Copyright Licensing

COPYRIGHT, LICENSING,
“FIRST
ANDSCREEN”
THE
Ronald A. Cass*
Introduction
As patent, copyright, and other intellectual property rights have assumed

greater economic importance, the manner in which those rights are used
has come under increased scrutiny. Recently filed antitrust litigation
against Microsoft Corporation, for example, focuses on the terms under
which Microsoft has licensed its Windows® operating system to computer
manufacturers (generally referenced as OEMs, for Original Equipment
Manufacturers). In particular, parties to the litigation complain about the
license agreements’ requirement that the first screen to appear when cus-
tomers initially turn on (“boot up”) a computer display certain features
common across all Windows-based platforms. 0 The “first screen provi-
sion” has been portrayed as evidence that Microsoft seeks to undermine
competitors in the computer software market.1
For antitrust buffs, there are serious arguments over the “so what”
question.2 One view is that even if Microsoft does whatever it can to under-
mine competing software producers, it has done nothing that has violated
antitrust laws. Everyone knows that Microsoft’s Chairman, Bill Gates, is the
world’s richest man and that Microsoft is one of America’s business giants.
But neither wealth nor business success confers monopoly power, and
monopoly power itself does not violate the antitrust laws. If Microsoft is
merely a big, successful competitor, there is no antitrust issue. This view is
bolstered by the fact that, notwithstanding its prominence, Microsoft ac-
counts for less than ten percent of computer software sales (suggesting that
it has by no means captured the software market or many pieces of it) and
faces vigorous competition in every line of business.3
Microsoft does supply a very large proportion of operating systems for
personal computers, having dramatically outdistanced the competition with
* Dean and Melville Madison Bigelow Professor of Law, Boston University

School of Law; consultant to Microsoft Corp. The author is grateful to David S. Evans,
Keith Hylton, Maureen O’Rourke, George L. Priest, and Bernard Reddy for helpful comments
and to Boston University and Microsoft Corp. for research support.
0 U.S. Department of Justice Complaint, United States v. Microsoft Corp.,
Civil Action No. 98-1232 (D. D.C.) [hereinafter DOJ Complaint]; State Attorneys
General Complaint, State of New York ex rel. Dennis C. Vacco, et al. v. Microsoft Corp.,
Civil Action No. 98-1233 (D. D.C.)[hereinafter AGs Complaint].
1 DOJ Complaint, supra note 1; AGs Complaint, supra note 1.
2 See, e.g., American Enterprise Institute For Public Policy Research, The
Amgen Forum: The Law And Economics of U.S. v. Microsoft (Federal News Service
Transcript of Proceedings, June 18, 1998).
3 A survey of 639 leading software firms puts Microsoft at 8.58% of global
software sales, well behind IBM’s 12.38%. International Data Corp., Worldwide
Software Revenues, 1995-1996 (1997).
2 COPYRIGHT, LICENSING,
its Windows operating system for Intel-compatible computers. All of those

challenging Microsoft start with the predicate that its Windows system is the
de facto standard for most types of personal computer in the U.S.4 Plain-
tiffs assume that Microsoft has monopoly power as a result of Windows’
success5 and argue that Microsoft has misused the advantage it enjoys with
the success of Windows by various actions, particularly provisions in con-
tracts licensing others to use Windows.
The plaintiffs do not claim that Microsoft is engaged in or is facilitating
a horizontal conspiracy—as would occur if Microsoft agreed with compet-
ing software firms to restrain output in a given product line. Instead,
plaintiffs allege that Microsoft’s vertical relations with other firms—in
which Microsoft contracts with others in a principal-agent relationship—im-
properly use the power of its copyright for Windows and that system’s
success in the marketplace. That is the essence of the complaint respecting
the first screen provision: that the rights conferred by copyright do not
permit Microsoft to ask its licensees to bind themselves in that way.6
That complaint is problematic in part because it seems on its face to
stand copyright law on its head. Copyright law provides an exclusive right
for the owner to decide when and how to allow the copyrighted material to
be used.7 Antitrust law, consequently, long has applied different standards
to ordinary vertical agreements and agreements licensing intellectual prop-
erty rights.8 Unfortunately, court decisions have not followed a single,
straight line respecting the relationship between antitrust and intellectual
property right laws, as discussed below,9 and the Microsoft case requires
delineation of the way antitrust law should deal with copyright licensing, if
not with contract arrangements more generally.
4 DOJ Complaint, supra note 1; AGs Complaint, supra note 1;

Declaration of Franklin M. Fisher, in United States v. Microsoft Corp., Civil Action No.
98-1232 (D. D.C.) [hereinafter Fisher Declaration]; Declaration of David S. Sibley, i n
United States v. Microsoft Corp., Civil Action No. 98-1232 (D. D.C.) [hereinafter Sibley
Declaration]; Declaration of Frederick R. Warren-Boulton, in State Attorneys General
Complaint, State of New York ex rel. Dennis C. Vacco, et al. v. Microsoft Corp., Civil
Action No. 98-1233 (D. D.C.).
5 Complainants define a narrowly drawn market in operating systems for
personal computers as the arena in which Microsoft assertedly exercises monopoly
power and ask that the court declares that the relevant market for antitrust analysis. See
DOJ Complaint, supra note 1; AGs Complaint, supra note 1.
6 Id.
7 See discussion infra text at notes 11-38.
8 E.g., Bement v. National Harrow Co., 186 U.S. 70 (1902); United States
v. General Elec. Co., 272 U.S. 476 (1926); Dawson Chem. Co. v. Rohm & Haas Co., 448
U.S. 176 (1980); USM Corp. v. SPS Technologies, Inc., 694 F.2d 505 (7th Cir. 1982),
cert. denied, 462 U.S. 1107 (1983).
9 See discussion infra, text and notes at notes 71-93.
AND THE FIRST SCREEN 3
Even if that issue is resolved favorably to plaintiffs (who dispute

Microsoft’s contention that intellectual property laws trump antitrust), there
is a second problem. Antitrust analysis of vertical relationships under the
rule of reason would require evaluation of the efficiency gains and costs of
the challenged actions. Although such evaluations are done in many
different settings, the complaints’ allegations of improper provisions in
licensing contracts call for an analysis that parses particular contract terms.
That analysis necessarily entails an artificial assignment of effects among
contract terms and is likely to be distorted from the considerations inform-
ing parties to the contracts.
This paper examines the first screen provision in the context of the law
and practice respecting computer software licensing. The first section
provides background on copyright. The second section explores the
considerations relevant to licensing contracts. The third section addresses
the intersection between antitrust and copyright licensing. The fourth
section directly considers the first screen provision—what it does, what
interests it serves, and what efficiencies it generates. A concluding section
argues that, while the provision should pass antitrust muster, the process of
examining such licensing provisions under the antitrust laws may do more
harm than good.
1. Computer Software Copyright
Background
It is common today (and correct) to speak of “intellectual property” (and,
concomitantly, of intellectual property rights) as important components of
our national endowment. But, despite the long history of such rights,
widespread recognition of their importance is a fairly recent development.
In the eighteenth century, copyright and patent were established rights
in England and in the American colonies, but many leading authorities
placed the labors of literary and inventive creation on a lower rung than
other economic activities. Thus, when Adam Smith published The Wealth
of Nations, just as American revolutionaries were taking up arms to gain
independence from England, he saw the fruits of mental labor as distinctly
different from labor in the fields or the foundry. Smith classed the effort
that produces intellectual property as “unproductive labour” along with
other work that today would be classified as “services,” a class that, in
Smith’s words, includes the work of “churchmen, lawyers, physicians, men
of letters of all kinds; players, buffoons, musicians, opera-singers, opera-
dancers, &c.”10 For Smith, productive labor belonged to the violinist who
manufactured the instrument, not to a Mozart or Beethoven whose genius
shaped the music or to a Heifetz or Stern whose gifts brought that music to
life.
Appreciation of the importance of the labor that produces (and per-
forms) creative works grew slowly, alongside the changing focus of work
more generally. A snapshot of the United States’ economy in 1800, 1900,
and today illustrates the broader change. In 1800 two-thirds of the
workforce was engaged in agriculture. In 1900, that had declined to one-
third, while more than half the workforce was engaged in manufacturing.
As we approach 2000, a tiny fraction of the workforce is engaged in agri-
culture, and less than one-third in manufacturing, while more than two-
thirds provide services.11
The shift from agriculture to manufacturing to services was paralleled
by an increase in investment in learning (both formal and on-the-job), in
research, and in development of new ideas and means of expression. These
in turn have provided returns to investors and supported economic growth.
Recently, the trend to greater returns to investment in human capital
(whether protected by specific legal entitlements or not) has accelerated, as
10 AD A M SMITH , AN INQUIRY INTO THE NATURE A N D CAUSES OF T H E

W EALTH OF NATIONS 315 (Edwin Cannan ed., Modern Library 1937; orig. pub. 1776).
See id. at 314-17.
11 See Ronald A. Cass & Eli M. Noam, The Economics and Politics of Trade
in Services, in R ULES FOR FREE INTERNATIONAL T R A D E IN SERVICES 43, 45, 46–49
(Daniel Friedmann & Ernst-Joachim Mestmäcker eds., Nomos Verlagsgesellchaft 1990).
is typical of periods of great change. 12 It is, as discussed below, more

doubtful that returns to innovative activity in general have increased, but
public assertions of the importance of knowledge-based activity—including
innovative activity—have burgeoned, with references to the “information
age” already sounding trite.
Copyright: Constitutional and Statutory Roots

At law, innovative activity is separated from other types of labor. The
Constitution of the United States grants Congress the power “to promote
the Progress of Science and useful Arts, by securing for limited Times to
Authors and Inventors the exclusive Right to their respective Writings and
Discoveries.”13 James Madison explained the constitutional provision as
one that both advanced public interests and preserved rights enjoyed by
authors and inventors at common law.14 Madison’s assertion about com-
mon law is not perhaps sound history, though he can be forgiven—that
exact issue divided the English House of Lords at about the same time as
the American Revolution (the Lords ultimately concluding that the com-
mon law did not support copyright prior to the Statute of Anne in 1710). 15
Madison’s assertion that copyright and patent advanced public interests,
however, was sufficiently accepted that the constitutional provision was not
debated and the nation’s first federal copyright law, the Copyright Act of
1790, was enacted by the First Congress.
The original copyright law, “An Act for the encouragement of learn-
ing,” gave authors rights in maps, charts and books. 16 Revisions of the law
five times over the next 80 years added new categories of work, beginning
with etchings and engravings and expanding through various types of
music, drama, paintings, designs, and photographs. 17 A general revision,
the Copyright Act of 1909, further expanded the classes of copyrightable
work and served for nearly seven decades as the template for American
copyright protection. During that time, additional changes in technology
brought new subjects—starting with motion pictures, added by statute in
1912—to the copyright table.
12 See Marvin H. Kosters, An Overview of Changing Wage Patterns in the

