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Cover Story: How Do You Think He Got So Rich?
Or, How Philadelphia Was the Gateway to Microsoft's Voyage on the Superhighway


by Manny D. Pokotilow

Spring 2000, Vol. 63, No. 1

This is my story of how an innocuous change in the Copyright Act and the interpretation of it in the Philadelphia case of Apple Computer v. Franklin Computer1 had a significant effect on the protection of computer software and as a result helped Bill Gates and Microsoft Corporation become the richest man and largest capitalized corporation in the world. . . The story begins in 1976 when the Copyright Act was passed and ends with the events that left standing the Third Circuit Court of Appeals decision making all types of computer programs, including operating systems software, copyrightable subject matter. An operating system is the computer program in a general purpose or personal computer that allows the user to progress in an orderly fashion through the physical processes of keying information into a computer. The operating system instructs the computer on how to use this information and receives the solutions to the problems posed. It is the operating system that brings up the first images on the screen and permits the key strokes to be seen on the monitor.

One fall morning in October 1981, I was playing tennis with my regular Saturday morning adversary, Dr. Bruce A. Lief (Sandy). The probability is that I was close to losing the second set when a good friend and former client, Barry Borden, caught me resting between games and asked me, "Can an operating system program be copied?"

My answer was simple. "If the operating system was patented, the answer is no."

Barry then asked, "What if the operating system is a computer program and it has been copyrighted?"

I stated that it would be impossible if the operating system was totally utilitarian.

At this point, Barry asked me if I would prepare a written opinion that explained why an operating system that was made of computer software could not be copyrighted. He explained to me that what he wanted to do was to make an improved personal computer that would be able to use all of the applications programs that had been created for the Apple Personal Computer (Apple PC). However, in order to make a computer that would be compatible with substantially all of the programs that had been written for the Apple computer, the computer would have to have an operating system copied from the Apple computer system. It was Borden's understanding that anyone who had attempted to make a computer and use the Apple operating system had been told flatly by Apple Computer that it would not license its operating system and would sue any company that attempted to use it.

At the time that I gave the written opinion that operating system computer programs could not be copyrighted, there had been a decision in Data Cash Systems, Inc. v. JS&A Group, Inc.2 interpreting the 1976 copyright statute, but none that interpreted the amendment to it in 1980, which was a result of the final report of the National Commission on New Technological Uses of Copyrighted Works (CONTU).3 Accordingly, because of the fear that Apple Computer would use the copyrights that it had registered on its operating system software, my advice to Barry Borden was if he started a company to make a competing computer and used the Apple operating system, he should make sure he raised enough money to defend a lawsuit against Apple. It was my belief at the time that unless Apple Computer had patented its operating system, it would not be able to stop a competing manufacturer of computers from copying its operating system, if the suit were defended properly.

The reason for my strong belief that operating system software was not copyrightable was based on constitutional, statutory and factual considerations. The factual consideration was the functional equivalence of an operating system made of computer hardware with that made from a programmed microprocessor (the central processing unit of a computer). If such hardware were patentable subject matter, so was the software version. If it were patentable, it would not be copyrightable.

Patents v. Copyrights
The source of patent protection and copyright protection is found in Article 1, Section 8 of the Constitution, which gives Congress the power to promote the progress of science and the useful arts by securing to authors and inventors, for a limited time, the exclusive right to their respective writings and discoveries. From the start, Congress separated this protection given to authors and inventors and established different criteria for protection and provided different periods of protection.

The division between the protections that were accorded to patents and to copyrights found its way into the 1976 Copyright Act in Section 102. Section 102(a) states that copyrights exist in original works of authorship. Section 102(b) specifically states that in no case does copyright protection for an original work of authorship extend to any idea, procedure, process, system, method of operation, concept, principle or discovery, regardless of the form in which it is described, explained, illustrated, or embodied in such work. Thus, copyright protection should not be given to protect technology, but rather only to protect the copyrightable works produced by technology.

This prohibition was based upon the definitive opinion of the Supreme Court in Baker v. Seldon4 in which an accounting form was held to be not copyrightable, but the expression of the explanation of the form was. The prohibition against protecting ideas and discoveries in Section 102(b) of the 1976 Copyright Act was consistent with the implementation of the patent laws in which Congress granted patent holders a seventeen-year monopoly5 in return for the complete disclosure of an invention, including the method for implementation of the invention. Every patent application includes, in addition to a complete explanation of the invention, claims that define the monopoly to which the inventor is entitled. This monopoly is specifically limited to the inventor's contribution to the progress of the useful arts. The application for a patent is also carefully screened by an examiner skilled in the particular field of technology related to the invention. After the scope of the patent is carefully defined in the claims and limited by the correspondence between the inventor and the examiner, only the improvements in technology entitled to a patent are protected under the patent statute.

