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April 5, 2004, 9:00 AM ET, Alert No. 869.
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Pate Criticizes EC Decision Regarding Microsoft

4/2. Hewitt Pate, the Assistant Attorney General in charge of the Department of Justice's Antitrust Division gave a speech in Washington DC in which discussed the European Commission's decision to fine and obstruct Microsoft. He expressed "deep concern about the apparent basis of this decision and the serious potential divergence it represents."

The EC announced its decision in a brief press release on March 24, 2004. However, the EC has yet to release the actual text of its decision. See, story titled "European Commission Seeks 497 Million Euros and Code Removal from Microsoft" in TLJ Daily E-Mail Alert No. 863, March 25, 2004.

Pate said that the EC decision lacks comity, that it will lead to antitrust forum shopping by parties seeking to benefit from regulation, that it may protect competitors rather than competition, and that it may chill lawful product improvement. He described his criticisms as "frank and constructive dialog".

Hewitt PatePate (at right) stated that "since 1996 the Antitrust Division has devoted substantial effort to a Section 2 case aimed at addressing exclusionary conduct by Microsoft. The ultimate outcome reflected not only considerable analysis and enforcement judgments by the Department and many state attorneys general, but also thorough review of those judgments in the U.S. judicial system. The Final Judgment that emerged from that process provides clear and effective protection for competition and consumers by preventing affirmative misconduct by Microsoft that would inhibit competition in middleware programs."

"That protection applies not only to the web browser that was the original subject of the United States' lawsuit, but also to the media player that is one of the subjects of the EC's decision. Given this significant prior U.S. effort, it is unfortunate that considerations of international comity and deference did not, in the Commission's judgment, carry sufficient weight to avoid the significant divergence that has now occurred. In a system of multiple enforcers, the alternative inevitably leads parties who can benefit from regulatory assistance to seek out the most restrictive regulator, and with respect to global products the effects of that regulator's actions may have effects in all markets", said Pate.

He continued that "the important tasks of eliminating affirmative impediments to the healthy functioning of competitive markets should be achieved without unduly hindering successful competitors or imposing burdens on third parties. This fine balance is reflected in the carefully crafted terms of the Final Judgment entered by the District Court. The EC has pursued a different enforcement approach by imposing a 'code removal' remedy that was not at any time -- including during the period when the U.S. was seeking a breakup of Microsoft prior to the rejection of that remedy by the court of appeals -- part of the United States' proposed remedy. We are concerned that imposing antitrust liability on the basis of product enhancements, even by "dominant" companies, risks protecting competitors, not competition, in ways that may ultimately harm innovation and the consumers who benefit from it."

Pate also stated that "In the case of simply adding admittedly valuable and functional features to an existing product -- as opposed to the contractual terms and exclusionary manipulations of software that were the issue in the U.S. case and that are now prevented by our remedy -- my concern is that decisions of this type may be interpreted by firms in ways that chill lawful product improvements that benefit consumers. If the result is that a dominant firm simply cannot improve its product by the addition of features until that product becomes sufficiently inferior that its dominance is eroded, then the inconsistency with core principles of U.S. antitrust law is plain. Even if a workable standard could be advanced, the potential for anticompetitive and anticonsumer consequences would remain high, both in a U.S. system in which enforcement is amplified through private treble damages litigation, and in an EC system where the threshold for finding ``dominance´´ appears much lower. Again, our concern is that while certain competitors may well benefit from intervention, consumers and innovation ultimately may not."

He also commented on maintaining a "positive relationship" with the EC. He said that "our ability to engage in a frank and constructive dialog reflects the health of that relationship".

Pate also discussed criminal antitrust enforcement, merger enforcement, the First Data/Concord litigation, the News Corp. DirecTV review, and assuring compliance with the Microsoft consent decree.