Labor Market, in T RADE AND W AGES : L EVELING WAGES D OWN ? (Jagdish Bhagwati &
Marvin H. Kosters eds., AEI Press 1994).
13 U.S. CONST ., art. I, sec. 8, cl. 8.
14 THE FEDERALIST, No. 43 (Madison) (Modern Lib. ed. 1941).
15 For an extended discussion of the English and American authorities, see
Howard Abrams, The Historic Foundation of American Copyright Law: Exploding the
Myth of Common Law Copyright, 29 WAYNE L. R EV . 1119 (1983). See also ROBERT A.
GORMAN & JANE C. GINSBURG, COPYRIGHT FOR THE NINETIES: CASES AND MATERIALS 1-5
(4th ed., Michie Co. 1993).
16 1 Stat. 124. See EDMUND W. KITCH & HARVEY S. PERLMAN , L EGAL
REGULATION OF THE COMPETITIVE PROCESS 620 (2d ed., Foundation Press 1979).
17 Id. at 621 (describing statutes of 1802, 1831, 1856, 1865, and 1870
amending copyright law); GORMAN & GINSBURG, supra note 16, at 7-8 (same).
The biggest change during the time that the 1909 Act was in force was
not in the nature of works that were presented for copyright protection but
in the nature of the protection sought by rights holders. The reason is that
the primary alterations of the technological landscape over that period, as
relevant to copyright, created new means of reproducing, of disseminating,
and of exploiting creative works. Radio, television, photocopying, audio
recording, video recording, and other technologies were invented or dra-
matically improved in this era. Efforts to rewrite the copyright law to
account for such changes began while some of the technologies that posed
the greatest problems for the 1909 regime were in their infancy and finally
reached fruition in the new copyright law of 1976. 18 As Professor Ed
Kitch and Dean Harvey Perlman explained soon after the law’s enactment,
the new law shifts the emphasis for copyright analysis:
Under the old law the starting principle was: the owner
shall have the exclusive right to copy his copies. Under
the new the principle is: the owner shall have the exclu-
sive right to exploit his work.19
The limits of that right are what is in issue in the litigation against
Microsoft.
Of course, the 1976 law did not end the legal story. Statutory amend-
ments in 1980, 1988, 1990, 1992, and 1994 have addressed issues raised by
particular technologies, including computer software (though software was
already covered by the protections of the 1976 statute),20 and have altered
the law to conform to international treaty obligations. The 1980 amend-
ment clarified the application of copyright to computer software programs
and the need for permission prior to inclusion of a program in a computer
(with narrowly tailored exceptions).21 Despite the amendments, copyright
law still follows the basic orientation of the 1976 Act.
Copyright: Regime Assumptions

The copyright law gives to the creator of an expressive work the right to
determine how that expression is used during a specified term of years.
Typically, the work expresses an idea, though eligibility for copyright is
not tied to the clarity or quality of the idea. Copyright protects the expres-
18 Pub. L. 94-553, 90 Stat. 2541.

19 KITCH & PERLMAN , supra note 17, at 622.
20 17 U.S.C. § 102. See H.R. Rep. No. 94-1733, 94th Cong., 2d Sess. 54
(1976); Apple Computer, Inc. v. Franklin Computer Corp., 714 F.2d 1240, 1247 (3d Cir.
1983), cert. dismissed, 464 U.S. 1033 (1984); G INSBURG & G ORMAN, supra note 16, at
685, 694-95.
2 1 Pub. L. 96-517, 17 U.S.C. § 101. The rationale for the 1980
amendments was provided in NATIONAL COMMISSION ON NEW T ECHNOLOGICAL USES O F
COPYRIGHTED WORKS, FINAL REPORT (1978) [hereinafter CONTU REPT.].
sion, not the idea expressed.22 Ideas are in the public domain, but each
original expression is protected against knowing, unconsented replication. 23
Protection of the form but not the content assumes that there is an impor-
tant (if at time modest) creative aspect to the expression itself—that “to be
or not to be” is not the same as “should I kill myself?” even if the
phrases’ meanings are equivalent.
Patent law, in contrast, gives broader protection but for a more limited
time. Patent law, like copyright, does not formally protect ideas, but its
protection goes well beyond mere intentional use of a prior expression.
Patent protection against unconsented use of an idea expressed in certain
tangible forms includes protection against using forms (machines, process-
es, and so on) closely related to but different from the patented form.24
The broader protection demands a higher threshold before protection is
obtained. Unlike copyright, which is available without prior screening for
any expression, patents are issued only after certain requirements are met,
including the requirement that the invention be novel and not be obvious to
sophisticated observers familiar with the prior learning on the subject (prior
“art”).
Because patent requires a greater degree of novelty 25 than copyright,
fewer patents are issued and it is less costly to determine what is patented
than what is copyrighted. Professor Landes and Judge Posner conclude
that the lower cost of identifying patented innovations implies that inven-
tors will be more likely to know about patented innovations relevant to their
work than about copyrighted innovations and less likely accidentally to
infringe; that, in turn, suggests a greater reason to grant stronger protection
to patents than to copyrights. 26 That, indeed, is the way the law has devel-
oped. Crudely put, the difference between the two intellectual property
rights schemes is this: copyright allows the creator of a new expression of
an idea the right to decide how and when that expression is used but no
right against innocent or accidental or certain incidental use; patent pro-
22 17 U.S.C. § 102 (b).

23 See, e.g., Whelan Assoc. v. Jaslow Dental Lab., 797 F.2d 1222 (3d Cir.
1996); Jessica Litman, The Public Domain, 39 EMORY L.J. 965 (1993). But see Computer
Associates Int’l, Inc. v. Altai, Inc., 982 F.2d 693, 704-12 (2d Cir. 1992) (describing
limits on scope of protection).
24 Competing explanations of the organizing principle behind the scope
of patent protection are given in Mark F. Grady & Jay I. Alexander, Patent Law and Rent
Dissipation, 78 VA. L. R EV . 305 (1992); Jack Hirshleifer, The Private and Social Value
of Information and the Rewards to Inventive Activity, 61 A M. ECON. R EV . 561 (1971);
Edmund W. Kitch, The Nature and Function of the Patent System, 20 J.L. & E CON . 265
(1977); Robert P. Merges, Commercial Success and Patent Standards: Economic
Perspectives on Innovation, 76 CALIF. L. REV . 803 (1988).
25 In patent law, novelty is a separate requirement from nonobviousness,
but the term novelty is used here to embody both requirements.
26 William M. Landes & Richard A. Posner, An Economic Analysis of
Copyright Law, 18 J. LEGAL STUD. 325 (1989).
vides the creator of a new idea, embodied in useful form, the right to pre-
vent all manner of activity that uses that idea without consent.27
Despite this distinction, the intellectual property rights regimes are
closely related. Both forms of intellectual property protection rest on three
assumptions about creative works. First, intellectual property law assumes
that the grant of an economically valuable right will increase the rate at
which new creative works are produced (and increase the value of those
creative works).28 Second, the law assumes that creative works have “pub-
lic goods” aspects—that they are costly to protect and can be used by
many people at once without affecting the quality of the use (unlike many
people trying to share a single automobile). 29 The second assumption
suggests that intellectual property produces value substantially greater than
its creators could capture without special protections. That indicates, in line
with the first assumption, that, without such protections, too little creative
work will be produced. Finally, the law assumes that the costs of restricting
use of new expressions and inventions are less than the benefits of new
creativity.30
There is a lively academic debate about these assumptions. 31 Fortunate-
ly (for the continuing liveliness of that debate) there is no likelihood of
proving or disproving the assumptions. They will continue to shape the law
while academicians continue to argue their merits.
Copyright in Computer Software
27 See, e.g., Stanley M. Besen & Leo Raskind, An Introduction to the Law
and Economics of Intellectual Property, 5 J. ECON. PERSPECTIVES 3 (1991).
28 See, e.g., Mazer v. Stein, 347 U.S. 201, 219 (1954); Sony Corp. of
America v. Universal City Studios, 464 U.S. 417, 429 (1984). See also Hirshleifer,
supra note 25; Kitch, supra note 25; Stan J. Liebowitz, Copyright and Indirect
Appropriability: Photocopying of Journals, 93 J. POL . ECON . 945 (1985).
29 See Besen & Raskind, supra note 28; Wendy J. Gordon, Fair Use as
Market Failure: A Structural and Economic Analysis of the Betamax Case and Its
Predecessors, 82 C OLUM. L. REV.1600 (1982) [hereinafter Betamax]; Hirshleifer, supra
note 25; Landes & Posner, supra note 27.
30 E.g., Twentieth Century Music Corp. v. Aiken, 422 U.S. 151 (1975).
31 E.g., Stephen J. Breyer, The Uneasy Case for Copyright: A Study of
Copyright in Books, Photocopies, and Computer Programs, 84 HA R V . L. RE V . 281
(1970); Grady & Alexander, supra note 25; Wendy J. Gordon, An Inquiry into the Merits
of Copyright: The Challenges of Consistency, Consent, and “Encouragement” Theory, 41
S TAN . L. REV . 1343 (1989) [hereinafter Challenges]; Landes & Posner, supra note 27;
Robert P. Merges & Richard Nelson, Market Structure and Technical Advance: The Role of
Patent Scope Decisions, in ANTITRUST, INNOVATION, AND C OMPETITIVENESS (Thomas M.
Jorde & David J. Teece eds., Oxford Univ. Press 1992); Tom Palmer, Intellectual
Property: A Non-Posnerian Law and Economics Approach, 12 HAMLINE L. REV . 262
(1989).
The protection of computer software through copyright also was a subject

