Supreme Court Eliminates “Patent Equals Market Power”
Tying is the sale of one product which the buyer wants (the “tying” product”) on the condition that the buyer purchase a second product (the “tied” product) which the buyer either does not want or would prefer to purchase elsewhere. When certain prerequisites are satisfied, tying is per se illegal under the antitrust laws. One of those prerequisites is that the seller have market power over the tying product. Several Supreme Court decisions, including Loew’s v. United States, 371 U.S. 38 (1962), held this market power was presumed when the tying product was patented or copyrighted. In Illinois Tool Works, Inc. v. Independent Ink, Inc., 506 U.S. ___ (March 1, 2006), however, the Supreme Court in an 8-0 decision held that this market power presumption was invalid, and that plaintiffs in tying cases involving patented or copyrighted products must prove market power as is necessary in cases involving the tying of nonpatented products.
The decision was not unexpected, as many commentators, lower courts, and federal enforcement authorities had criticized Loew’s and recognized that, since there are close substitutes for many patented products, patents may convey little, if any, market power. See, e.g., 1995 DOJ/FTC Guidelines for the Licensing of Intellectual Property, § 2.2 (“Agencies will not presume that a patent, copyright or trade secret necessarily confers market power … there will often be sufficient actual or potential close substitutes … to prevent the exercise of market power”). As it did in the recent Volvo decision involving price discrimination, however, the Court went beyond its holding and reiterated its view that some tying arrangements may serve legitimate purposes and be pro-competitive. The Court also rebuffed attempts to retain the market power presumption but make it rebuttable, or limit it to situations where the tying arrangement involves the purchase of unpatented goods over a period of time rather than the simultaneous purchase of two products. While Loew’s was not expressly overruled, the Court cited it with disapproval twice and it may well have passed into the antitrust dustbin.
The tying arrangement at issue in Independent Ink was straightforward. The tying product was a patented ink jet printhead for printers and the tied product was a specially designed but unpatented ink used in printers incorporating the printhead. The defendant required the printer manufacturers purchasing its printhead to also buy its ink. Plaintiff had developed an ink with the same chemical composition as that sold by defendant, but found itself foreclosed by defendant’s tie from selling such ink to the manufacturers.
In the trial court plaintiff relied solely on the presumption arising from the patent to show market power, and eschewed any attempt to show the absence of substitutes or market power in the traditional sense. The District Court granted defendant’s summary judgment motion, emphasizing that, despite Loew’s and other Supreme Court cases, more recent cases had rejected the presumption. 210 F. Supp. 2d 1155 (C.D. Cal. 2002). The Federal Circuit, however, reversed. 396 F. 3d 1342 (Fed. Cir. 2005). In an opinion that almost seemed to invite certorari, it held the Supreme Court authority was controlling despite contrary decisions in the lower courts and withering criticism from many commentators.
Justice Stevens, writing for a unanimous court, stated that the market power presumption had its basis in the patent misuse doctrine and migrated to antitrust due to the Court’s “strong disapproval” of tying arrangements as evidenced by such decisions as Loew’s and International Salt Co. v. United States, 332 U.S. 392 (1947). He then stated, however, that this disapproval had “substantially diminished” citing the Court’s more recent decisions in United States Steel Corp. v. Fortner Enterprises, 429 U.S. 610 (1977) and Jefferson Parish Hospital Dist. No. 2 v. Hyde, 466 U.S. 2 (1984). Jefferson Parish rejected the application of the per se rule to all tying arrangements emphasizing that only where the seller has the ability to “force the purchaser to do something that he would not do in a competitive market” should the per se rule apply. Justice O’Connor’s concurring opinion in Jefferson Parish questioned the propriety of treating any tying arrangement as per se illegal. She also questioned the validity of the market power presumption arising from patents observing it was actually a product of patent misuse cases, not antitrust jurisprudence.
Patent misuse is a defense to a royalty or infringement claim where the patentee has engaged in certain conduct, such as tying, that constitutes misuse. Four years after Jefferson Parish was decided, Congress amended the Patent Act to narrow the definition of tying insofar as it constituted patent misuse. It limited misuse tying to situations where “the patent owner has market power in the relevant market for the patent or patented product on which the license or sale is conditioned.” 35 U.S.C. § 271(d)(5). In the Court’s view, this amendment eliminated the market power presumption in the misuse context, and so the same result should follow in the antitrust context. Thus, it concluded that patent or copyright tying arrangements should be evaluated under the standards of Fortner and Jefferson Parish rather than Loew’s.
While the full impact of Independent Ink remains to be seen, it will change the playing field for ties involving intellectual property, and for the licensing of copyrighted products such as movies and books. The traditional market power threshold for tying outside the intellectual property area, derived from Jefferson Parish, is above 30 per cent of the market. Jefferson Parish, 466 U. S. at 26-29 (market share of 30 per cent did not demonstrate the requisite market power). This standard will now be applied to cases involving patented or copyrighted products. In the intellectual property arena, where the technology that defines markets moves at warp speed, 30 per cent is a high threshold. Independent Ink also further evidences the Court’s retreat from its earlier hostility to tying arrangements, and underscores its recognition that tying may be pro-competitive in some cases. While the Court did not abandon the per se rule for tying, it took another step in that direction. The combination of the high market share threshold and the continuing trend towards recognizing the legitimacy of tying arrangements may result in the increased use of tying in marketing and distribution of products by many businesses.
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