Upon the granting of a patent, a printed publication of the entire patent application, including the specification and claims, is made available to the public and is classified in accordance with its specific art in the United States Patent and Trademark Office. Everything disclosed in the patent application that is not defined in the claims as the exclusive property of the inventor can be used without permission of the inventor. Anyone can build on the description by the inventor to make further developments and, in this way, the law is intended to promote the progress of the useful arts.

In contrast to the patent system, there is only a registration system for copyrights. The copyright application is checked only for formalities and the United States Copyright Office then registers the work of the author. Such registration gives to the author, minimally, a ninety-five-year monopoly.6 Unlike a patent, only the copyright holder-author is allowed to adapt or modify the copyrighted work. No portion of the copyrighted work may be copied, so the public does not have genuine access to a copyrighted computer program as a "teaching tool."

Nonetheless, in 1980, CONTU issued its final report recommending that the new copyright law should be amended to make it explicit that computer programs, to the extent that they embody an author's original creation, are proper subject matter of copyright. In addition, CONTU recommended that computer users of copyrighted programs who are rightful possessors of copies of the computer programs can adapt these copies only for their personal use.

Accordingly, Section 101 of the Copyright Act was amended to add the definition that a "computer program is a set of statements or instructions to be used directly or indirectly in a computer in order to bring about a certain result."

In light of the fact that the only amendment that was made to the 1976 Copyright Act was the addition of a definition of computer programs, it was hard to see how any court would be able to find that a set of instructions that operates a computer was not the method of operation of the computer and under Section 102(b) of the Copyright Act strictly prevented from being copyrighted.

Apple v. Franklin Computer
Barry Borden created a company called Franklin Computer. The company began to manufacture personal computers that were improvements over the Apple PC, but that utilized the Apple PC operating system software for the purpose of enabling the Franklin Computer to be Apple-compatible, i.e., compatible with the base of 10,000-plus programs written by others for the Apple PC, such as word processing programs, copying programs and spreadsheets.

My involvement began again at the end of April 1982, when the attorney for Apple Computer called and asked me to be local counsel for Apple. I advised him that I would have a conflict if Apple Computer sued Franklin Computer because I already represented Franklin Computer and recommended that he call someone else. Two days later, Apple Computer sued Franklin Computer for copyright infringement.

Franklin Computer asked me to defend the intellectual property issues and Jerome J. Shestack7 to represent Franklin Computer on the misuse and the antitrust issues raised by Apple's conduct. My partner, Barry A. Stein, worked with me on the intellectual property issues, and Jerry Shestack's team included Michael Mangan, Sherry Swirsky and a law student, Ronald Karam, all of whom have become partners at Schnader, Harrison, Segal & Lewis. The discovery was highlighted by the deposition of Steve Wozniak, the co-founder of Apple Computer with Steve Jobs. Wozniak was considered to be a programming genius who had written much of the operating system of the Apple computer. He showed up at the deposition wearing a pair of sunglasses formed by two apple-shaped lenses. He brought with him a dozen donuts that he ate throughout the deposition, sharing them with no one.

After a month and a half of discovery and preparation for a preliminary injunction hearing that included working late into every evening and often into the morning, the team was ready. The regret that I have, which still haunts me, is missing my daughter Chari's graduation from Lower Merion High School the night before the hearing started. The preliminary injunction hearing commenced with Apple presenting many witnesses who explained the development of the Apple computer operating system and the expense to which Apple had gone to create the system. Apple called to the witness stand designers of Franklin's operating system to support its contention that Franklin had merely copied the operating system programs of Apple, a fact that had been readily admitted throughout by Franklin.

However, the cross-examination of Apple witnesses showed clearly that in the useful form of the program, i.e., the object code in the read-only memory, any change of even a single bit in the computer program changed the operation of the system. In addition, even the slightest change in the operation of the system would prevent compatibility of the computer with a substantial portion of the computer programs that had been designed to be compatible with the Apple computer.

Franklin's expert, the late Morton C. Jacobs, a Philadelphia patent attorney who had been a pioneer in the field of obtaining patents on computer programs, testified that without an operating system program, a computer can do nothing. When the operating system is installed, it becomes an integral part of the computer and the introduction of the program in a general purpose computer makes it a special purpose computer. He also explained the equivalence of computer hardware and programmed microprocessors, both of which were patentable. In addition, he cited the Unix Operating System patent that had been obtained by Bell Laboratories to demonstrate the utility and the patentability of operating systems.

