to a state of common access (Yandle, 1998, P. 10) [19]. While this is only one example of regulatory failure it demonstrates a common pattern. The porous nature of many regulatory solutions leaves them open to loopholes. Gaps that can be easily exploited.