The Legal Regulation of Interoperability in an Oligopolistic Market
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The Legal Regulation of Interoperability in an Oligopolistic Market In Partial Completion of PhD Sally Elizabeth Weston December 2015 Bournemouth University 1 This copy of the thesis has been supplied on condition that anyone who consults it is understood to recognise that its copyright rests with its author and due acknowledgement must always be made of the use of any material contained in, or derived from, this thesis. 2 Sally Elizabeth Weston The Legal Regulation of Interoperability in an Oligopolistic Market Abstract 3D CAD (Computer Aided Design) software is widely used in engineering industries to design products and manage their lifecycles. It is crucial to the economy as it records vital design information and knowhow on all engineered products in the developed and developing worlds. The industry is oligopolistic with few suppliers and while efforts have been made to standardise data transfer formats by the promulgation of standards there are formidable interoperability issues. Once users have purchased a particular brand of software they are essentially “locked in” and the industry has all the elements associated with a lack of interoperability, namely network effects, lock-in, and proprietary software and interfaces. Intellectual Property Rights in software are granted to incentivise innovation but cause a lack of interoperability. The ideas and principles which underlie software interfaces are not protected by copyright but there is no such exemption for patents. Interfaces are similar to standards and their indirect effect amplifies their impact and value and distorts the intended intellectual property protection. As the machine code which is distributed to users is not readable, reverse engineering is permitted to enable interoperability, subject to restrictions, including prohibiting the sharing of interface specifications, which is tantamount to making the information a statutory trade secret. Using legal doctrinal research of primary and secondary materials including case law, previous research alongside industry documents and interviews with experts in the industry, this thesis makes original and significant contributions to knowledge. Firstly, the research provides an assessment of the legal regulation of lock-in in an oligopolistic market and identifies the inability of competition law to provide a remedy. It had previously been assumed that competition law would provide a remedy of last resort to require disclosure of interface information. Secondly, considering the indirect function of control of interfaces the justification for patents in interface standards is critically evaluated. Thirdly, with reference to the normative framework of balancing control and openness of interfaces, the ability of the studied market to achieve an optimum balance is evaluated, taking account of the impact of market conditions including the lock-in of the users’ proprietary data, the software’s functional nature and the need for data integrity. Fourthly, with reference to this research and intellectual property law principles and practice existing proposals are critically evaluated including the reduction of the term of protection which will harm vertical interoperability of complementary software. The argument that the time and cost of reverse engineering has a purpose in protecting first comers is countered and it is proposed that reverse engineering of interfaces should be easy and effective. Recommendations are made to improve the dissemination of interface information to allow markets to move towards an optimum balance with minimum regulatory interference. The regulation of interoperability is a balancing act between control by rightsholders and openness of interfaces and this thesis builds on existing research to refine and expand the criteria that identifies the ‘pivot’. Recommendations with least intervention and encouraging efficient market solutions are made with an emphasis on improving reverse engineering’s effectiveness, particularly in the openness and dissemination of interface specifications. 3 Contents Acknowledgements .................................................................................................................. 9 Declaration ................................................................................................................................ 9 CHAPTER 1. INTRODUCTION ............................................................................................... 10 1.1 Introduction .................................................................................................................. 10 1.2 Context and Perspective ............................................................................................... 11 1.3 Broader Theoretical or Policy Relevance of the Inquiry ............................................... 12 1.4 Research Questions ...................................................................................................... 15 1.5 Contribution .................................................................................................................. 15 1.6 Structure and Overview of Thesis................................................................................. 16 CHAPTER 2. RESEARCH METHODOLOGY ............................................................................. 20 2.1 Introduction .................................................................................................................. 20 2.2 Doctrinal Research ........................................................................................................ 20 2.3 Qualitative Empirical Research ..................................................................................... 21 2.4 Sampling Methodology ................................................................................................. 24 2.5 Interview Sample .......................................................................................................... 26 2.6 Subject Areas Explored in the Interviews ..................................................................... 27 2.7 Sample Questions and Answers ................................................................................... 29 CHAPTER 3. NATURE AND CONTEXT OF INTEROPERABILITY .............................................. 30 3.1 Introduction .................................................................................................................. 30 3.2 Interoperability ............................................................................................................. 30 3.3 Interfaces ...................................................................................................................... 32 3.4 Intellectual Property Rights in Interfaces ..................................................................... 34 3.5 Interoperability and Innovation ................................................................................... 36 3.6 Reverse Engineering ..................................................................................................... 39 3.7 Breakthrough or Follow On Innovation ........................................................................ 44 3.8 Market Failure and Intervention .................................................................................. 46 3.9 Network Effects and Market Failure ............................................................................ 47 3.10 Supplier Lock-in ......................................................................................................... 50 3.11 Supplier Lock-in, Market Failure and Intervention ................................................... 52 3.12 Case Studies Evidencing Lock-in ................................................................................ 54 3.12.1 Mainframe Computers ............................................................................................ 54 3.12.2 ERP Software ........................................................................................................... 55 3.12.3 3D CAD Software ..................................................................................................... 57 3.12.4 iTunes, the iPod and DRM....................................................................................... 58 4 3.12.5 What can we learn from iTunes? ............................................................................ 64 3.13 Achieving the Right Balance ...................................................................................... 66 3.14 Summary .................................................................................................................... 68 CHAPTER 4. THE INDUSTRY ................................................................................................. 72 4.1 Introduction .................................................................................................................. 72 4.2 Rationale for Selecting the Subject .............................................................................. 73 4.3 Defining the 3D CAD Market ........................................................................................ 75 4.3.1 Sub-markets within the 3D CAD Market .................................................................... 76 4.4 Interoperability in the 3D CAD Market ......................................................................... 78 4.5 Evolution and Interoperability of General Software Market ....................................... 79 4.6 Evolution of 3D CAD Software