that was debated. The debate was not whether computer software deserved
protection similar to that granted other intellectual property. Both propo-
nents and opponents of copyright protection for software agreed that
software development required the same sort of creative activity and de-
pended on the same sort of financial and personal investment as other
intellectual property and was no less deserving of legal protection.
The dispute over computer software—so far as it differed from the
more general debate over the appropriate scope and duration of intellectual
property rights—centered on the question of which intellectual property
regime best fit the realities of this particular form of creative work. 32 Sof-
tware consists of two sets of instructions, source code and object code. The
first of these, source code, is the set of directions that a programmer writes
indicating what he wants the program to do—start the computer, boot up a
screen, put certain images on that screen, and so on. The second instruc-
tion set, object code, is the translation of the source code’s instructions into
the binary language in which computers function, actually speaking to the
computer. 33 The argument over software protection largely revolved
around the fact that object code is “read” only by computers, and thus
seemed to some commentators more appropriately assimilated to the patent
regime than to the copyright regime.34
32 See, e.g., Landes & Posner, supra note 27; Pamela Samuelson, et al., A
Manifesto Concerning the Legal Protection of Computer Programs, 94 COLUM. L. R EV .
2308 (1994) [hereinafter Manifesto] and authorities cited id. at 2310 n.1; John T. Soma,
et al., Minimizing Reverse Engineering: Sample Language for Dual United States and
European Union Software Licenses, 24 DENV. J. INT’L L. & POL’Y 145, 147-51 (1995).
33 Source code can be translated into object code through a compiler
(which generally is a device located outside the computer on which the program will run).
The compilation process produces a translation of the source code that can be configured
to execute instructions at optimum speed. An alternative to compilation is to use an
interpreter (which generally is located inside the computer that is running a program) to
translate source code into object code on a line-by-line or instruction-by-instruction
basis. The interpreter does not retain memory of prior instructions, so that, unlike with a
compiled program, repeated functions must be explained to the computer in full detail
each time.
34 See discussion and citations in U.S. CONGRESS, OFFICE OF T ECHNOLOGY
A SSESSMENT, FINDING A BALANCE : C OMPUTER SOFTWARE , INTELLECTUAL P ROPERTY ,
AND THE CHALLENGE OF T ECHNOLOGICAL CHANGE (Gov’t Printing Office 1992) [ OTA
R EPT.]; Arthur R. Miller, Copyright Protection for Computer Programs, Databases, and
Computer-Generated Works: Is Anything New Since CONTU?, 106 HARV . L. REV . 978
(1993); Maureen O’Rourke, Drawing the Boundary Between Copyright and Contract:
Copyright Preemption of Software License Terms, 45 DU K E L.J. 479, 484-85 n. 20
(1995); Samuelson, et al., Manifesto, supra note 33. See also Apple Computer, Inc. v.
Franklin Computer Corp., 545 F. Supp. 812 (E.D. Pa. 1982), rev’d 714 F.2d 1240 (3d
Cir. 1983), cert. dismissed, 464 U.S. 1033 (1984).
The choice between these regimes was central to the work of the Nation-
al Commission on New Technological Uses of Copyrighted Works
(CONTU). The CONTU report in 1978 resolved the matter in favor of
copyright protection, concluding that innovation in software worthy of
protection tended to occur too rapidly and along too many margins to be
suitable to a patent regime. Both source and object code fit better with the
copyright model, even though the expressive element of object code is not
directly evident to a human audience. 35 Congress, which had included
software already as a “literary work” eligible for copyright protection,
adopted the CONTU approach two years later, making copyright coverage
clearly applicable to software.36
2. Copyright Licensing
What is Licensed?
In keeping with the basic approach of the copyright law, copyright owners
are given great freedom in deciding the terms on which to license their
products. After all, the value of the copyright is the ability of the right
owner to set terms expected to maximize the return from licensing.37
Licensing agreements cover all manner of terms. Among the subjects to
be found in license agreements are: the period of time during which the
licensed material can be used, the use allowed of the material (including
elaborate restrictions on various aspects of licensed performances), alloca-
tion of rights to derivative works, constraints on disclosure of information
contained the material or obtained from the material, assignment of liabili-
ties (including some tax liabilities), specifications for (or constraints on)
sublicensing, provision for changed circumstances (including changes in
corporate identity or ownership), price and payment terms, provisions
respecting bankruptcy during the contract period, and survival of obliga-
tions (such as nondisclosure) following license term.38
Agreements range from the very simple to the incredibly complex,
from the painstakingly negotiated to the standard-form contract. As a rule,
the market for the particular work or type of work will determine the form
in which a licensing contract is crafted. At one end, works that will be used
infrequently, in ventures that are idiosyncratic (rather than fitting off-the-
shelf patterns), and that could prove highly lucrative are strong candidates
for individually negotiated agreements. At the other end, copyrighted
35 Apple Computer, Inc. v. Franklin Computer Corp., 714 F.2d 1240 (3d
Cir. 1983), cert. dismissed, 464 U.S. 1033 (1984); CONTU REPT., supra note 22.
36 Pub. L. 96-517, 17 U.S.C. § 101.
37 Besen & Raskind, supra note 28; Gordon, Betamax note 30; O’Rourke,
supra note 35. See also Gordon, Challenges, supra note 32, at 1356-58, 1368-70 (broad
privilege consistent with common law property rights doctrine).
38 See, e.g., MARK L. GORDON , COMPUTER SOFTWARE : CONTRACTING FOR
DISTRIBUTION AND D EVELOPMENT 243-375 (John Wiley & Sons 1985); H. Ward Classen,
Fundamentals of Software Licensing, 37 IDEA 1 (1996).
works that are likely to have numerous uses by widely scattered entities
whose demand for the works is sufficiently elastic that separate negotia-
tions, even fitting well-defined patterns, are inconceivable—most uses of
recorded music fit this example—may be handled under a group or blan-
ket license arrangement. 39
What Interests Does Licensing Serve?
Although practicing lawyers who write about copyright licensing common-
ly explain the importance to all contracting parties of careful license nego-
tiation (a subtle reminder of the value of the lawyers’ services), 40 other
commentators sometimes assume that copyright license terms are selected
solely by the licensor (right owner).41 At times that assumption is paired
with the conclusion that license terms solely benefit the licensor, with the
licensee being disadvantaged by them.42
The image of an all-controlling licensor is at once a natural outgrowth
of the copyright regime and a gross distortion of reality. It is natural in the
sense that the copyright regime is a property rights regime: the owner of a
copyright has the exclusive right to determine how the right will be exer-
cised, how the copyrighted work will be used, and thus will agree only to
license terms that are to the licensor’s benefit. Saying that, however, does
not mean that license terms are unilaterally dictated by licensors indepen-
dent of the interests and wishes of licensees.43
The notion of the licensor acting independent of the preferences of
putative licensees is the same as the notion of a grocery store acting solely
in its own interest, without regard to the tastes of its potential customers. It
is true that the grocery store sets prices for its products without engaging in
separate negotiation with each customer. (That generally is not the case for
copyright licensing, although it is the case with so-called “shrink-wrap”
39 See Broadcast Music, Inc. v. Columbia Broadcasting System, 441 U.S. 1

(1979) (declaring that blanket licenses used by BMI—like licenses used by the American
Society of Composers and Publishers, ASCAP—are not per se illegal tying
arrangements). In some instances, even the blanket license is too burdensome a
mechanism. Those instances fall within the “fair use” exception. See Gordon, Betamax,
supra note 30.
40 E.g., GORDON, supra note 39; Classen, supra note 39; Thomas Hemnes,
Restraints on Alienation, Equitable Servitudes, and the Feudal Nature of Computer
Software Licensing, 71 DENVER U. L. REV. 577 (1994).
41 E.g., Philip Abromats, Comment: Copyright Misuse and Anticompetitive
Software Licensing Restrictions: Lasercomb America, Inc. v. Reynolds, 52 U. PITT. L. REV.
629 (1991).
42 E.g,, Microsoft Accused, THE ECONOMIST, May 23, 1998, at 21-22.
4 3 See, e.g., OLIVER E. WILLIAMSON , T H E E CONOMIC I NSTITUTIONS O F
CAPITALISM: FIRMS, MARKETS, RELATIONAL CONTRACTING 85-130 (Free Press 1985).
licenses.)44 But the licensor, like the grocery store,45 is limited in what it
can charge by what customers are willing to pay, which is dictated by the
particular preferences of each customer and the alternatives available to
them. The grocery store may set a price for beef or strawberries or milk
without negotiation, but setting the right price—the one most advantageous
to the store—requires that the price also be one that is attractive enough to
enough customers that the store could not do better by lowering its price.
To do that in a competitive market, the store must set prices that balance the
store’s interests with the customers’ interests in the same way it would if the
parties engaged in face-to-face negotiation over prices—regardless of the
store owner’s wishes, those are the only prices that maximize the owner’s
profit.46
What is true for the store owner is true for other sellers and licensors:
even where a seller (or licensor) seems unilaterally to be setting the price to
be paid by a buyer (licensee), sensible price-setting must reflect the inter-
ests and preferences of the other party (the buyer or the licensee). And in
ordinary circumstances, the price should be the best price that other party
could hope to obtain through hard bargaining under the circumstances.
The statement holds for the terms of a deal (a sale or a licensing agreement)
as well as for the price. You cannot separate price from what is being
bought; the same considerations hold for both. 47 So, even if there were no
explicit negotiation, licensing should be seen as a cooperative venture:
getting it right requires integration of the parties’ interests.48
What’s Wrong with this Picture?

Three caveats need to be offered with respect to the picture drawn above.
One addresses the ubiquitous divergence of the real from the ideal. The
second concerns the problem of having multiple issues in motion simulta-
neously. And the third deals with the monopoly component of intellectual
property rights. The first two are discussed immediately below, and the
third is taken up under the next heading.
44 See O’Rourke, supra note 35.

45 With apologies, “store” here is used as an anthropomorphism, standing
as shorthand for the interests of those who own and operate the enterprise.
46 See, e.g., ARMEN ALCHIAN & WILLIAM R. ALLEN, EXCHANGE AND PRODUC-
TION : COMPETITION , C OORDINATION , AND CONTROL 85-87 (Wadsworth Publishing Co.
1977); GEORGE J. STIGLER, THE ORGANIZATION OF INDUSTRY 5-15 (University of Chicago
Press 1968) [hereinafter INDUSTRY ]; GEORGE J. STIGLER , THE THEORY OF PRICE 88-102
(MacMillan 1966) [hereinafter P RICE ]; P. Diamond, Search Theory, in TH E N E W
P ALGRAVE : ALLOCATION , INFORMATION A N D MA R K E T S 271, 282-85 (John Eatwell,
Murray Milgate & Peter Newman eds., MacMillan 1989).
47 ALCHIAN & ALLEN, supra note 47, at 185-86; Diamond, supra note 47.
48 See WILLIAMSON, supra note 44, at xx. See also William Baxter &
Daniel Kessler, Toward a Consistent Theory of the Welfare Analysis of Agreements, 47
S TAN . L. REV . 615 (1995).
The first caveat is that, despite the incentive of sellers and licensors to set
prices and terms that harmonize the interests of the parties, actual prices
and terms may not accomplish that end. The most common reason for the
variance is the difficulty of securing the information necessary to get prices
and terms that best fit the parties’ interests. The obvious point here is that
it is difficult to gain information about other people’s preferences, which
are apt to vary widely. The less evident, but more fundamental point is that
we seldom know our own preferences with any specificity. 49 I may be
willing to respond if asked how much I would pay to obtain particular
goods or how much I value specific features—such as the proximity of a
grocery store to my house or the layout of the store or its decor or its
policy with respect to charge accounts—but there is little basis for crediting
my statements. As with merchants who find it necessary to adjust prices
over time as they observe customers’ behavior, I am likely to learn what
value I place on particular goods only from experience. With most matters,
trial-and-error is a necessary heuristic.50
The second caveat concerns an aspect of reality that exacerbates the
general information problems encountered in most markets: although in
textbooks, goods are individual, free-standing commodities, in reality we
are offered choices that bundle many features together rather than discrete-
ly priced, independent goods. Thus, I do not experience separately the
proximity, layout, decor, and so on, of a grocery store. I do not experience
an infinite number of grocery stores with all possible combinations of these
features, as well as of each good offered for sale. Instead, I learn that I
generally prefer the store that is more brightly lit and has a better selection,
especially of fresh meat, fish and vegetables, even though it has somewhat
higher prices on many items and is a block or two further from my home.
The same is true for virtually every consumer good and the vast majority of
intermediate goods as well.51
The information problems that comprise these first two caveats—which
apply to market transactions generally, not only to software licensing—do
not mean that market prices and terms depart radically from efficient prices
and terms. These two caveats merely indicate that real prices (and other
terms for market transactions) often diverge somewhat from what might be
seen as the theoretical ideal.52 Prices change over time not only because
49 See Amos Tversky & Daniel Kahneman, Judgment Under Uncertainty:

Heuristics and Biases, in J UDGMENT UNDER U NCERTAINTY: HEURISTICS AND BIASES chap.
1 (Daniel Kahneman, Paul Slovic & Amos Tversky eds., Cambridge Univ. Press 1982).
50 Id.
51 See, e.g., STIGLER, I NDUSTRY, supra note 47, at 14. The information
problems presented by the typical market’s bundling of goods also would exist (albeit in
different form) for segregable goods. ALCHIAN & ALLEN, supra note 47, at 110-15.
52 But see STIGLER, I NDUSTRY, supra note 47, at 117-20 (explaining that
departures from notions of perfect efficiency are ubiquitous so that efficiency truly should
be understood not in terms of abstract ideal but instead in terms of ordinary market
functions).
consumer preferences change and production costs change but also be-
cause markets respond to built-in feedback mechanisms—such as the
experience of shortages of some goods at prevailing prices and gluts of
other goods—that constantly provide information to help buyers and
sellers better identify the right prices and terms. 53 The basic market story,
hence, is not the Panglossian “best of all possible worlds” story but a story
of incremental movement in that direction in a world where the information
needed to reach our goal is too costly, too widely dispersed, and too incon-
stant for any centralized process to do better.54
What’s Different About Copyright Licensing?