He also commented on telecommunications generally. He stated that "the Section 271 process has been completed, signaling the openness to local competition. Exciting new and independent avenues of competition in the form of Voice Over IP and growing wireless substitution continue. The long-expected move toward consolidation in the wireless sector may actually be arriving, and other new combinations and competitive approaches may be on the horizon. We will examine each of these as they come with an eye to the many changes occurring in this dynamic sector."

Senators Bash FASB Stock Options Proposal and Class Action Lawyers

4/1. Sen. John Ensign (R-NV), Sen. George Allen (R-VA), and Sen. John Warner (R-VA) and  spoke in the Senate in support of S 1890, the "Stock Option Accounting Reform Act", a bill that would require expensing of stock options for only the CEO and the next four highest paid officers of a company.

On March 31, 2004, the Financial Accounting Standards Board (FASB) released a document titled "Exposure Draft, Share-Based Payment, an Amendment of FASB Statements No. 123 and 95" that proposes that companies must expense stock option plans for all employees.

The FASB summarized its report in a release. It wrote that "The exposure draft covers a wide range of equity-based compensation arrangements. Under the Board’s proposal, all forms of share-based payments to employees, including employee stock options, would be treated the same as other forms of compensation by recognizing the related cost in the income statement. The expense of the award would generally be measured at fair value at the grant date. Current accounting guidance requires that the expense relating to so-called fixed plan employee stock options only be disclosed in the footnotes to the financial statements."

The FASB's comment period for the exposure draft ends June 30, 2004. See, story titled "FASB Proposes Expensing of Stock Options" in TLJ Daily E-Mail Alert No. 867, April 1, 2004.

Sen. John EnsignSen. Ensign (at right) stated that "Trial lawyers are gearing up for the biggest windfall of the 21st Century. They will be the only winners in this misguided action. FASB's proposed rule would allow companies to either use Black Scholes or a Binomial method to expense options. Both are flawed models and will yield very different and certainly inaccurate results." See, Congressional Record, April 1, 2004, at Page S3562.

He elaborated that "There is no question that market capital will be destroyed when these flawed numbers hit financial statements. Because companies have to choose the method they use to expense, and the inputs that feed into that flawed model, they will most certainly be barraged by class action lawsuits from greedy trial lawyers who will exploit the difficult decisions that FASB is going to force companies to make."

He added that "individual investors will now have absolutely no ability to make meaningful comparisons between companies. Different companies using different flawed valuation models will confuse and mislead the very people FASB purports to help."

Sen. Ensign also made the point that "This move represents a tremendous threat to our global competitiveness. Communist China has, as a part of their 5 year plan, the use of stock options. They are setting out to duplicate the success of our very own Silicon Valley and stock options are at the very heart of the Chinese government plan."

Sen. Allen picked up on this point. He continued that "This news is sure to be greeted with joy by our competitors in the Pacific Rim. Entrepreneurs in Taiwan, Singapore and China will not just continue to focus on software development or gene sequencing there. They will create global competitors there which will be listed on those stock markets. They will be free to offer stock options without the burden of expensing and our most talented people will flock there, just as they flocked to the Silicon Valley and Virginia when our technology industries were built. I find it distressing that a communist country, the People's Republic of China, has companies attracting entrepreneurial people and customers with stock options. Meanwhile, here in America an unelected, prejudicial board wishes to stop such employee ownership, motivation and success to Americans. This proposal will harm the ability of innovative American companies to successfully compete."

Sen. Warner also spoke in the Senate about the FASB proposal. He stated that the FASB action "will unequivocally impede economic growth and stifle the economic recovery of our high-tech sector as well as other industries."

He stated that "small companies and start-ups, which depend on employee stock options to attract the smartest and brightest, will be dealt a detrimental blow. The costs associated with the implementation of this new rule will inhibit small business growth. In a time when the United States is struggling to keep more jobs in America, this proposal undermines U.S. competitiveness. Talented and skilled U.S. workers will be forced to look to our competitors, countries such as Taiwan and Singapore, for high paying technology based employment.

