Transcript Standard Setting and the New Horizontal Agreement Guidelines

Open Source and
Merger Policy: Insights from
the EU Oracle/Sun Decision
Simonetta Vezzoso, Trento University
3rd Annual Conference on Innovation and
Communications Law
Melbourne
May 29-31.2011
IP/COMPETITION LAW INTERFACE
• Art 101 Treaty on the Functioning of the European Union (TFEU)
R&D/patent pools/ IP licensing practices
• Art. 102 TFEU: abuse of dominant position cases
- EU Micosoft case
- EU Rambus case
etc.
• EU Council Regulation (EC) No 139/2004 of 20 January 2004 on
the control of concentrations between undertakings: not yet
well explored
IP AND MERGER CONTROL: SOME BASICS
• IPR as a legal barrier to entry: implications on the
merger assessment
• IPR in the remedy phase (assignment or licensing)
• IPR related transaction (eg. acquisition of IPR) can be considered a
concentration if market turnover can be attributed to those rights
• merger control only concerns « external growth », eg not IP on a
new product acquired by internal R&D activities
• IPRs transfer rarely isolated (also tangible assets
involved)
IP/MERGER CONTROL: SUBSTANTIVE ASSESSMENT
• « Does
the merger significantly impede effective
competition in particular as a result of the creation or
strengthening of a dominant position? »: SIEC Test »
• Competition: price competition and, to a much minor extent,
competition by innovation
• art. 2(1) (b) Merger Regulation: in making the appraisal the
Commission should take into accont «… the development of
technical and economic progress»
MERGER CONTROL’S TOOLKIT
• identify the markets affected
- products/services
- technology market (IMS/Health case: even if the IPR doesn’t license it)
- innovation markets (R&D)
• establish market share
• establish concentration level (Herfindahl Hirschmann Index eg)
• SIEC assessment
- IPRs as such rarely confer a dominant position (but: Jackson Pollock case)
- IPRs can intensify competition : incentives to do things « differently »
(exclusion of substitutes)
--- OECD Study (1989)
27% of the cases IP licensor faced no alternative supplier
34%: 2 to 5 alternatives
10%: 5 to 10
29%%: 10 or more
SIEC TEST
• A significant impediment to effective competition may consist in
coordinated and non-coordinated (or unilateral) effects
• Unilateral effects: merged firm is profitably able to exercise market
power on its own
• Coordinated effects can arise when firms remaining in the market
after the merger realize that because of their reciprocal
interdependency they are much better off if they coordinate to limit
their rivalry
• despite the absence of single or collective market dominance,
concentrations involving the elimination of important competitive
constraints may, under certain circumstances, result in a significant
impediment to effective competition
ORACLE/SUN MERGER
• Merging undertakings:
- Oracle (US database and application software company)
- Sun Microsystems, a US hardware and software vendor.
• total value of approximately: USD 7,400 million
• approved by Sun’s stockholders on July 16, 2009
• notified both to the EU Commission and to the US DOJ’sAntitrust Division
• US DOJ: August 20, 2009 : waiting period terminated
• the Commission issued a Statement of Objections in early November 2009,
• Oracle made public commitments: transaction was unconditionally
approved
COMPETITIVE CONCERNS
• Statement of Objections: potential problems especially
as regards the future workings of competition on the
database market (software making it possible to store,
sort, and analyse data)
• Potential competition concerns would have stemmed
from Oracle’s acquisition of an open source database
business, MySQL (purchased in 2008/value: USD 1
billion)
• open source nature of MySQL had decidedly shaped
the competition assessment of the merger under
scrutiny
OPEN SOURCE: MYTHS AND REALITY CHECK
• decisive contribution to the computing industry’s
remarkable growth and sustained innovation pace (eg
cloud computing technologies)
• despite being non-proprietary, is predominantly
commercial
• growing intersection and cross-contamination
between open source and proprietary models
THE SIEC TEST IN THE CONTEXT OF THEORACLE/SUN CASE
• MySQL: most deployed open-source database worldwide, and the third
one if taking proprietary databases into consideration
• However, MySQL’s market share based on revenues is comparatively much
smaller (0-5 % range)
• Oracle is the largest and strongest proprietary database vendor (market share
of over 40% in 2008)
• The database market is highly concentrated (Oracle, IBM and Microsoft : more
than 80% of the market in terms of revenues
• Theory of harm, para.37 of the Horizontal Guidelines: some firms, despite
having a relatively small market share, may be an important competitive force
SIEC AND MYSQL’S OPEN SOURCE NATURE
• MySQL: version 2 of the General Public Licence
- if a product, which contains modified or unmodified open source code
that had been licensed under GPLv2 is commercialised, then the code
of the entire, commercialised product needs to be disclosed
(so called « viral effect »).
• « dual licensing model »: MySQL offered both with an open source
licence for free and with a commercial proprietary licence
• MySQL’s nature essential:
(a) in determining whether MySQL constituted an
“important competitive force”;
(b) in order to assess Oracle’s ability and incentive to degrade or eliminate
MySQL post-merger;
(c) in order to appraise the likelihood of sufficient and timely replacement
entry post merger;
(d) in evaluating the adequacy of the public announcement made by Oracle
SELECTED HIGHLIGHTS
• MySQL was particularly attractive to users because its open source nature
made it less vulnerable to hold-ups than closed source databases
•the open source nature of MySQL was crucial in understanding the
product’s remarkable development in terms of the incremental addition
of features and qualities. Its in-house developing resources aside,
MySQL could leverage the contributions of a large “ecosystem” of
third party developers to improve the code and report errors.
Proprietary vendors cannot profit in the same way of external capabilities.
• MySQL’s vulnerability to Oracle’s strategies: open source nature could not
effectively prevent Oracle from withholding sales of MySQL or from
degrading it over time (Oracle’s public announcement necessary)
•Many barriers (in particular legal ones) could prevent “forking” (taking a copy
of MySQL’s version available under GPL and developing it independently
from the original source code)
COMMITMENTS (LARGELY NON BINDING !)
• to continue to make available and enhance MySQL code for at least five
years under the GPL
• not to require customers to purchase support services from Oracle as a
condition to obtaining a commercial licence to MySQL
• to increase spending on MySQL research and development compared
to Sun’s funding in the most recent fiscal year preceding the
closing of the transaction
• Etc.
CONCLUSION: A U TURN?
• End of the first phase investigation :“the open source nature of Sun's MySQL
might not eliminate fully the potential for anti-competitive effects”.
-viable open source database products should remain available to customers
as alternatives to proprietary solutions (Neelie Kroes)
• merger cleared following Oracle’s largely not legally binding commitments
• Neelie Kroes now in charge of the Digital Agenda (“mixed” approach)
• “more economic approach” : difficult to explain the importance of preserving
a sufficient level of diversity of offers (products, services) from which customers,
be it intermediaries along the value chain or end-consumers, can choose
THANK YOU!
International Review of Intellectual Property and
Competition Law, 2011, p. 344 ff.