The third caveat about the general picture of markets tending to set effi-
cient prices and terms draws a distinction among incentives in different mar-
ket settings. This distinction, which has been a subject of considerable
misunderstanding, focuses on market features thought to correlate with the
proximity of parties’ incentives to those depicted above.
In some settings, there is sufficient competition for the seller’s (or
licensor’s) incentives to approximate those described above, incentives to
set prices and terms that are jointly optimal for the parties to the deal and
that also are efficient from a broader, social perspective.55 Frequently, such
settings are referred to as ones involving “perfect competition,” although
far less than perfect competition will suffice to assure that sellers have the
right incentives. Thus, for example, pricing that looks very much like what
would obtain under perfect competition can—and often does—occur when
there are very few sellers in the market.56 Indeed, such pricing can occur
even when there is only one seller—the potential ability of others to offer
closely competing goods is enough to constrain prices to competitive
norms.57
In some markets with limited competition, however, it is possible for
sellers to profit from setting prices above the competitive ideal and restrict-
ing output below the competitive ideal. This departure from the ideal is
more likely when there are few enough sellers (actual or potential) to
53 ALCHIAN & ALLEN , supra note 47; S TIGLER , PRICE , supra note 47, at
xx.
54 FREIDRICH A. H AYEK, THE R OAD TO S ERFDOM (Univ. of Chicago Press
1944); JOSEPH A. S CHUMPETER , CAPITALISM , S OCIALISM, AND DEMOCRACY (Harper &
Row 1975; orig. pub. 1942).
5 5 This definition looks only to allocative efficiency, not to other
possible social goals.
5 6 See John S. McGee, I N DE F E N S E OF INDUSTRIAL C ONCENTRATION
(Praeger 1971); Eugene F. Fama & Arthur B. Laffer, The Number of Firms and
Competition, in THE COMPETITIVE ECONOMY : SELECTED READINGS 43 (Yale Brozen ed.,
General Learning Press 1975).
57 See W ILLIAM J. BAUMOL , J O H N C. PA N Z A R & ROBERT D. W ILLIG,
C ONTESTABLE MARKETS AND THE THEORY OF INDUSTRY S TRUCTURE (Harcourt, Brace,
Jovanovich, rev. ed. 1988).
facilitate collusion, 58 and most likely where a single producer occupies the
field.59 (Put aside, for now, the question of what this means from either a
legal or policy vantage.)
Is this the sort of market in which owners of intellectual property rights
compete? Commentary often assumes that the answer is yes. 60 After all,
intellectual property rights—like the general run of property rights—are
designed to give the rights owner a monopoly over a particular good. The
law ascribes to the holders of property rights certain powers that can be
(and at times are) described as those accorded a legally sanctioned monop-
olist. A homeowner, for example, is legally entitled to control access to his
property (with few exceptions) even if the terms of this “monopoly”
control—the prices for and conditions under which access is granted—do
not appear to replicate the operation of a perfectly competitive market. 61
So, too, a patent or copyright owner is legally entitled to control the exploi-
tation of that property, even if this exercise of “monopoly power” results
in different prices and terms than those that (observers predict) would
obtain in a fully competitive market.62
That “monopoly,” however, does not suggest any particular change in
the marketplace from the competitive paradigm described above. Of
course, the right holder is the sole supplier who can serve the artificially
delimited “market” for the patented or copyrighted work—or at least the
market for new access to that work (as old copies of the work may be in
existence providing competition, perhaps very substantial competition, to
sales or licenses of new copies). But that market is not usefully described.
Consider, for example, that roughly 500,000 books, plays, articles, and
stories are registered for copyright in America each year and about 70,000
58 George J. Stigler, A Theory of Oligopoly, 72 J. POL . ECON . 44 (1964)

[hereinafter Oligopoly]. Although collusion is a major concern when few sellers occupy
a market (and, merger considerations aside, tends to be the primary concern), actual
collusion is not necessary to produce supra-competitive prices and sub-competitive
output. See, e.g., JEAN TIROLE , A THEORY OF I NDUSTRIAL ORGANIZATION (MIT Press
1988); Symposium on Tacit Collusion, 38 AN TITRUST BULL. 1 (Spring 1993).
59 Richard A. Posner, The Social Costs of Monopoly and Regulation, 83 J .
POL. ECON. 807 (1975).
60 See, e.g., Note, An Economic Analysis of Royalty Terms in Patent Licenses,
67 M INN . L. R EV . 1198,1221 (1983). The tendency of commentators to characterize
markets for goods associated with intellectual property as monopolistic was noted by
Professor Stephen Carter: “[C]ommentators constantly refer to intellectual property
rights as monopolies—all right, limited monopolies—even though the typical proprietor
lacks the market power (and often, as Edmund Kitch has noted, the incentive) to extract
monopoly rents.” Stephen L. Carter, Does It Matter Whether Intellectual Property Is
Property?, 68 CHI.-KENT L. REV. 715, 717 (1993).
61 See generally AMERICAN L A W I NSTITUTE, RESTATEMENT, S ECOND , O F
THE LA W OF PROPERTY (Landlord & Tenant) (ALI 1977), (Donative Transfers) (ALI
1988).
62 See, e.g., 17 U.S.C.§ 106; OTA REPT., supra note 35, at 185-86.
new book titles are published annually.63 Each of the authors enjoys a
nominal monopoly with respect to his work. If someone wants to repro-
duce a book or use passages from a book or turn the book into a stage or
screen play, the person must strike a deal with the “monopolist” who holds
the copyright on that work. Yet the book market is intensely competitive,
and many, many people are competing to produce books and to turn ideas
into stage productions and movies.
The nature of this market (and of markets more generally) often is
misconstrued. Casual observers frequently have an unrealistically narrow
view of the sources of competitive constraint and an unrealistically expan-
sive expectation of profitability. The most obvious substitute produc
ts—the ones apt to be visible to casual observers—will be those that most
influence the short-run value of a good but rarely are the only important
sources of competition. Indeed, over the longer term, they frequently are
not the most important sources of competition. Atari’s video game system,
for instance, had few immediate substitutes, but it was rapidly supplanted by
a better technology.
In the same vein, successful ventures generally are visible to casual
observers but are not representative of overall profitability for a given class
of goods. That is true for copyrighted goods as well as for others. The
most publicized aspect of the book market may be the fact that especially
successful authors can reap huge rewards.64 Once the authors have created
a work that is unusually popular—and at times in anticipation of it—the
authors are thought of as controlling particularly valuable resources. But
the market in which the authors in fact compete is the intensely competitive
market to create such specially valuable goods. Thinking only of the
returns to those who do best in this market dramatically distorts the sense of
this market, much as focusing only on Tiger Woods distorts a sense of the
market for golf professionals or focusing on Michael Jordan distorts one’s
sense of the market for professional ball players—or, so far as these two
athletes are seen in their role as product pitchmen, focusing on them dis-
torts a sense of the market for American sports figures or more generally
for public figures. Whatever the returns to the top players, the creative
markets remain intensely competitive.65
63 Gary Ink, Book Title Output and Average Prices: 1996 Final and 1997
Preliminary Figures, in THE B OWKER A NNUAL: L IBRARY AND T RADE B OOK A LMANAC
521-22 (43d ed., Dave Bogart ed., R.R. Bowker 1998).
64 See Mark Feeney, High-Stakes Bookmaking; Huge Advances, Readership
Slump Make ’90s Publishing a Gamble , BOS. G LOBE , Dec. 10, 1997, at C1; Bob Hoover,
Best Seller; Michael Chrichton Strikes It Rich Before His Latest Book Hits the Stores,
PITTSBURGH P OST -G AZETTE , Dec. 7, 1996, at D-12; Doyle McManus, Gingrich Inks a
Book Deal for $4 Million, L.A. TIMES , Dec. 23, 1994, at A1; Jeff Zaleski, The Grisham
Business; Novelist John Grisham, PUB. WKLY., Jan. 19, 1998, at 248; Clancy Deal Worth
$100 Million, CHI. SUN -TIMES, Sep. 8, 1997, at 32.
65 Even in intensely competitive markets, those who control particularly
valuable inputs—for example, especially fertile land—may earn returns above the norm.
Even though they set terms for access to “monopoly” rights, copyright
licensing agreements resemble the typical setting in which the terms and
price of the agreement harmonizes the interests of the parties (the licensor
and licensee) in the same way that a grocery store’s prices reflect the
interests of the store owner and potential customers. As noted earlier, the
prices and terms may not be ideal, but as a rule there should be no greater
divergence from the ideal than in the grocery store example. The monopo-
ly in the copyright owner’s case is analogous to the grocery store’s mo-
nopoly over its specific location. Information problems may distort par-
ties’ perceptions of what agreement is best—and may account for differ-
ences between parties to an agreement during negotiation—but the copy-
right itself typically is not the cause of any distortion.66
The prospect of arrangements between parties accounting optimally for
both sets of interests does not, of course, suggest that the interests of the
parties are identical, either before or after agreement. The extensive litera-
ture on “agency costs”—which encompasses writing about production by
teams, supervision of employees by managers and investors, and other
activities that take place in principal-agent settings—takes as a given the
continued separation of interests even among closely cooperating parties
operating in a single, commercial enterprise.67
Nonetheless, this literature explains that, despite the divergence of
parties’ interests, each party in such settings has reason to account for the
interests of other parties. Consequently, an extensive variety of agreements
and non-negotiated (but mutually accepted) arrangements are used to align
parties’ incentives more closely.68 There appears to be every reason to
presume that software licensing contracts, like other contracts generally,
represent as good an accommodation of the interests of the contracting
6 6 See, e.g., George A. Akerlof, The Market for “Lemons”: Quality

Uncertainty and the Market Mechanism, 84 Q.J. E CON . 488 (1970) ( exposing effects of
information problem in market without copyright or other monopoly rights).
67 See, e.g., Armen Alchian & Harold Demsetz, Production, Information
Costs, and Economic Organization , 62 AM E R . EC O N . R E V . 777 (1972); William J.
Carney, Controlling Management Opportunism in the Market for Corporate Control: An
Agency Cost Model, 1988 W IS. L. REV. 385; Frank H. Easterbrook & Daniel R. Fischel,
Close Corporations and Agency Costs, 38 STAN. L. R EV . 271 (1986); Eugene F. Fama &
Michael C. Jensen, Separation of Ownership and Control, 26 J.L. & ECON . 301 (1983).
68 See, e.g., Alchian & Demsetz, supra note 68; Kenneth J. Arrow, The
Economics of Agency, in PRINCIPALS AND AGENTS: T HE STRUCTURE OF BUSINESS 37 (John
W. Pratt & Richard J. Zeckhauser eds., Harvard Bus. School 1985); Carney, supra note
68; Michael C. Jensen & William Meckling, Theory of the Firm: Managerial Behavior,
Agency Costs and Ownership Structure, 3 J. FIN. ECON. 305 (1976).
parties as can be found.69