S 1890 is sponsored by Sen. Mike Enzi (R-WY), and 16 other Senators. The related bill in the House is HR 3574, also titled the "Stock Option Accounting Reform Act". It is sponsored by Rep. Richard Baker (R-LA), Rep. Anna Eshoo (D-CA), Rep. David Dreier (R-CA), and 98 other Representatives.

The majority of the cosponsors of these bills are Republicans. However, there are Democratic sponsors from states that are home to technology industries.

In California, both Senators, Boxer and Feinstein, are cosponsors. The entire Silicon Valley delegation, Democrats all, are cosponsors -- Rep. Eshoo, Rep. Lofgren, Rep. Tauscher, and Rep. Honda. Other California Democrats who support this bill include Pelosi, Sanchez, Dooley, Filner, and Harmon

From Oregon, Democratic Representatives Wu and Hooley are cosponsors. From Washington, there is Rep. Inslee and Rep. Adam Smith. Finally, from Virginia, there is Rep. Boucher and Rep. Jim Moran. These Democrats are frequently involved in technology related issues.

Microsoft and Sun Microsystems Settle

4/2. Microsoft and Sun Microsystems announced that they have settled all pending litigation between the two companies. See, Microsoft release and Sun release.

Both companies stated that "The agreements involve payments of $700 million to Sun by Microsoft to resolve pending antitrust issues and $900 million to resolve patent issues. In addition, Sun and Microsoft have agreed to pay royalties for use of each other's technology, with Microsoft making an up-front payment of $350 million and Sun making payments when this technology is incorporated into its server products."

They also announced "broad technology collaboration". Scott McNealy, Ch/CEO of Sun, stated a joint press conference with Steve Ballmer, CEO of Microsoft, that "We have Solaris, we have Sun, we have Java, but we also have Windows and .NET. We need to interoperate, we need to make these things happen, and we need to just stop the noise and start the collaboration and cooperation and get it together."

In 1997, Sun filed a complaint in the U.S. District Court (NDCal) against Microsoft regarding Java licensing. Microsoft and Sun entered into a Technology Licensing and Distribution Agreement in 1996 under which Sun licensed its Java technology to Microsoft. The two companies went through extensive litigation, and settled that litigation acrimoniously in 2001. Microsoft had decided to develop its own competing programming language, C#, as an alternative to Java. (This case was D.C. No. 97-CV-20884 and App. Ct. No. 99-15046).

See also, TLJ summary of this case (last updated in 2000), with hyperlinks to pleadings, opinions and orders. Microsoft also has a web page with extension links to pleadings, orders, and opinions in this case, and subsequent litigation between the two companies.

Sun filed another complaint in the U.S. District Court (NDCal) against Microsoft alleging violations of antitrust law, and copyright infringement. It built upon on earlier disputes, but also incorporated antitrust. This was just one of several such antitrust actions filed in the wake of the governments' successful antitrust action against Microsoft. The Judicial Panel on Multidistrict Litigation transferred the action to the U.S. District Court (Maryland).

On December 23, 2003, the District Court issued its Java must carry injunction. See, opinion [42 pages in PDF] of the District Court, and story titled "District Court Rules Microsoft Must Carry Sun's Java" in TLJ Daily E-Mail Alert No. 574, December 24, 2002.

However, on June 26, 2003, the U.S. Court of Appeals (4thCir) issued its opinion [28 pages in PDF] vacating the portion of the District Court's preliminary injunction that required Microsoft to incorporate in and distribute with every copy of its Windows PC operating system and every copy of its web browser Sun's Java software. This was also known as the "must carry injunction".

But, the Appeals Court upheld the portion of the District Court's preliminary injunction that prohibited Microsoft from distributing any software developments of Java software, other than products licensed to Microsoft by Sun in the 2001 settlement agreement arising out the prior litigation over Microsoft's alleged misuse of Java source code. (This case is D.C. Nos. CA-02-2739-JFM and CA-00-1332-MDL, and App. Ct. No. 03-1116.)