After considering the testimony and briefs submitted by counsel, Judge Clarence Newcomer issued a very careful and considered opinion denying the preliminary injunction sought by Apple Computer on the basis that it was doubtful that operating system programs were copyrightable subject matter.

All Programs Copyrightable
After being denied its request for reconsideration by the District Court for the Eastern District of Pennsylvania, Apple appealed to the United States Court of Appeals for the Third Circuit. In addition to the briefs from Apple Computer, three amicus curiae briefs, including a brief from Microsoft Corporation, were filed that completely supported Apple's contention that operating systems software is and should be copyrightable, and a fourth amicus brief was submitted that partially supported Franklin's position. In the opinion of the Court of Appeals for the Third Circuit, the court noted that the copyrightability of the programs had considerable significance to the computer industry. The opinion was also clearly influenced by the court's finding that Apple had estimated that the works in suit took forty-six man-months to produce at a cost of over $740,000 and that Franklin had merely copied each of the works in suit from the Apple PC at little or no cost. The court found unpersuasive Franklin's contention that operating system programs are, per se, not copyrightable. Franklin had also contended that to achieve total compatibility with independently developed application programs written for the Apple PC required copying precisely the operating code. This, therefore, limited the number of ways to arrange operating systems to enable a computer to run the vast body of Apple-compatible software.

The court rejected Franklin's contention on the basis that it was a commercial and competitive objective that does not enter into the somewhat metaphysical issue of whether particular ideas and expressions have merged.8 Accordingly, believing that the 1980 amendments reflected Congress' intention or orientation to encourage creativity in computer programming through the copyright laws, the court reversed the District Court's decision and stated that all computer programs, including operating systems, are copyrightable.

The Court of Appeals for the Third Circuit thus remanded the case to the District Court to make further findings with respect to other defenses of Franklin that included misuse of the Apple copyrights barring their enforcement and that the three most important operating system programs of Apple were published without the requisite copyright notice, which at that time invalidated copyrights.

However, the decision rendered by the Court of Appeals for the Third Circuit devastated Franklin Computer. Franklin found that the decision had frightened the substantial majority of its distributors and this caused a huge short fall of cash just as Franklin had begun to expand. Accordingly, the least expensive avenue for Franklin Computer was filing a petition for certiorari with the Supreme Court of the United States so that it would not be necessary to retry the case before the United States District Court. On the eve of determining whether certiorari would be granted, Franklin Computer settled with Apple Computer on terms that would barely keep Franklin Computer alive. The settlement left standing the decision of the United States Court of Appeals for the Third Circuit. The foundation for Bill Gates' multi-billion dollar computer and software empire was being laid. The Third Circuit's decision was followed by all of the Courts of Appeal throughout the United States that had considered the same issue — which finally brings us to how Bill Gates got so rich. Bill Gates was the founder of Microsoft Corporation, the stock of which now has fair market value of approximately $500 billion and fifteen percent of which is still owned by Bill Gates.

Microsoft's Monopoly
The growth of Microsoft is chronicled in findings of fact made on November 5, 1999 by the United States District Court Judge Thomas Jackson in the consolidated civil antitrust actions brought by the United States government and the state of New York against Microsoft Corporation in the United States District Court for the District of Columbia.

Among the findings was the conclusion that Microsoft enjoys monopoly power in the market for Intel-compatible operating systems. It also found that Microsoft's dominant market share is protected by a high barrier to entry, which includes the 70,000 application programs written solely for Windows software.

From its inception, Microsoft focused primarily on developing software and licensing it to various purchasers. This is in contrast to the plan that Apple Computer had which was to not license the operating system and thereby be the exclusive seller of computers made for the third-party software that had been created to work with the Apple operating system.

In 1981, Microsoft released the first version of its Microsoft disk-operating system that was known as MS-DOS. The system required a keyboard entry of characters used to type specific instructions in order to perform tasks such as launching applications and copying files. When International Business Machine Corporation (IBM) selected MS-DOS for pre-installation on its first generation of PCs, Microsoft's product became the dominant operating system sold for Intel-compatible PCs.

In 1985, Microsoft began shipping a software package known as Windows. Unlike the MS-DOS system, the Windows product included a graphical user interface, enabling users to perform tasks by selecting icons and words on the screen through the use of a mouse. At first, the Windows system was just a user interface to be used with MS-DOS. However, as Windows was improved by Microsoft, it became more of an operating system.