3. Antitrust and Copyright
Antitrust Law and Intellectual Property Right “Misuse”

Antitrust law reflects concerns about business practices that undermine
competition. Discussion of the overlap between antitrust and intellectual
property law frequently observes that the former opposes monopoly, while
the latter confers monopoly rights.70 That observation does not, however,
resolve the questions about how far the monopoly rights extend and in
what circumstances concerns about competition can limit those rights.
Those questions evoke widely varied answers from experts in antitrust and
intellectual property as well as from the courts.71
Courts struggling with the questions have found life complicated by
decisions expanding antitrust law to reach matters that previously might
have been addressed by equity doctrines and other decisions extending
equity doctrines to subjects squarely within the purview of antitrust. De-
fenses to actions for enforcement of patent rights—now termed “patent
misuse”—later extended by analogy to copyright (under the heading of
“copyright misuse”) encompassed attempts to use the intellectual property
rights in ways that seemed inimical to public policy (or other traditional
equity concerns for enforcers to come before the equity court with clean
hands).72 The only issues dealt with under the “misuse” headings, howev-
er, look very much like staple problems of antitrust law, which today has
evolved into a relatively well-developed body of law.
That overlap does not mean that the two bodies of law—antitrust and
intellectual property “misuse”—followed similar paths in resolving the
issues both address. Assumptions about market operations that informed
69 The one arena in which there is appreciable question about this

assertion is the use of so-called “shrink-wrap” contracts with ultimate consumers of
software. See ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996); O’Rourke, supra
note 35.
70 Justice Oliver Wendell Holmes, for instance, suggested that patentees
enjoy a monopoly over their invention that includes the right to withhold a license to
use it, making antitrust inquiry into that decision inapposite. Motion Picture Patents
Co. v. Universal Film Mfg. Co., 243 U.S. 502, 510 (1917) (Holmes, J., dissenting).
71 See, e..g.,Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2 (1984);
USM Corp. v. SPS Technologies, Inc., 694 F.2d 505 (7th Cir. 1982), cert. denied, 462
U.S. 1107 (1983); Louis Kaplow, The Patent-Antitrust Intersection: A Reappraisal, 97
HARV. L. R EV . 1813 (1984) [hereinafter Intersection]; Robert P. Merges, Reflections on
Current Legislation Affecting Patent Misuse, 70 J. P AT. & TRADEMARK O FF . SOC ’Y 793
(1988) [hereinafter Misuse]; Donald Turner, Legal Restrictions on Exploitation of the
Patent Monopoly: An Economic Analysis, 76 YALE L.J. 267 (1966); Mark A. Lemley,
Comment: The Economic Irrationality of the Patent Misuse Doctrine, 78 CAL . L. REV .
1599 (1990) [hereinafter Irrationality].
72 See Morton Salt Co. v. G.S. Suppinger Co., 314 U.S. 488 (1942).
the contours of intellectual property rights “misuse” doctrines—such as

the assumption that award of these rights automatically conferred meaning-
ful power over market prices—survived in misuse doctrine long after they
were abandoned in antitrust litigation.73 Judges’ resistance to efforts to
bring misuse doctrine into line with a body of antitrust law more sensitive
to evolving economic learning led Congress to intervene in the late 1980s,
amending the Patent Act to bring that body of law into line with antitrust
on the issue of market power.74
That change has not sufficed to eliminate conflict between intellectual
property law and antitrust law. Some courts and commentators maintain
that a defense of copyright or patent misuse still exists separate from the
antitrust law and extending to actions that do not violate antitrust law, even
if similar to conduct subject to antitrust attention.75 But the patent law
amendment has reinforced arguments that antitrust should set the outer
limits of whatever misuse doctrine is retained. To a significant extent, the
argument over a separate misuse doctrine now has become more a matter
of aesthetics than substance, given the nature of the claims advanced under
the misuse doctrine.76
Vertical Relations in Antitrust and Copyright

The more trenchant questions are what the content is of whatever legal rule
does govern—and what substantive rule should govern—business behavior
central to the intellectual property laws and especially to copyright: licens-
ing others to use the protected work. Plaintiffs in the Microsoft litigation
have urged that intellectual property licensing be treated no differently
from any other activity, while Microsoft has argued in effect that intellectu-
al property licensing should be immune from antitrust scrutiny.77 Apart
from citations to precedent, Microsoft’s argument stresses licensing ar-
rangements’ centrality to the scheme of the copyright law. Licensing
surely tends to provide efficient means of exploiting intellectual property
rights. So far as efficiency defines what is socially beneficial in business
and intellectual property laws define what is socially beneficial for creation
73 See Kaplow, Intersection, supra note 72; Lemley, Irrationality, supra

note 72.
74 Pub. L. No. 100-703, 102 Stat. 4676 (1988), amending 35 U.S.C. §
271(d).
75 Practice Mgt. Info. Corp. v. American Medical Assn., 121 F.3d 516
(9th Cir. 1997); Merges, Misuse, supra note 72.
76 USM Corp. v. SPS Technologies, Inc., 694 F.2d 505, 511 (7th Cir.
1982), cert. denied, 462 U.S. 1107 (1983) (Posner, J.).
77 United States v. Microsoft Corp. & State of New York ex rel. Dennis C.
Vacco, et al. v. Microsoft Corp., Civil Actions Nos. 98-1232 & 98-1233 (D. D.C.),
Defendant’s Memorandum in Support of Motion for Summary Judgment (Aug. 10, 1998),
Plaintiffs’ Joint Response to Microsoft’s Motion for Summary Judgment and Reply in
Support of Motions for Preliminary Injunction (Aug. 31, 1998).
and exploitation of innovative talents, one might expect that antitrust-type

concerns would play no role.78
It is hard to know how far one can push that expectation. After all,
antitrust laws have been used to regulate a range of business conduct that
commentators find more likely to be beneficial than harmful.79 Most of
the complaints have focused on specific applications of the antitrust laws,
rather than on its broader contours,80 and commentators find much anti-
trust law tailored to protect efficient business practices. 81 Still, antitrust law
surely is not entirely congruent with efficiency.82
Among the most questionable applications of antitrust is its use to
police vertical relationships.83 Although some practices in vertical dealings
can be cleverly disguised horizontal restraints, cogent economic explana-
tions have been offered for many more vertical arrangements that have
been subject to antitrust scrutiny. These arrangements tend to promote
efficiency, as one should expect with contracts between principals and
agents (buyers and sellers, licensors and licensees).84 The essence of such
contracts is the apportionment of responsibilities between parties with
different competencies, the selection of mechanisms that will align the
parties’ interests at the lowest possible cost—goals oriented to attainment of
efficiencies.85 Consistent with the efficiencies that can be expected with
78 See Kaplow, supra note 72 (arguing that the scope for antitrust
concerns depends on the gap between intellectual property laws’ ambit and socially
optimal protection for inventive activity).
79 See, e.g., THE C AUSES AND CONSEQUENCES OF ANTITRUST: THE P UBLIC
CHOICE PERSPECTIVE (Fred S. McChesney & William F. Shugart II eds., Univ. of Chicago
Press 1995).
80 See, e.g., Paul H. Rubin, What Do Economists Think About Antitrust? A
Random Walk Down Pennsylvania Avenue, in McChesney & Shugart eds., supra note 80,
at 33, 36-61.
8 1 See, e.g., RI C H A R D A. P OSNER , A NTITRUST L A W : A N E CONOMIC
P ERSPECTIVE (Univ. of Chicago Press 1976). See also ROBERT H. B ORK, THE A NTITRUST
PARADOX: A POLICY AT WAR WITH ITSELF (Basic Books 1978) (often supporting, but also
often condemning, antitrust doctrine).
82 See, e.g., McChesney & Shugart eds., supra note 80.
83 See, e.g., BO R K , supra note 82, at 245, 288-98, 379-81; Donald J.
Boudreaux & Robert B. Ekelund, Jr., Inframarginal Consumers and the Per Se Legality of
Vertical Restraints, 17 H OFSTRA L. REV. 137 (1988); Benjamin Klein & Kevin Murphy,
Vertical Restraints as Contract Enforcement Mechanisms, 28 J.L. & ECON. 265 (1988).
84 See, e.g.., Baxter & Kessler, supra note 49 (arguing that confusion on
this point traces to courts sometimes mistaking vertical relationships—those involving
parties engaged in production of complements not substitutes—for horizontal
relationships and vice versa); Boudreaux & Ekelund, supra note 84; Klein & Murphy,
supra note 84.
85 See WILLIAMSON , supra note 44, at 85-130; Baxter & Kessler, supra
note 49.
vertical arrangements, courts generally have been more willing to weigh

explanations for provisions in vertical arrangements than in horizontal
agreements.86 Yet courts have not put vertical arrangements entirely off
limits for antitrust.87
If courts do not always shape doctrine in ways that fit efficiency consid-
erations, they do take account of efficiencies in many settings. Courts have
given special attention, at least at times, to the efficiency arguments of
patent or copyright licensing arrangements challenged on antitrust gr
ounds. 88 Of course, efficiency concerns are only put in issue when two
requisites of antitrust claims are established: that the licensor exercises
monopoly power, and that the licensor has taken actions proscribed by
antitrust law (unless justified) because of their untoward effect on competi-
tion. These are substantial hurdles. In numerous cases, even where monop-
oly power was proven (or assumed) courts have expressed concern to keep
antitrust law from becoming a vehicle for second-guessing technical and
product design decisions, especially of intellectual property rights owners.89
And, more generally, courts specifically have vouchsafed the propriety of
steps by rights owners to protect the integrity of their products.90
If Microsoft correctly interprets the relation of antitrust to copyright
law, or if these hurdles of antitrust law are not cleared, the inquiry is at an
end. If, however, plaintiffs persuade the court in this case and similar
future cases on the threshold issues of law and fact, courts considering
challenges to copyright license provisions will ask a question similar to the
question presented when technological integration is challenged. Courts
will ask if there is a reasonable explanation (not directed at subverting
competition) for the contested choice. In the contract setting, courts will
86 Compare Continental TV, Inc. v. GTE Sylvania, Inc., 433 U.S. 36

(1977), with Dr. Miles Med. Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911).
87 See, e.g., Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752 (1984);
Continental TV, Inc. v. GTE Sylvania, Inc., 433 U.S. 36 (1977).
88 USM Corp. v. SPS Technologies, Inc., 694 F.2d 505, 511 (7th Cir.
1982), cert. denied, 462 U.S. 1107 (1983).
89 E.g., United States v. Microsoft Corp., Civil Action Nos. 97-5343 &
98-5012, 1998 WL 327855 at *13-*19 (D.C. Cir. June 23, 1998); Foremost Pro Color,
Inc. v. Eastman Kodak Co., 703 F.2d 534, 542-44 (9th Cir. 1983), cert. denied, 465 U.S.
1038 (1984); California Computer Prods., Inc. v. IBM, 613 F.2d 727 (9th Cir. 1979);
International Data Processing, Inc. v. IBM, 585 F. Supp. 1470, 1471-76 (D. N.J. 1984);
ICL Peripherals Leasing Corp. v. IBM, 448 F. Supp. 228, 230-34 (N.D. Cal 1978), 458
F. Supp 423, 439-41 (N.D. Cal. 1978), aff’d per curiam sub nom. Memorex Corp. v.
IBM, 636 F.2d 1188 (9th Cir. 1980), cert. denied, 452 U.S. 972 (1981).
90 E.g., Community for Creative Non-Violence v. Reid, 846 F.2d 1485
(D.C. Cir. 1988), aff’d, 490 U.S. 730 (1989); WGN Continental Broadcasting Co. v.
United Video, Inc., 693 F.2d 622 (7th Cir. 1982); Gilliam v. American Broadcasting Co.,
538 F.2d 14 (2d Cir. 1976); National Bank of Commerce v. Shaklee Corp., 503 F. Supp.
533 (W.D. Tex. 1980). These decisions are straightforward applications of U.S.
intellectual property law, not European-style “moral right” determinations.
assess the plausible efficiencies from the contested provisions. In the usual
case, the contracts can be expected to reflect efforts to achieve efficiencies,
to exploit the benefits of copyrighted work, and to distribute responsibili-
ties between licensor and licensee in a cost-effective manner.91
The Problem of Contract Deconstruction
Unfortunately, the complexity of the considerations of contracting parties
and the number of terms that tend to comprise the bundle of rights subject
to contract make it difficult for non-parties (and perhaps for parties as well)
readily to explain what work one term taken alone performs or how elimi-
nating that term would affect price.92 That should not be a surprise—after
all, those were exactly the problems identified as the ubiquitous reasons for
the real world being so troublesome and messy a place. That is why the
game of picking apart complex contracts ex post invariably resembles
efforts to articulate the distinctive contribution each particular ingredient in
a cake mix (eggs, flour, etc.) makes to the cake. How much of the cake’s
success can we say is attributable to the eggs? Of course, we can’t say.93
But there is considerable temptation to try anyway. The same is true of
efforts to deconstruct licensing agreements, identifying the role played by
specific license provisions. That effort will be a standard part of antitrust
challenges to copyright agreements.
4. The First Screen
One licensing term that has been challenged as specially troublesome is the
provision in contracts between Microsoft and OEMs that is known as the
first screen provision. Plaintiffs assert that Microsoft alone benefits from
this term and that OEMs, consumers, and other software producers are
harmed. Before discussing the provision, it is helpful to spell out its dos
and don’ts.
What Is the First Screen Provision?