On April 2, 2004, Microsoft and Sun did not release any settlement agreement(s). They stated in their press releases that in addition to settling their U.S. lawsuit, "Sun is also satisfied that the agreements announced today satisfy the objectives it was pursuing in the EU actions pending against Microsoft."

The press releases elaborate on the nature of the collaboration between the two companies. There is a "Technical Collaboration Agreement" that provides that both companies with "access to aspects of each other's server-based technology and will enable them to use this information to develop new server software products that will work better together." This will eventually include Windows, e-mail and database software. For example, "one of the important elements of large scale computing environments is software to manage user identities, authentication and authorization. As a result of this agreement, Sun and Microsoft engineers will cooperate to allow identity information to be easily shared between Microsoft Active Directory and the Sun Java System Identity Server, resulting in less complex and more secure computing environments."

In addition, "Sun has agreed to sign a license for the Windows desktop operating system communications protocols under Microsoft's Communications Protocol Program, established pursuant to Microsoft's consent decree and final judgment".

Also, "Microsoft may continue to provide product support for the Microsoft Java Virtual Machine that customers have deployed in Microsoft's products."

The two companies also stated that "Sun and Microsoft have agreed that they will work together to improve technical collaboration between their Java and .NET technologies."

Finally, the two companies also stated that "The parties have agreed to a broad covenant not to sue with respect to all past patent infringement claims they may have against each other."

Japan Joins US in Complaining to WTO About China's Discriminatory Tax on Integrated Circuits

3/31. Japan notified the World Trade Organization (WTO) that it joins the United States in complaining to the WTO that the People's Republic of China's value added tax on integrated circuits violates the PRC's WTO obligations. See, Request to Join Consultations.

On March 18, 2004 the U.S. filed a complaint, which is formally labeled a "Request for Consultations", with the WTO against the PRC stating that the PRC's preferential tax treatment of integrated circuits produced in the PRC is discriminatory, and a violation of the PRC's WTO obligations. See, story titled "US Complains to WTO About PR China's Tax Preference for Domestic Producers of Integrated Circuits" in TLJ Daily E-Mail Alert No. 859, March 19, 2004.

Japan's request states that "Pursuant to paragraph 11 of Article 4 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU), the Government of Japan hereby notifies the Government of the People's Republic of China that it desires to be joined in the consultations requested by the Government of the United States in a communication circulated to WTO Members on 23 March 2004 (WT/DS309/1, G/L/675, S/L/160), titled "China - Value-Added Tax on Integrated Circuits", in light of the substantial trade interest of Japan as one of the major beneficiaries of the multilateral trading system under the WTO, as well as being a major exporter of integrated circuits to China."

Washington Tech Calendar
New items are highlighted in red.
Monday, April 5

The House will be in recess from April 5 through April 16 for the Spring recess. It will next meet on Monday, April 19.

The Senate will meet for morning business. No votes will be taken.

The Supreme Court will begin a recess. (It will return on April 19, 2004.)

Deadline to submit comments to the Federal Communications Commission (FCC) in response to its Notice of Inquiry and Notice of Proposed Rulemaking (NOI & NPRM) [31 pages in PDF] regarding the interference temperature method of quantifying and managing interference among different services. See, notice in the Federal Register, January 21, 2004, Vol. 69, No. 13, at Pages 2863 - 2870. This NOI/NPRM is FCC 03-289 in ET Docket No. 03-237. See also, stories titled "FCC Announces NOI/NPRM on Interference Temperature Model" in TLJ Daily E-Mail Alert No. 779, November 14, 2003, and "FCC Releases NOI/NPRM on Interference Temperature Approach" in TLJ Daily E-Mail Alert No. 789, December 1, 2003.

Deadline to submit comments to the National Archives and Records Administration's Electronic Records Policy Working Group regarding implementation of Section 207(e)(1)(A) of the E-Government Act of 2002, regarding "Public Access to Electronic Information". This section provides for "the adoption by agencies of policies and procedures to ensure that chapters 21, 25, 27, 29, and 31 of title 44, United States Code, are applied effectively and comprehensively to Government information on the Internet and to other electronic records.'' See, notice in the Federal Register, March 8, 2004, Vol. 69, No. 45, at Page 10764.

