On September 16, 2008, Japan Fair Trade Commission (the “JFTC”) issued a ruling against Microsoft Corporation (“MS”) regarding its use of a so-called “NAP” clause in its software licenses. The MS NAP clause prevented licensees from asserting certain intellectual property rights against MS and its customers.
The ruling was issued after almost four years of hearings. In the ruling, the JFTC found that the NAP provision in MS’s licenses for its Windows operating systems (“OS”) for personal computers (“Windows OS”) violated the prohibition against dealing on restrictive terms, one of the unfair trade practices under the Anti Monopoly Act (the "AMA"). As a result, the JFTC issued a cease and desist order against MS.
The JFTC’s more than 140-page ruling is voluminous and covers a wide range of topics. The full implications of this wide ranging ruling likely will only become clear over time. Set forth below is the summary of the JFTC ruling (the “JFTC Ruling”).
MS is a U.S. company that develops and licenses its Windows OS to original equipment manufacturers (“OEMs”) on the condition that the licensee OEMs will not assert any of their patents against Microsoft even if the patented inventions were included in the licensed software (i.e., Windows OS or its replacement or successor products). This license provision is known as a non-assertion of patent or “NAP” clause. The NAP clauses in MS’s agreements with OEMs (the “MS NAP Clauses”) were to be effective for a certain period of time even after the termination of the underlying license agreements (survival of the MS NAP Clauses).
Beginning around 1998, on the other hand, MS started licensing its new OS, Windows 98, which contained an audio-visual (“AV”) application called Windows Media Player. Since that time, MS has gradually expanded the AV capability of its OS (i.e., Windows Media Technologies including Windows Media Video, Windows Media Audio, Windows Media DRM, etc.). While some OEMs, particularly those holding patents related to AV technologies, complained that the MS NAP Clauses should be deleted from their license agreements, MS did not agree to delete the provision at that time.
The MS NAP Clauses were deleted from agreements executed on or after August 1, 2004, and there has been no NAP clause in the license agreement with MS since then. However, the MS NAP Clauses in agreements executed prior to July 31, 2004 still remain in effect, and will remain in effect beyond the expiration of the agreement term because of survival provisions contained in the agreements.
In its proposed order called “recommendation (kankoku)” issued July 13, 2004, the JFTC found that the MS NAP Clauses violated the prohibition against dealing on restrictive terms, one of the unfair trade practices, stating that OEMs that licensed the Windows OS could not file patent infringement suits against MS or against other OEMs to which the Windows OS was licensed. In response, MS deleted the NAP provision from its license agreements. Having done so, however, MS nevertheless challenged the validity of the proposed order. Accordingly, a hearing called a “shimpan” was commenced. On September 16, 2008, the JFTC issued its decision in the case, including a cease and desist order called a “shimpan shinketsu.”
Summary of the JFTC Ruling
While the JFTC identifies a number of issues of dispute in the September 16, 2008 ruling (i.e., the JFTC Ruling), among the important points is whether MS NAP Clauses likely discouraged OEMs from conducting R&D activities relating to PC AV technology. While the JFTC’s fact finding and analysis are fairly detailed and complicated, the following provides a summary of its findings.
The MS NAP Clauses provided MS and its licensees with protection from patent infringement lawsuits not only when using the Windows OS, but also its replacement or successor products. The JFTC also found that the NAP remained in effect beyond the expiration of the agreement term because of the survival provision in the agreements (“future effects”). In addition, the JFTC found that the scope of coverage of the MS NAP Clauses would expand more broadly in the course of expansion of the Windows OS. Furthermore, once Window OS incorporated technologies patented by OEMs, other OEMs and almost all PC users and developers of PC software could use the OEMs’ technologies for free for almost an unlimited period.
Before July 31, 2004, OEMs repeatedly expressed their concern about actual and potential use of their patented technologies in future versions of the Windows OS, particularly as MS expanded its AV functionalities. OEMs also complained about MS’s failure to disclose sufficient information about the Windows OS so that OEMs could review what scope of their technologies would be captured by Windows OS. The JFTC concluded that this behavior undermined the incentives of OEMs to conduct PC AVtechnology research and development on or before July 31, 2004.
The JFTC also found that the incentives of OEMs to innovate in AV functions were undermined after July 2004. In addition, the JFTC concluded that OEMs already had a large concern that their patents may have been infringed by Windows OS as of July 31, 2004, and such patented technologies were “core” technologies of PC AV technologies. The JFTC determined that the OEMs’ incentives and ability to expand upon these technologies such as audio and video compression and decompression technologies were substantially diminished.
Under these circumstances, particularly given the vague scope of functionalities and future MS products covered by the NAP clause in the pre-July 31, 2004 agreements, incentives of OEMs to invest in PC AVtechnology research and development were undermined due to the future effect of the MS NAP Clauses.
Implications of the Ruling
While the JFTC Ruling made clear certain unresolved issues concerning unfair trade practices in the technology and intellectual property contexts, there are many open issues. The JFTC found that the “remarkably overbroad nature” of the MS NAP Clauses made them anticompetitive. The JFTC is silent, however, on what type of NAP clauses are permissible.
In essence, the JFTC ruled that the MS NAP Clauses were a violation of the prohibition against dealing on restrictive terms because of their existing and potentially overbroad coverage in terms of time frame, technologies, and parties. Firms engaged in technology-related businesses should carefully design their NAP clauses in light of the JFTC Ruling, which does not provide a bright line test.