Finally, in 1995 Microsoft introduced to the market the software package called Windows 95, which was the first operating system for Intel-Compatible PCs that included the same functional characteristics as the MAC operating system manufactured by Apple Computer. However, unlike the Apple system which was not licensed to third parties, Microsoft licensed the Windows operating system to all computer manufacturers that asked for such a license.

Because of the ability to buy Windows 95 as part of the computers produced by a large number of manufacturers, much more software was being written for the Windows systems than had ever been produced for the MAC operating system of Apple Computer. In addition, Microsoft licensed copies of its software programs directly to consumers, although the largest part of its MS-DOS and Windows sales consists of licensing the product to manufacturers of PCs.

By virtue of the fact that independent software developers have already created more than 70,000 application programs that work only with the Microsoft operating system known as Windows, these applications have become a barrier to entry that makes it substantially impossible for an independent software developer of operating systems to make a competing operating system. This is because there is little incentive for an independent software application developer to write for another company's operating system.

The applications barrier prevents aspiring software developers from entering into the operating system market and cajoling a significant number of customers away from a dominant incumbent such as Microsoft. Even if Microsoft were to price its products substantially above competitive levels for a significant period of time, a user is still more likely to buy a computer based on its ability to be used with all of the application programs in the marketplace. It was for this reason that Microsoft was held to have a monopoly power in the market for Intel-compatible operating systems in the United States.

The legacy of the Third Circuit's decision in Apple Computer vs. Franklin Computer Corp. is that it has enabled Microsoft essentially to block computer software developers from making compatible software. Thus, for the applications programs that presently exist for Windows 95 and 98, without substantially copying the operating systems and interfaces9 that are in the Windows 95 and 98 platforms, a software developer cannot provide a fully compatible operating system for all of the applications programs that had been written.

As a result of permitting copyright protection for computer software, even without making any innovations, Microsoft can maintain its monopoly in the operating systems market. As long as Microsoft continually adds interfaces to Windows through updates and modified versions, whether inferior or better, it prevents software developers from making competitive operating systems that could work with the thousands of application programs compatible with the Windows operating system. By the time a rival finishes cloning10 the interfaces currently in existence, Microsoft typically has added a multitude of new exposed interfaces that are required for compatibility with new programs.

Because of this barrier to entry, rivals can never catch up to ensure consumers that their operating systems would run all of the applications written for Windows.11 Moreover, unlike a patent that is used to encourage the growth of technology by making the operation of the program known to the public, Microsoft is not required to disclose to the copyright office how to make the Windows software when it obtains copyright registrations. Thus, not only does the Copyright Act prevent adaptation of the Windows software by anyone other than its owner, but absent expensive reverse engineering, it also prevents educating the public or competitors as to the operation of the Windows software.

Accordingly, in the absence of the court issuing an order invalidating all copyrights owned in the Windows 95 and 98 software, or having them dedicated to the public, both Bill Gates and Microsoft should enjoy a long and prosperous future because of the copyrightability of operating systems software.

Thus did an innocuous change by Congress help to make it possible for Microsoft and Bill Gates to be remunerated for substantially every computer sold in the United States.

Notes

  1. 545 F.Supp. 812 (E.D. Pa 1982), reversed at 714 F.2d 1240 (3rd Cir. 1983).
  2. 480 F.Supp. 1063 (N.D. Ill 1979). This decision was very explicit that object code (the electronic or physical form of computer software) was not copyrightable.
  3. CONTU was established by Congress in 1974 to make recommendations concerning the copyrightability of computer software.
  4. 101 U.S. 99, 25 L. Ed. 841 (1879).
  5. The end of the monopoly is now twenty years from the date of filing of the patent application that matures into a patent.
  6. In the 1976 Copyright Act, the monopoly was originally seventy-five years. It was recently enlarged by twenty years to prevent Mickey Mouse from falling into the public domain.
  7. Shestack later became the president of the American Bar Association and is now a partner with Wolf, Block, Schorr and Solis-Cohen, LLP.
  8. When there is a merger of the expression so that the idea can only be expressed in a limited number of ways, there is deemed to be a merger that prevents copyrightability of the expression. In the context of computer programs, if the instructions of a program provide one of only a limited number of ways of performing the desired function, there would be a merger that makes the program not copyrightable.
  9. Interfaces are computer programs within the operating systems used to connect the operating system to an applications program.
  10. "Cloning" is the term used for writing a computer program that duplicates the functions of another computer program, but it is written without copying the first program.
  11. In fact, in the early 1990s, IBM spent more than $100 million and failed in attempting to make a competing operating system for PCs.