Tuesday, April 6


Wednesday, April 7

10:00 AM. The Senate Judiciary Committee Subcommittee on Administrative Oversight and the Courts will hold a hearing on a proposal to split the Ninth Circuit. See, notice. Location: Room 226, Dirksen Building.

12:30 - 1:30 PM. The Center Strategic and International Studies (CSIS) will host a program on cybersecurity. The speakers will be Steve Ballmer (CEO of  Microsoft), John Hamre (P/CEO of the CSIS), Robert Holleyman (P/CEO of the Business Software Alliance). Press contact: Mark Schoeff at 202-775-3242 or or Gina Maffei at 202-775-3167 Location: CSIS, 1800 K Street, NW, B-1 conference level.

12:30 PM. Virginia Attorney General Jerry Kilgore will speak on "Technology and the Law". Location: George Mason University School of Law.

12:30 PM - 2:00 PM. The DC Bar Association's Section on Criminal Law and Individual Rights will host a brown bag lunch (with admission charge) titled "Federal Practice Series: Handling Electronic Evidence: From Authentication to Admissibility to Minimizing that Damaging E-mail". The speaker will be Adam Rosman (Zuckerman Spaeder). Prices vary. For more information, call 202 626-3463. Location: D.C. Bar Conference Center, 1250 H Street NW, B-1 Level.

Deadline to submit reply comments to the Federal Communications Commission (FCC) regarding its proposed rules regarding universal service subsidies for rural health clinics. Comments are due by February 23, 2004. Reply comments are due by April 7, 2004. See, notice in the Federal Register, December 24, 2003, Vol. 68, No. 247, at Pages 74538 - 74541.

Thursday, April 8

10:00 AM. The Senate Judiciary Committee will hold a hearing on several pending judicial nominations, including William Duane Benton (to be a Judge of the U.S. Court of Appeals for the 8th Circuit), Robert Bryan Harwell (District of South Carolina), George Schiavelli (Central District of California), and Curtis Gomez (Virgin Islands). See, notice. Location: Room 226, Dirksen Building.

11:00 AM. The Senate Commerce Committee will hold a business meeting. The agenda includes consideration of several non technology related bills and several nominations, including that of Theodore Kassinger to be Deputy Secretary of the Department of Commerce. Press contact: Rebecca Hanks at 202 224-2670. Location: Room 253, Russell Building.

1:30 - 3:00 PM. Federal Communications Commission (FCC) World RadioCommunication 2007 (WRC-07) Advisory Committee's Informal Working Group on Satellite Services and HAPS will meet. See, FCC notice [PDF]. Location: Leventhal Senter & Lerman, 2000 K Street, NW, 7th Floor Conference Room.

6:00 - 8:00 PM. The Federal Communications Bar Association (FCBA) will host a continuing legal education (CLE) seminar titled "FCC's Environmental and Historic Preservation Action Plan - One Year Later". Prices vary. To register, contact Wendy Parish at Location: Wiley Rein & Fielding, 1750 K Street, NW, 10th Floor.

Sunday, April 11


WTO Panel Rules Regarding Telecommunications In Mexico

4/2. A dispute settlement panel of the World Trade Organization (WTO) released its report [256 pages in PDF] regarding telecommunications in Mexico. On August 17, 2000, the U.S. complained to the WTO against Mexico regarding trade in basic and value-added telecommunications services.

The panel found for the U.S. on several matters. It found that "Mexico has not met its GATS commitments under Section 2.2(b) of its Reference Paper since it fails to ensure that a major supplier provides interconnection at cost oriented rates to United States suppliers for the cross-border supply, on a facilities basis in Mexico, of the basic telecommunications services at issue".

