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The internationalisation of software and computer services
SEPT ~ OC'~
T[{I: CONPUTFR ~AV~,: AND SEC[JRITY REPORT
how and patent lic~nces. Though despite much pressure from industry the~ latest draft of the Know-how licensing regulation does not include location clauses amongst the list of "white" exempt clauses. Examples of restrictive clauses which would fall outside of Article 85 if the Coditel principle were applied: - machine restrictions which tie the licence to a designated computer (CPU); - installation restrictions which tie the use of the software to specific rooms; - location restrictions which tie the use of the software to a specific building; - use of the software on computer systems which can be accessed by remote terminals or modems. Certain other commonly included clauses should also be considered as a part of the existence of the copyright. For example: - use of the software only to process the licensee's software; - prohibition on copying with exceptions perhaps for adaption and/or purposes; - ban on modification of the software; - ban on reverse engineering the object code by reverse compilation; - prohibition on sub-licensing or assignment without the permission of the licensor; - obligation on licensee to return the software to the licensor upon termination of the agreement. It should be stressed again that there is no formal guidance on the clauses which fall within the "existence" of the copyright and those which fall within the "exercise" of the right. T Y I N G CLAUSES A N D C O M P U T E R S The problem of tying (i.e. the linking in a sale of unrelated products) is expressly prohibited when employed by a dominant undertaking as a commercial tactic under Article 86 and under Article 85 when in the context of an agreement irrespective of whether the parties imposing the clause is dominant. The only difference between the two provisions is that there exists the possibility of exemption under Article 85(3) but there is virtually no get-out under Article 86. Tying has been something of a problem in the context of
1 9 8 % 9 0 i 3 CLSR
computer products and indeed remains so. Computer leasing companies sometimes wrap up together hardware and software in a single leasing package. Hardware suppliers will link operating software to the hardware; some seek to sell hardware and more sophisticated software. The European Commission have intervened to prevent IBM from tying up memory capacity with hardware since they view the products as separate (see below). The European Commission have informally in the past been adherents to the views expressed by the U.S. Ninth Circuit Court of Appeals case of Digidyne Corp. v Data General Corp. 734 F.2d 1336. In that case the Data General demanded a much higher royalty from those customers who purchased software without hardware from them than from those who purchased the hardware and the software together. They sought to justify this practice by referring to the investment cost of R&D in the operating software. The Court rejected that business reasons could be pleaded as justifying a tie-in. The Commission appear to follow this line of thinking. Although there may be some liberalisation in their policy in recent times it remains fairly strict. In the context of know-how licensing the Commission are now thinking along the lines of allowing tie-ins where they are necessary: (a) for a technically satisfactory exploitation of the licensed technology; and (b), for ensuring that the production of the licensee conforms with the quality standards that are respected by the licensor and other licensees; and (c) to allow the licensee to carry out related checks. There is a less generous formulation of permissible tying in the patent licensing regulation which limits the discretion to those ties which are technically necessary. As noted above where the licensor/lessee/vendor is dominant then there is almost no latitude at all. For example in the IBM settlement case (ibid) the Commission wrung a settlement out of IBM whereby the latter would agree to offer memory capacity separate from the mainframe even to the extent of physically modifying the mainframe product. The fact that the two products were interdependent was of but limited weight in the argument. Nicholas Green, Barrister Report Correspondent
BOOK REVIEW I N T E R N A T I O N A L DEVELOPMENTS IN SOFTWARE A N D C O M P U T E R SERVICES The Internationalisation of Software and Computer trends; for example, the level of internationalisation of the data Services OECD 1989 189pp. (OECD Information Computer processing segment is definitely lower than that of software. Communications Policy Series No. 17) Ff120 ISBN 92 64 131 396 However, the growing importance of telecommunications This study analyses the growing internationalisation of software network-based services, which increase the "tradeabi/ity' of and computer service firms. The instant transfer of services and services, is perceived as a strategic opportunity by firms active software and the inexpensive reproduction of the latter permitted in the market. The report notes that the development of this new by information technologies have made it very difficult to quantify way of providing services by private companies strongly depends the flow of trade by existing methods. Information technology on policies towards regulation and the role of competition in the has blurred the barriers between existing service sectors and telecommunications field. Growth in the industry between 1985 created new services and the terms of competition are changing and 1991 is forecast to rise at a real annual rate of 16%-20% as the number of participants from other sectors increases. The in the United States, Japan and the most advanced European study notes that inconsistencies among available data sources countries. Software and computer services are among the fastest have hampered its compilation, although it has been possible growing components in an industry worth approximately US$72 to reach some conclusions and point to some crucial problem billion in 1987. areas. The findings of the present study, then, focus on the dimension of the market, and the level of and the obstacles to The study is available from OECD - in the UK from HMSO, internationalisation. The study looks closely at the structure of PC) Box 276, London SW8 5DT. Telephone orders: the software and computer servicesindustry and notes the current 01-873-9090.