The first screen provision in Microsoft’s contracts with OEMs specifies
what must appear on the computer screen at the end of the boot-up se-
quence when a consumer first turns on (boots up) a computer on which
Microsoft Windows has been installed as the operating system.94 The
91 See discussion supra, text at notes 41-69.

92 See Ronald A. Cass & Clayton P. Gillette, The Government Contractor
Defense: Contractual Allocation of Public Risk, 77 V A . L. RE V . 257 (1991); Oliver
Williamson, Assessing Contract, 1 J.L., ECON . & ORG .177 (1985).
93 This example of fruitless analysis is a long-time favorite of Professor
James A. Henderson, Jr., who kindly has not sought copyright protection.
94 When a user turns on a typical computer with a program such as
Windows 98 installed, the computer will initially load and run a program that is part of
the computer’s basic input-output system (BIOS) to test the system hardware and look for
additional routines in the system. The BIOS then turns control over to a program located
provision has three components: two components that address the style of
the screen and a mandatory content component. For ease of discussion, the
scope of the provision (what it applies to) will be treated as a fourth element
of the first screen provision.
Style—Desktop: The first, and most basic, style component is
that the first screen must contain the familiar Windows “desktop.” The
desktop is a layout for the screen. It consists of a background (which can
be configured in a variety of designs, sometimes called “wallpaper”) on
“top” of which are visual cues (icons). Each icon can be activated by
moving a pointer to it and clicking on it (one click or two, depending on
the version of Windows and the system’s configuration). The Windows
system then inaugurates operation of the relevant program. This point-
and-click procedure replaces the earlier DOS operating system commands,
which required users to memorize the particular word-commands for
specific functions (in application programs, the older system required users
to know particular keys and combinations of keys). In addition to the
icons, a bar runs across the bottom of the screen that allows users (with the
same point-and-click system) to find and inaugurate the full panoply of
programs contained in the computer. Features such as an “active channel
bar” can be added to the desktop without violating the style constraint.
Content—Icons: The second component of the first screen
provision is a requirement that the desktop for that screen include particu-
lar icons that serve as entry points for certain functions. The desktop must
display icons for eliminating files or programs (the “Recycle Bin”), for
transferring files or programs (“My Briefcase”), for access to the different
files and programs on the hard drive and in other locations (“My Comput-
er”), for access to local networks (“Network Neighborhood”), and for file
management as well as access to the Internet (“Internet Explorer”). This
component is a mandatory one, not a prohibitory one. The provision does
not preclude the addition of other icons to the screen, including icons for
technologies that duplicate functions represented by the mandated icons
and icons that permit users to change the configuration of the desktop.
The contract language respecting icons on the first screen only lays out the
minimum requirements for the first screen desktop.
Style—Icons: The third component of the provision also relates
to the icons but, like the first component, is a matter of style. It specifies
that any icons added to the desktop on the first screen must conform to the
size and general style of the mandated icons. It does not modify the con-
tent component by prohibiting any icons, programs, or functions.
Scope: The first screen provision has a very limited scope. It
applies to the first screen that appears when a consumer first boots up a
computer that has been set up with the Windows operating system. It does
not regulate what consumers can do in subsequent uses of the computer
(though it would proscribe an automatic change programmed by the OEM
to occur on subsequent uses). The screen can be reconfigured by any user
in the “master boot record” of the disk drive being used to boot the system, and that
program will load the operating system. Control then passes to the operating system,
which goes through another sequence of locating and/or activating various hardware and
software. The entire process commonly is referred to as the “boot-up” sequence.
so that, after the very first use, the nature and arrangement of the items on
the desktop changes, the features and programs that are enabled by the
simplest (one step) point-and-click process changes, the background of the
desktop changes, and so on, from merely aesthetic alterations to complete
substitution of the entire user interface structure represented on the screen.
The provision does not require that consumers be left wholly on their own
in conceiving and making such changes. OEMs can facilitate change
s—large or small—by placing an icon on the first screen that can change
the default first screen with a single click, substituting another first screen,
or OEMs could put an icon on the first screen that reveals a menu of possi-
bilities for changing the first screen. The consumer not only is in control
of what appears on subsequent boot-ups of the computer; the consumer is
in charge and not restricted to any preset list of options. The provision, in
other words, is a first-screen/first-time term of the license agreement so far
as consumers are concerned.
Why Have a First Screen Provision?

The point made at the start of this section, picking up the thread of discus-
sion in sections 2 and 3, was the difficulty of decomposing agreements to
assign separate functions to each provision. Sometimes provisions do have
specific, independent functions that can be discussed meaningfully apart
from an overall sense of the contract, but the venture typically risks miscon-
struction. In the licensing contracts, as a rule, no provision will have effects
independent of other terms; the trade-offs implicit in such contracts almost
assures that analysis of any single provision will not capture the net effect
of its inclusion.
Evaluation of the purposes served by the first screen provision is not
quite so problematic as evaluation of the provision’s effects. Purpose does
not require the same netting out of other terms as is required of effects
analysis. But such evaluations still should be proffered with considerable
caution. That said, the first screen provision seems on its face to serve three
purposes.
Training Cost Reduction: The first purpose is simple and pow-
erful: to reduce the cost to consumers of using the new product. Newness
is an attraction in some arenas, but it more commonly discourages. This is
most easily seen with children. Anyone who has children has observed how
much they depend on familiarity. They like to have the same routines, to
do the same things, to read the same books, to watch the same shows.
Familiarity gives a sense of comfort, of confidence, of mastery over the
external world, of security in doing something that is already within one’s
experience. In economic terms, familiarity reduces the cost of the activity,
which makes it more attractive.
Though we seldom attribute to adults the need for security we see in
children—for whom so much of the world is novel and inexplicable—we
do see a ubiquitous interest in lowering costs of our activities. At times, this
cost-lowering impetus looks quite similar to a child’s search for familiarity.
How many of us choose the same foods from foreign language menus so
that we will not have to master new terms? How many of us go to the same
places (restaurants, vacation spots, etc.) and do the same things at them so
that we will not have to learn what is to our liking there or risk disappoint-
ment at discovering that the new experience is not what we hoped?
More generally, familiarity reduces the need for an investment in
training before a product or service can be used effectively. While the
advantage is especially important with products that have large training
costs, even a small savings in cost can be important in many settings.
Everyday products as well as technologically advanced products provide
evidence that we resist investing in training where that is efficiently avoid-
able, a point that holds in all settings, including where the training is easy
and the cost seemingly trivial.
Market responses to this lesson also are ubiquitous. Reduced training
costs, for example, explain similarities across numerous products that are
provided in highly competitive markets. Consider examples involving two
sorts of buttons: conventions that avoid the need to learn and adjust to
differences explains why men’s shirts all button in the same direction and
why telephones tend to have buttons arrayed in the same layout regardless
of the phone’s size or shape or manufacturer.
In the case of Microsoft’s licensing agreements, the first screen provi-
sion serves the same purpose as other devices that reduce training costs. It
assures that the first screen a user of any Windows-based computer sees
provides the accustomed look of a desktop—familiar to anyone who uses
any computer with the Windows system—with extremely low-cost methods
of gaining access to popular features and programs.
Two primary routes are provided on the first screen for access to pro-
grams. The lower-cost access is for programs that have an icon on the
desktop already—simply point and click on the icon—and a desktop that
has certain icons on it already (the standard, minimum set) nearly elimi-
nates any training time or cost for those programs. Further, making all
programs accessible through the “Start” button (the icon at the bottom left
of the first screen)—again using point-and-click technology—makes the
entire array of programs loaded into the computer accessible at very low
cost.
The consequence of this organization of the first screen is that com-
puter users can turn on any computer with Windows and immediately get
into the programs they want without learning new or complex commands.
In this respect, Windows combines standardization of computers using that
operating system with simplification of the interface between user and
computer. As has generally been the trend for all advanced technologies,
this environment moves complexity into the software program so that the
requirements placed on consumers—the training costs, primarily—can be
reduced.95
Moreover, Microsoft’s organization of Windows as a “belt-and-sus-
penders” approach, providing multiple routes into some key functions,
further reduces training costs by allowing unsophisticated users to continue
95 This conforms to George Guilder’s description of how progress is made

in computing. See GEORGE G ILDER , M ICROCOSM : T H E Q UANTUM R EVOLUTION IN
ECONOMICS AND TECHNOLOGY 166-68 (Simon & Schuster 1989).
to go through the most familiar route. This approach provides a basis for
requiring that an Internet Explorer icon appear on the first screen. Internet
Explorer technologies not only provide access to the Internet, but also
provides options for file management, transfer, and access. The increasing
integration of the Internet into everyday computer use—reflected in Micro-
soft’s decision that technologies associated with Internet access and use
should be integrated with other technologies governing computer opera-
tion—changes the consumer demand for an operating system. The re-
quired inclusion of the Internet Explorer icon, as with the other content-
based icon requirements, seems quite clearly driven by a desire to provide a
product with features consumers find useful in a sufficiently standardized
package to facilitate operation.
Quality Control: A second reason for the first screen provision
is that it facilitates quality control. If certain features are always present on
the first screen and those features are not modified by OEMs, the responsi-
bility for assuring that the features work as intended will lie squarely with
Microsoft. Insofar as Microsoft expects to receive the blame for any
quality problems and anticipates that OEM modification of the features
associated with the first screen could generate problems, it is rational to
insist that those features be presented “as is.” This is especially true if the
features are important to unsophisticated consumers. Those are the con-
sumers least likely to be able to navigate around problems and least likely
to be able to assess responsibility for problems.
In many settings, the division of responsibility between one company
and another or between a company and its customers is predicated on the
expectation that one is better positioned to assure the desired outcome.
Professor George Priest’s study of consumer product warranties is one
example of the business decisions that turn on such considerations.96 The
same principle applies to the relationship among consumers, software
companies, and hardware manufacturers.
In principle, quality control can be maintained in other ways. Microsoft
could agree with OEMs that, if OEM modification of the operating system
software impaired the operation of specified programs or features, the
OEM would cover the costs associated with that problem. These costs
could include costs of fixing the problem, direct costs associated with loss
of consumer confidence in the operating system (costs incurred to boost
consumer confidence to prior levels), and indirect costs such as lost sales.
Modest reflection, however, suggests that this alternative, litigation-
oriented solution is apt to be less efficient than a precaution-oriented
solution. The causation inquiry necessary to a litigation-oriented solution
will be difficult as will the calculation of costs. Contracts are written to
impose liquidated damages penalties or other litigation-oriented solutions
to quality control problems in some circumstances. But circumstances
where that is the efficient solution typically involve clear responsibility on
one contracting party for performing a task (for which the other party is
96 George Priest, A Theory of the Consumer Product Warranty, 90 Y ALE