It also found that "Mexico has not met its GATS commitments under Section 1.1 of its Reference Paper to maintain ``appropriate measures´´ to prevent anti-competitive practices, since it maintains measures that require anti-competitive practices among competing suppliers which, alone or together, are a major supplier of the services at issue".

It also found that "Mexico has not met its obligations under Section 5(a) of the GATS Annex on Telecommunications since it fails to ensure access to and use of public telecommunications transport networks and services on reasonable terms to United States service suppliers for the cross-border supply, on a facilities basis in Mexico, of the basic telecommunications services at issue"

Finally, it found that "Mexico has not met its obligations under Section 5(b) of the GATS Annex on Telecommunications, since it fails to ensure that United States commercial agencies, whose commercial presence Mexico has committed to allow, have access to and use of private leased circuits within or across the border of Mexico, and are permitted to interconnect these circuits to public telecommunications transport networks and services or with circuits of other service suppliers."

Also, the panel recommended that "that the Dispute Settlement Body request Mexico to bring its measures into conformity wit h its obligations under the GATS."

However, the panel found for Mexico on several matters. It found that "Mexico has not violated Section 2.2(b) of its Reference Paper, with respect to cross-border supply, on a non-facilities basis in Mexico, of the basic telecommunications services at issue".

It also found that "Mexico has not violated Section 5(a) of the GATS Annex on Telecommunications, with respect to the cross-border supply, on a non-facilities basis in Mexico, of the basic telecommunications services at issue".

Finally, it found that "Mexico has not violated Section 5(b) of the GATS Annex on Telecommunications, with respect to the cross-border supply, on a non-facilities basis into Mexico, of the basic telecommunications services at issue."

People and Appointments

4/2. Jonathan Schwartz was named President and Chief Operating Officer of Sun Microsystems. He was previously Sun's Executive Vice President of Software. See, Sun release.

More News

4/2. The Office of the U.S. Trade Representative (USTR) released the draft text of the U.S. Morocco Free Trade Agreement. See especially, chapters pertaining to telecommunications [PDF], electronic commerce [PDF], and intellectual property rights [PDF], and side letter regarding optical disks.

4/1. The Computer & Communications Industry Association (CCIA) filed an amicus curiae brief [27 pages in PDF] with the U.S. Court of Appeals (FedCir) in Chamberlain v. Skylink regarding the anti-circumvention provisions of the DMCA (17 U.S.C. § 1201) and interperability. The CCIA brief states that "In this case, Chamberlain attempts to use Section 1201 of the DMCA to thwart competition between its transmitters and the Model 39 transmitters manufactured by Skylink Technologies. Chamberlain argues that in order to communicate commands to Chamberlain garage door openers, Skylink’s transmitters circumvent a technological protection measure designed to prevent non-Chamberlain transmitters from interacting with the software in Chamberlain receivers. Chamberlain asserts that by manufacturing transmitters capable of this circumvention, Skylink has violated 17 U.S.C.§ 1201(a)(2)." The CCIA concludes that "Interoperability is critical to competition in the computer industry. In turn, reverse engineering and subsequent use of the interface specifications learned through reverse engineering are critical to achieving interoperability. Congress inserted Section 1201(f) into the DMCA to insure that the prohibition of circumvention of technological protection measures did not interfere with interoperability." The brief was written by Jonathan Band and Matthew Schruers of the Washington DC office of the law firm of Morrison & Foerster (MoFo). This case is The Chamberlain Group, Inc. v. Skylink Technologies, Inc., U.S Court of Appeals for the Federal Circuit, App. Ct. No. 04-1118, an appeal from the U.S. District Court for the Northern District of Illinois, D.C. No. 02-CV-6376).

3/30. The European Commission announced it a release that it has "adopted today a series of documents which complete the landmark modernisation of the European Union's antitrust enforcement rules and procedures". This landmark package will take effect on May 1, 2004. The EC also published the following items, all in PDF: Regulation, Cooperation Network, Cooperation with Courts, Notice on Complaints, Guidance Letters, Effect on Trade, and Article 81.3.

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