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French Courts Approach Regarding Software Bundling : Revolution or Setback?

posted Apr 24, 2012, 1:24 PM by Julien Pillot   [ updated Apr 24, 2012, 1:24 PM ]

In just two months, two French courts fined PC manufacturers (respectively Lenovo in February and Samsung in April) for unfair tying arrangements. In both cases, the judge held that bundling hardware (a laptop, for instance) with software programs, particularly operating systems like Microsoft’s Windows, without giving final users a chance to refuse license agreements and/or to obtain a refund for the unwanted pre-installed software, is inconsistent with the European legal ground on fair commercial and competition practices. Indeed, as direct applications of the European Directive 2005/29/CE (on unfair business-to-consumer commercial practices in the internal market), these rulings are of particular interest not only as they set two precedents in terms of private damage claims, but especially because they might be well received on the European ground. Such judgments are nonetheless far from being neutral both on legal and economic perspectives.

In the last-to-date Samsung decision, the judge Frederick explicitly held that “the resale of a product supplied by the trader, but not solicited by the consumer is an aggressive commercial practice which has to be considered unfair in all circumstances”. On the one hand, as a strict application of the law - which is somewhat reminiscent of the classic Microsoft case -, this decision aims at correcting current distortion of competition in the software market resulting from abusive hardware-software bundling. Indeed, how many final users will look for alternative offers when they could enjoy a set of pre-installed software (bestsellers, most of the time) for “free” (actually, perceived as free because of strong price opacity as well as strict complementarity between hardware and software)? In a nutshell, fighting against technology lock-in and market foreclosing, this decision is 1) developers-friendly in giving them a greater chance to broadcast their products (freeware included) and then to compete more vigorously, 2) consumer-friendly in enhancing their freedom of choice.

On the other hand, such a ruling might be seen as a formalist approach while the European Commission rather argues for the adoption of economic criteria. Indeed, not to mention classic works from the Chicago School arguing that vertical bundling eliminates the double-marginalization and other price discrimination problems, modern antitrust economics suggest that, in certain circumstances, tying contracts are likely to enhance both economic performances of producers (for instance, in terms of risk-sharing and incentives to invest) and consumer welfare (in terms of product quality, see the analysis of the famous IBM case by Scherer & Ross). Other virtues of tying contracts includes, in a jumble, decrease of transaction costs, overcome of market failures, optimization of computer architecture (through hardware-software complementarity) and the strengthening of user experience (through learning effects).

Taking into account these potential economic efficiencies, most scholars argue that courts should analyze tying arrangements under the rule of reason, that is to say balancing pro and anticompetitive effects (in a consumer welfare perspective) of undertakings’ strategies, and then assessing the lawfulness of commercial conduct and competition move on a case-by-case basis. As mentioned above, from an economic standpoint, such a “revival” of the per se rule against tying arrangements is not only nonsense, but can also be seen as unsound backpedaling while the European Antitrust world desperately calls for further modernization.