L.J. 1297 (1981).
paying) and some readily ascertained performance measure as a trigger for

the damages penalty.97 That looks very different from the software-OEM-
consumer relationship.
The quality control concern seems especially apposite to contract
provisions that restrict OEMs’ capacity to modify the code embedded in
Windows. The challenge to restrictions on deletion of code associated with
Internet Explorer’s web browsing technologies flies in the face of this
concern. 98 Internet Explorer technologies have been integrated into the
functioning of Windows 95 and, even more, Windows 98, so that any at-
tempt to modify the system to eliminate code controlling Internet Explorer
technologies and substitute code intended to duplicate deleted capabilities
is likely to create exactly the sort of problems that give software programs a
bad name. The inclusion of the full Internet Explorer technologies safe-
guards against the problems that, even if caused by an OEM, appear likely
to be laid in some measure at Microsoft’s door. From Microsoft’s vantage,
hence, insistence on the full inclusion of the Internet Explorer code solves a
potential problem in an efficient manner. Inclusion of the icon represent-
ing these technologies, as noted above, provides a low-cost means for users
to gain ready access and an efficient method of cuing unsophisticated users
to the technologies’ availability.
Brand Identification: Third, the requirement of a first screen
that has certain uniform features helps maintain brand identity for Win-
dows. That brand identity clearly is helpful to Microsoft. Consumers who
are familiar with the look and feel of a given brand, who associate easy use
of the computer with that brand, plainly will be more likely to support that
brand. If there is no obvious similarity from one Windows-based computer
to the next, there is relatively little meaning to the brand, so far as a typical
consumer could tell. If it were not possible to limit what Microsoft’s
licensees can do, OEMs might find it advantageous to repackage the Win-
dows program under the OEM label. Though not clearly a step that would
serve either party’s interest, it is the sort of risk principal-agent accords
routinely guard against.99
The producer-protective aspect of branding is its most obvious feature.
Brand identity is created to help market goods—if a brand is familiar to
consumers, and especially if it is associated with positive experiences, it will
provide a basis for preferring the branded good to competing goods. The
brand is designed to advance the manufacturer’s (or marketer’s) interest.
97 See, e.g., Kenneth W. Clarkson, et al., Liquidated Damages Versus

Penalties: Sense or Nonsense?, 1978 WIS . L. R E V . 351; Eric L. Talley, Contract
Renegotiation, Mechanism Design, and the Liquidated Damages Rule, 46 STAN . L. REV .
1195 (1994).
9 8 As noted earlier, it also flies in the face of decisions upholding
copyright owners’ control of modifications of their works and decisions upholding
rights to integrate technologies free from judicial second-guessing. See authorities cited
supra notes 89-90.
99 E.g., Jensen & Meckling, supra note 69.
But the brand also has value to consumers. It conveys information that
is important about what consumers will get when they purchase products
grouped under a given brand label.100 The McDonald’s restaurant that
you have never been to in a city you have never visited has an expected
menu, quality, and cost derived from prior experience with that brand. The
value that consumers place on that information has earned trillions of
dollars for those who have created brand identities over the past few de-
cades in hotels and restaurants and retail stores, among other goods and
services. The corollary of the franchise brand value to consumers is that
the franchise brand serves interests of the franchisor and franchisee as
well—or, moving from McDonald’s to Microsoft, the interests of Microsoft
and the OEMs.
Although the first screen provision should aid brand identity, it is so
modest a requirement that its utility at branding is limited. The OEMs have
sufficient flexibility to add to the desktop, to customize the desktop with
different backgrounds, logos, and added functionality, to reduce the Win-
dows brand identity and to increase the OEM brand identity. The provision,
thus, looks to be a compromise between the interests of Microsoft and the
OEMs—which, given the nature of copyright licensing, is no surprise.
Exclusion, Externalities, and Party Interests

The first screen provision serves interests of Microsoft, OEMs, and consum-
ers. So, what is the concern? Assertedly Microsoft has prevented rival
software companies from gaining access to customers, precluded OEMs
from providing the best software packages for their target customers, and
impeded customers’ access to the software they prefer.101 Beyond the
assumption that the first screen provision is a unilateral imposition by
Microsoft on other parties (an assumption taken up below), specific aspects
of the provision are claimed to generate specific problems and demonstrate
an anticompetitive purpose. The claims have the defect of all efforts to
deconstruct agreements and depend on “armchair” conjectures rather than
on demonstrated effects cognizable within the purview of antitrust laws.
OEM Brand Interference: The configuration of the first screen
desktop (and its place following the Windows logo), for instance, allegedly
impairs the ability of OEMs to create brand identity of their own.102 That
100 See, e.g., Ronald H. Coase, Advertising and Free Speech, 6 J. L EGAL
STUD. 1 (1977); Aaron Director, The Parity of the Economic Market Place , 7 J.L. & E CON .
1 (1964); Richard Schmalensee, Advertising, in THE NEW PALGRAVE DICTIONARY O F
E CONOMICS, vol. I, 34 (John Eatwell, Murray Milgate & Peter Newman eds., MacMillan
1987).
101 See DOJ Complaint, supra note 1; AGs Complaint, supra note 1;
Fisher Declaration, supra note 5; Sibley Declaration, supra note 5.
102 See Sibley Declaration, supra note 5. The license agreements between
Microsoft and OEMs prohibit OEMs from altering the boot-up sequence for Windows.
This has the effect of proscribing OEM use of the screen for other purposes (including
advertising purposes) during the Windows boot-up, an effect that is allegedly
allegation seems implausible, given the success of particular brands, such as

Compaq, Dell, IBM, and Gateway, which appeal to different segments of the
computer market.
The allegation seems implausible as well because the OEMs have con-
siderable flexibility to differentiate their products. They can do this by the
way they present the desktop, the background wallpaper and logos they
choose for the desktop (including using the corporate logo in a repeated
pattern for the background, as Toshiba and Dell, for examples, have done),
the software they choose to offer, and the software they choose to highlight
through icon placement on the first screen. OEMs also enjoy other oppor-
tunities for branding, such as placing logos on the hardware itself, perhaps
beside the computer screen where it is most likely constantly to be in view,
as well as on the box in which the computer arrives—in other words, on
places that are first seen and most obvious to consumers.
If, however, the first screen provision did interfere with OEM brand
identity, that is not obviously problematic. The conclusion would be that
contracting parties would have to decide how much to promote Microsoft
brand identity and how much to promote OEM brand identity. Presu-
mably, that is a question, like others in a licensing contract, that turns on the
relative value of the competing interests. If OEMs think that a contract
provision hurts their brand identity, some offset is required, in price or in
other contract terms. There is no reason to believe that contracts between
Microsoft and OEMs have not provided that offset, if it indeed is necessary.
For those who are concerned about the ability of contract parties to gain
terms they desire, it is noteworthy that the OEMs tend to be very large
commercial enterprises, some significantly larger than Microsoft. There is
no evidence that these companies have had difficulty establishing brand
identity or that competition among OEMs has been less than vigorous.
And if there is little evidence of any harm here, there is even greater diffi-
culty in bringing such harm to OEM brand identity as might exist within
the realm of antitrust concerns.103
Icon Inclusion/Program Preclusion: Another claim is that
requiring all Windows-based systems to include particular icons on the first
screen prevents OEMs from offering the array of programs they otherwise
would choose to put on the first screen.104 That may be true. OEMs might
choose to omit some icons for programs that duplicate those already re-
quired by the Microsoft contract. On the other hand, OEMs might choose
anticompetitive. See DOJ Complaint, supra note 1; AGs Complaint, supra note 1;
Fisher Declaration, supra note 5; Sibley Declaration, supra note 5. The license
agreement does not, however, prohibit licensee-OEMs from using a different operating
system prior to the inauguration of Windows operation; the Windows license agreement
does not regulate what occurs during boot-up if an OEM chooses to use another system in
addition to Windows to perform functions prior to starting or switching to Windows.
103 For discussion of the peculiar realm of such concerns, see William H.
Page, Antitrust Damages and Economic Efficiency: An Approach to Antitrust Injury, 47 U.
C HI. L. REV . 467 (1980).
104 DOJ Complaint, supra note 1; AGs Complaint, supra note 1; affidavit
of David S. Sibley.
to add some icons that otherwise would not be on the first screen. For
example, if Microsoft wants to have access to Internet Explorer technolo-
gies available through an icon on the first screen and the OEM believes that
its customers will prefer different browsing software, the OEM may choose
to highlight the availability of an alternative browser by placing that icon
alongside the Internet Explorer icon. Under the license agreements, OEMs
can place additional icons on the first screen.
The argument that icons required by the first screen provision have
preclusive effect turns on two claims. First, the desktop is seen as a scarce
resource that does not have space enough for all programs. Hence, any
icon placed on the desktop must preclude some other icon.105 That argu-
ment is specious. Of course, desktop space is scarce in the same sense in
which every resource is scarce. But the space used by icons required by the
first screen provision is only about fifteen percent of the desktop. The
remaining 85 percent is left to the OEMs. It is possible that even that much
space is not enough. But look at the desktop screens of different comput-
ers as the OEMs have configured them. The OEMs have left a great deal of
room on every desktop. That strongly suggests that they believe that
customers do not need many icons on the desktop—which, in turn, suggests
that the icons Microsoft wants placed on the initial desktop screen do not
displace other icons.
Maybe, however, the reason OEMs leave desktop space empty is that
consumers prefer to add their own icons and dislike a desktop with limited
open space. If that is so, the Microsoft icons would be competing both with
other program icons and with open space. That might mean that Microsoft
icons increase the value of remaining icon spaces on the desktop and could
preclude the addition of icons that otherwise would be there. Again, this
armchair theorizing is not rooted in actual effects. For one thing, if the
scarcity problem exists because consumers prefer to have space to add
icons, that implies that those consumers are in fact capable of moving icons
on and off the screen (a task the competent computer user can perform
given the way the Microsoft first screen is set up). But if that is so, then,
again, the presence of the Microsoft icons on the screen is not terribly
significant.
Moreover, the program that so much public and legal attention has
focused on as one that is precluded by the requirement of an Internet
Explorer icon—Netscape’s competing browser—is in fact included on a
very large number of first screens.106 Not only is it included in the first
screens seen by many consumers who purchase Windows-based personal
computers for their own use; it also is loaded onto many such computers at
work where a great many computer users do the majority of their computer
work and where they also frequently acquire computers for work off-site.
Whatever OEMs place on the first screen, for those users the first screen
105 Affidavit of David S. Sibley.

106 Casual inspection of computers at two local stores revealed that many
computers come pre-loaded with both Windows (including Internet Explorer) and
Netscape Navigator.
they see frequently is configured by someone at the office to have the

software and accessibility desired for that workplace.
The second reason given for the assumption that inclusion of Microsoft
icons on the first screen excludes other icons is a supposed fear of consum-
er confusion. The hypothesis is that unsophisticated consumers would be
confused by having two programs that perform essentially the same func-
tion, and for that reason OEMs would be unlikely to place a second (insert
function here: browser program or word processing program or spread-
sheet program or financial management program) icon on the desktop. 107
Again, the hypothesis is not logically compelling—there is no explanation
why consumers would find this confusing, any more than having two types
of orange juice to choose from in a grocery store is confusing. Nor is the
hypothesis of confusion rooted in fact—there is plenty of evidence that
OEMs do choose to place duplicate (and at times triplicate) programs on
the computer and icons on the first screen.
Size Matters?—Icons and Markets: A third alleged problem with
the first screen provision is the requirement that all icons have the same size
and general style. This supposedly interferes with the interest of OEMs in
presenting the best software programs to the consumer. The argument is
that OEMs might wish to direct their customers to specific programs that a
particular OEM feels work better for those consumers and, without the first
screen provision in license contracts, would use a larger icon to prevent
consumer confusion.108
This argument, too, seems quite weak. First, it is in essence an objection
to the inclusion of a Microsoft-designated icon, not to the size constraints.
But, as discussed above, the inclusion requirement does not seem to pre-
clude other icons (even though it conceivably could). Second, despite the
delivery of many computers there is no evidence that the inclusion of equal
sized icons for alternative programs confuses consumers. The hypothetical
problem is just that: hypothetical.
Third, it is hard to make this hypothetical problem into a real antitrust
concern. Even to come close, the hypothetical must be extended; for
example, the argument might be that because the OEM cannot put a larger
icon, it chooses not to put in the icon for a duplicate program. That means
that the advantage of the other (assertedly better) program is less than the
disadvantage of consumer confusion. But the point of the hypothetical is
that better programs are being harmed (by the insistence on inclusion of
the first program’s icon and size-equivalence of the second program’s
icon). How much better can the second program be if a slight chance of
consumer confusion is enough to cause OEMs to drop it?
A different extension of the hypothetical could be that the OEMs put
the duplicate program icon on the first screen but consumers are so con-
fused that they flood the OEMs with calls. If that is a problem, it is one that
will affect the price OEMs would pay to license Windows with the first
screen provision. That, too, is hardly an issue for the antitrust laws.
107 Fisher Declaration, supra note 5; Sibley Declaration, supra note 5.