T[{I: CONPUTFR ~AV~,: AND SEC[JRITY REPORT
how and patent lic~nces. Though despite much pressure from industry the~ latest draft of the Know-how licensing regulation does not include location clauses amongst the list of "white" exempt clauses. Examples of restrictive clauses which would fall outside of Article 85 if the Coditel principle were applied: - machine restrictions which tie the licence to a designated computer (CPU); - installation restrictions which tie the use of the software to specific rooms; - location restrictions which tie the use of the software to a specific building; - use of the software on computer systems which can be accessed by remote terminals or modems. Certain other commonly included clauses should also be considered as a part of the existence of the copyright. For example: - use of the software only to process the licensee's software; - prohibition on copying with exceptions perhaps for adaption and/or purposes; - ban on modification of the software; - ban on reverse engineering the object code by reverse compilation; - prohibition on sub-licensing or assignment without the permission of the licensor; - obligation on licensee to return the software to the licensor upon termination of the agreement. It should be stressed again that there is no formal guidance on the clauses which fall within the "existence" of the copyright and those which fall within the "exercise" of the right. T Y I N G CLAUSES A N D C O M P U T E R S The problem of tying (i.e. the linking in a sale of unrelated products) is expressly prohibited when employed by a dominant undertaking as a commercial tactic under Article 86 and under Article 85 when in the context of an agreement irrespective of whether the parties imposing the clause is dominant. The only difference between the two provisions is that there exists the possibility of exemption under Article 85(3) but there is virtually no get-out under Article 86. Tying has been something of a problem in the context of
1 9 8 % 9 0 i 3 CLSR
computer products and indeed remains so. Computer leasing companies sometimes wrap up together hardware and software in a single leasing package. Hardware suppliers will link operating software to the hardware; some seek to sell hardware and more sophisticated software. The European Commission have intervened to prevent IBM from tying up memory capacity with hardware since they view the products as separate (see below). The European Commission have informally in the past been adherents to the views expressed by the U.S. Ninth Circuit Court of Appeals case of Digidyne Corp. v Data General Corp. 734 F.2d 1336. In that case the Data General demanded a much higher royalty from those customers who purchased software without hardware from them than from those who purchased the hardware and the software together. They sought to justify this practice by referring to the investment cost of R&D in the operating software. The Court rejected that business reasons could be pleaded as justifying a tie-in. The Commission appear to follow this line of thinking. Although there may be some liberalisation in their policy in recent times it remains fairly strict. In the context of know-how licensing the Commission are now thinking along the lines of allowing tie-ins where they are necessary: (a) for a technically satisfactory exploitation of the licensed technology; and (b), for ensuring that the production of the licensee conforms with the quality standards that are respected by the licensor and other licensees; and (c) to allow the licensee to carry out related checks. There is a less generous formulation of permissible tying in the patent licensing regulation which limits the discretion to those ties which are technically necessary. As noted above where the licensor/lessee/vendor is dominant then there is almost no latitude at all. For example in the IBM settlement case (ibid) the Commission wrung a settlement out of IBM whereby the latter would agree to offer memory capacity separate from the mainframe even to the extent of physically modifying the mainframe product. The fact that the two products were interdependent was of but limited weight in the argument. Nicholas Green, Barrister Report Correspondent
BOOK REVIEW I N T E R N A T I O N A L DEVELOPMENTS IN SOFTWARE A N D C O M P U T E R SERVICES The Internationalisation of Software and Computer trends; for example, the level of internationalisation of the data Services OECD 1989 189pp. (OECD Information Computer processing segment is definitely lower than that of software. Communications Policy Series No. 17) Ff120 ISBN 92 64 131 396 However, the growing importance of telecommunications This study analyses the growing internationalisation of software network-based services, which increase the "tradeabi/ity' of and computer service firms. The instant transfer of services and services, is perceived as a strategic opportunity by firms active software and the inexpensive reproduction of the latter permitted in the market. The report notes that the development of this new by information technologies have made it very difficult to quantify way of providing services by private companies strongly depends the flow of trade by existing methods. Information technology on policies towards regulation and the role of competition in the has blurred the barriers between existing service sectors and telecommunications field. Growth in the industry between 1985 created new services and the terms of competition are changing and 1991 is forecast to rise at a real annual rate of 16%-20% as the number of participants from other sectors increases. The in the United States, Japan and the most advanced European study notes that inconsistencies among available data sources countries. Software and computer services are among the fastest have hampered its compilation, although it has been possible growing components in an industry worth approximately US$72 to reach some conclusions and point to some crucial problem billion in 1987. areas. The findings of the present study, then, focus on the dimension of the market, and the level of and the obstacles to The study is available from OECD - in the UK from HMSO, internationalisation. The study looks closely at the structure of PC) Box 276, London SW8 5DT. Telephone orders: the software and computer servicesindustry and notes the current 01-873-9090.