108 Fisher Declaration, supra note 5; Sibley Declaration, supra note 5.
Perhaps the extended hypothetical would be that the OEMs put the
second icon on the screen and consumers who could have been directed
toward one program (of the OEM’s choosing) instead pick another pro-
gram, even though the icons are similar in size and placement and both
appear on the first screen. The assumption, then, would be that Microsoft
gains an illegal advantage over software competitors when both companies’
programs are included in computers, are accessible to consumers on the
same terms, and are represented on the first screen by the same size icons.
That assumption is hard to support.
The difficulty with all of the hypothetical examples is that they begin
with a licensing provision that does not lend itself to easy characterization
as anticompetitive. It is a far cry from a provision insisting that one firm’s
programs only must be featured first, that no program that duplicates its
programs can be included in the computer, that its programs’ icons must
be twice as big or twice as bright or the only icons to appear in color—in
other words, the hypothetical must go very far in order to transmute the
actual first screen provision into anything that looks even remotely within
the ambit of antitrust.
Provision’s Provenance: Finally, the first screen provision is
questioned on the basis of Microsoft’s advocacy of it. The argument goes
like this: if Microsoft has to urge OEMs to accept this provision, and per-
haps as a result must charge less for licensing the Windows operating
system or grant other concessions to OEMs, it must be inimical to Micro-
soft’s competitors—after all, wouldn’t the OEMs favor the provision if it
served a purpose other than handicapping Microsoft’s competition?
Again, the question starts with a plausible predicate and jumps to an
illogical—or at least unnecessary—conclusion. Doubtless, the impetus for
much of the first screen provision comes from Microsoft. Apart from
evidence that some OEMs objected to versions of this provision, it is obvi-
ously in Microsoft’s interest to have its brand identity strongly established,
its key technologies prominently displayed, and its programs’ operations
free from quality problems. It obviously is in Microsoft’s interest, too, to
devise an integrated set of technologies that will appeal to consumers and to
insist that OEMs present that as Microsoft’s creation, rather than repackag-
ing it as a set of programs or similar offerings from the OEM.
Just as obvious, however, should be the fact that the provision is not
simply a presentation of Microsoft’s desires: OEM interests and consumer
interests also play a hand in shaping the contours of the first screen provi-
sion. The provision is tailored to allow variation among OEMs, to allow
addition of programs of the OEMs’ choosing, to allow more non-Microsoft
programs than Microsoft programs to be featured on the first screen, to
allow competitors’ programs to be featured on an equal basis, to allow
substantial opportunity for OEMs to establish brand identity as well as to
guide consumers’ choices among technologies, and to allow users full
flexibility to rearrange the way the screen is configured and the technolo-
gies accessed following the initial boot-up.
The essential function of the first screen provision is one that benefits
both Microsoft and consumers but that has less importance to others,
including OEMs and makers of software that is built on the Windows
platform. That function is the facilitation of computer use by creating

enough similarity across computer types and manufacturers, the reduction
of training costs discussed above. The reduced training cost is experienced
directly by consumers and is part of the value of the Windows operating
system. But the value is an externality so far as OEMs and other software
firms are concerned, as the reduction in training costs applies to all Win-
dows-based computers and all Windows-based software. Some OEMs may
want to inhibit consumers from shifting among different brands of comput-
er (from shifting away from their brand); some software producers also
may want to make it more costly for consumers to switch away from their
products; but Microsoft (in its role as copyright owner on the Windows
operating system) and consumers gain value from the reduction in switch-
ing costs.
It would be no surprise if Microsoft is the party most interested in
having a first screen provision in its Windows licensing contracts with
OEMs. It also is of no moment for analysis of the provision’s effects.
There are legitimate reasons, wholly apart from Microsoft’s interest in the
integrity of its software, supporting such a provision. And the first screen
provision takes a limited approach to assuring that the positive externalities
of low training costs are maintained, an approach that gives weight to OEM
interests and consumer interests as well as the copyright owner, Microsoft.
Conclusion
The challenge to the first screen provision in Microsoft’s contracts with

OEMs seeks to revisit a complex accord between a principal and its agents.
Because the first screen provision does promote efficiency and does not
impede competition, this challenge should fail. But it should be under-
stood as part of a pattern of inquiries that take antitrust law down a path
that, ultimately, could become a collision course with the rights accorded
by our intellectual property laws.
The rights of copyright owners and their ability effectively to contract
for licenses that maximize the value of their intellectual property are put at
risk by a legal process dependent on picking apart contract provisions ex
post. This process is fraught with difficulty. And, as many others have
noted, that difficulty is conducive to a use of the process that is far from the
public-interest image so often associated with antitrust. Indeed, the likely
effect of such armchair quarterbacking is that the antitrust laws become
captive of well-placed firms in search of an industrial policy that protects
declining firms against more successful firms—an outcome likely to frus-
trate innovation and efficiency and to harm the public.109
109 See William Baumol & Janusz Ordover, Antitrust: Source of Dynamic
and Static Inefficiencies?, in Jorde & Teece eds., supra at 82, 86-95; Frank H.
Easterbrook, Ignorance and Antitrust, in Jorde & Teece eds., supra at 119, 123-32;
Frank H. Easterbrook, The Limits of Antitrust, 63 TEX . L. REV . 1 (1984); Robert B.
Ekelund, Jr., Michael J. McDonald & Robert D. Tollison, Business Restraints and the
Clayton Act of 1914: Public- or Private-Interest Legislation?, in McChesney & Shugart
The ex post analysis, of course, can be done. And when that task is
performed, the first screen provision passes antitrust muster. In fact, none
of the criticisms of the first screen provision holds up under scrutiny. The
provision serves quite legitimate ends and supports values that are broadly
shared among consumers even though those values are not a particular
concern for businesses other than Microsoft. In fact, Microsoft’s efforts to
define its product and to guard against degradation or free riding reflect
the difference between interests that a licensor internalizes and those that
motivate licensees. The key consumer advantage to which the provision
responds is a reduction in training costs. But that same interest, along with
complementary interests in providing a valuable product to the consumer
and in providing a product that is not merely appropriated by OEMs
substituting their individual interests for Microsoft’s interests and broader
consumer interests, runs through a number of contract provisions.
The important point is not simply that Microsoft’s first screen provision
is supported by more than plausible efficiencies. Rather, it is the danger of
a legal requirement that each contract provision be subject to analysis to
identify its singular contribution to the contract. We can be quite sanguine
that principal-agent accords will systematically tend to achieve efficien-
cies,110 and the terms chosen by the parties will be those best designed to
harmonize the parties interests given the state of knowledge at that time. It
is another matter altogether, however, to ask parties to provide explanations
that will convince non-parties that specific efficiencies are associated with
any given term. It is worse yet for parties to be put to the task of proving
the magnitude of such efficiencies. A good part of the difficulty of assess-
ing the magnitude of contract-driven efficiencies is a problem common to
efficiencies afforded by many conventions. Those efficiencies, including
the training cost efficiencies associated with the first screen provision,
routinely appear to convey trivial savings in individual cases, even though
in the aggregate these efficiencies generate enormous consumer value.
If every copyright licensing provision that confers a benefit on the
copyright owner is suspect, the first screen provision certainly can be
questioned. If suspicion attaches to every copyright licensing provision
that confers a benefit on a copyright owner with a large product market
share (in a market drawn around that copyrighted work), the first screen
provision can be listed among the suspects. But licensing should confer
benefit on copyright owners: that is part of the design of copyright law and
of contracts. And success in the marketplace does not dispossess a firm of
the benefits that copyright law and contract generally convey. Though
Microsoft should be able to establish the efficiency-enhancing properties
eds., supra note 80, at 271-86; Fred S. McChesney, Be True to Your School: Chicago’s
Contradictory Views of Antitrust and Regulation, in McChesney & Shugart eds., supra
note 80, at 323-40; Fred S. McChesney & William F. Shugart, The Unjoined Debate, in
McChesney & Shugart eds., supra note 80, at 341-44; Oliver Williamson, Antitrust
Lenses and the Uses of Transaction Cost Economics Reasoning, in Jorde & Teece eds.,
supra at 137-58; Ramsey Hanna, Note, Misusing Antitrust: The Search for Functional
Copyright Misuse Standards, 46 STAN . L. REV . 401 (1994).
110 See, e.g., BORK, supra note 82, at 387-91.
of the first screen provision, litigation over that provision takes the law
down a road only America’s lawyers should want to travel.

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COPYRIGHT, LICENSING,

As patent, copyright, and other intellectual property rights have assumed

* Dean and Melville Madison Bigelow Professor of Law, Boston University

its Windows operating system for Intel-compatible computers. All of those

4 DOJ Complaint, supra note 1; AGs Complaint, supra note 1;

Even if that issue is resolved favorably to plaintiffs (who dispute

1. Computer Software Copyright

10 AD A M SMITH , AN INQUIRY INTO THE NATURE A N D CAUSES OF T H E

is typical of periods of great change. 12 It is, as discussed below, more

Copyright: Constitutional and Statutory Roots

12 See Marvin H. Kosters, An Overview of Changing Wage Patterns in the

Copyright: Regime Assumptions

18 Pub. L. 94-553, 90 Stat. 2541.

22 17 U.S.C. § 102 (b).

Copyright in Computer Software

The protection of computer software through copyright also was a subject

39 See Broadcast Music, Inc. v. Columbia Broadcasting System, 441 U.S. 1

What’s Wrong with this Picture?

44 See O’Rourke, supra note 35.

49 See Amos Tversky & Daniel Kahneman, Judgment Under Uncertainty:

What’s Different About Copyright Licensing?

58 George J. Stigler, A Theory of Oligopoly, 72 J. POL . ECON . 44 (1964)

6 6 See, e.g., George A. Akerlof, The Market for “Lemons”: Quality

parties as can be found.69

Antitrust Law and Intellectual Property Right “Misuse”

69 The one arena in which there is appreciable question about this

the contours of intellectual property rights “misuse” doctrines—such as

Vertical Relations in Antitrust and Copyright

73 See Kaplow, Intersection, supra note 72; Lemley, Irrationality, supra

and exploitation of innovative talents, one might expect that antitrust-type

vertical arrangements, courts generally have been more willing to weigh

86 Compare Continental TV, Inc. v. GTE Sylvania, Inc., 433 U.S. 36

4. The First Screen

What Is the First Screen Provision?

91 See discussion supra, text at notes 41-69.

Why Have a First Screen Provision?

95 This conforms to George Guilder’s description of how progress is made

96 George Priest, A Theory of the Consumer Product Warranty, 90 Y ALE

paying) and some readily ascertained performance measure as a trigger for

97 See, e.g., Kenneth W. Clarkson, et al., Liquidated Damages Versus

Exclusion, Externalities, and Party Interests

allegation seems implausible, given the success of particular brands, such as

105 Affidavit of David S. Sibley.

they see frequently is configured by someone at the office to have the

107 Fisher Declaration, supra note 5; Sibley Declaration, supra note 5.

platform. That function is the facilitation of computer use by creating

The challenge to the first screen provision in Microsoft’s contracts with

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