Patents, Tying and Market Power: The Implications of ITW v. Independent Ink for Antitrust Claims Against IP Owners

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1 Patents, Tying and Market Power: The Implications of ITW v. Independent Ink for Antitrust Claims Against IP Owners Andrew J. Pincus Christopher J. Kelly March 14, 2006

2 Summary of Seminar The case, the issue and the decision Andy Pincus Practical antitrust counseling issues Chris Kelly The decision s broader antitrust law implications Herbert Hovenkamp

3 Factual Background ITW manufactured printing systems made up of piezoelectric impulse jet printheads and inks for use in packaging assembly lines Patents covered the printhead, bottle containing the ink, and the connection between them ITW s license required OEM customers (the assembly line manufacturers) to purchase ink from ITW Plaintiff claimed this requirement constituted a tying arrangement in violation of Section 1

4 Legal Background A tying arrangement is an agreement by a party to sell one product [the tying product] but only on the condition that the buyer also purchases a different (or tied) product, or at least agrees that he will not purchase that product from any other supplier. Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 462 (1992) A tying claim requires, among other things, proof that the defendant exercised appreciable economic power in the tying product market. Ibid. The requisite economic power is presumed when the tying product is patented or copyrighted United States v. Loew s, Inc., 371 U.S. 38, (1962)

5 Lower Court Decisions District Court: Rejected market power presumption: the Supreme Court s language... concerning presumptions of market power arose at a time when genuine proof of power in the market for the tying product was not required ; but more recently, the Court began demanding real proof of such market power. Federal Circuit: Although International Salt and Loew s have been subject to heavy criticism and [t]he time may have come to abandon the doctrine, overruling the cases was a prerogative of the Supreme Court.

6 The Supreme Court s Analysis: Changing Views of Tying Over the years... this Court s strong disapproval of tying arrangements has substantially diminished. Slip op. 5 [E]arly opinions consistently assumed that [t]ying arrangements serve hardly any purpose beyond the suppression of competition. Ibid. That view was rejected in Fortner II, [and] has not been endorsed in any opinion since. Slip op. 6. [T]ying may have procompetitive justifications... NCAA v. Board of Regents, 468 U.S. 85, 104 n.26 (1984) Buyers often find package sales attractive; a seller s decision to offer such packages can merely be an attempt to compete effectively.. Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2, (1984)

7 The Supreme Court s Analysis: Description of the Presumption The well-settled proposition that if the Government has granted the seller a patent or similar monopoly over a product, it is fair to presume that the inability to buy the product elsewhere gives the seller market power. Slip op. 1 (quoting Jefferson Parish, 466 U.S. at 16) [N]othing in our opinion [in Jefferson Parish] suggested a rebuttable presumption of market power applicable to tying arrangements involving a patent on the tying good....[i]t described the rule that a contract to sell a patented product on condition that the purchaser buy unpatented goods exclusively from the patentee is a per se violation of 1 of the Sherman Act Slip op. 8.

8 The Supreme Court s Analysis: Relevance of Patent Law Patent misuse decisions assumed that ties of patented and nonpatented goods had the effect of restraining competition The presumption that a patent confers market power migrated from patent law to antitrust law in International Salt. Slip op patent law amendment requires proof of market power in the relevant market for patent misuse defense. 35 U.S.C. 271(d)(5) amendment invites a reappraisal of the per se rule announced in International Salt. Slip Op. 12 It would be absurd to assume that Congress intended to provide that the use of a patent that merited punishment as a felony would not constitute misuse. Ibid.

9 The Supreme Court s Analysis: Other Considerations [I]nformed by extensive scholarly comment and a change in position by the administrative agencies charged with enforcement of the antitrust laws. Slip op. 3 virtual consensus among economists -- Slip op. 16 DoJ/FTC Antitrust Guidelines issued in 1995 While [the antitrust enforcement agencies ] choice is not binding on the Court, it would be unusual for the Judiciary to replace the normal rule of lenity that is applied in criminal cases with a rule of severity for a special category of antitrust cases. Ibid.

10 The Court s Holding: First Articulation [W]e conclude that tying arrangements involving patented products should be evaluated under the standards applied in cases like Fortner II and Jefferson Parish rather than under the per se rule applied in Morton Salt and Loew s.... [Liability] must be supported by proof of power in the relevant market rather than by a mere presumption thereof. Slip op. 13

11 The Court s Holding: Second Articulation Congress, the antitrust enforcement agencies, and most economists have all reached the conclusion that a patent does not necessarily confer market power upon the patentee. Today, we reach the same conclusion, and therefore hold that, in all cases involving a tying arrangement, the plaintiff must prove that the defendant has market power in the tying product. Slip op. 16

12 What Was the Court Examining? [W]hether the presumption of market power in a patented product should survive as a matter of antitrust law Slip op. 1 [T]he presumption of per se illegality of a tying arrangement involving a patented product Slip op. 11 a reappraisal of the per se rule announced in International Salt Slip op. 12 Is the Court equating the market power presumption with per se illegality? What about justifications?

13 Issues for Antitrust Counsel (1) Patent tying now clearly on same ground as non-ip tying Plaintiff must prove market power Forces plaintiffs to pony up Price discrimination through tying recognized as consistent with competition

14 Issues for Antitrust Counsel (2) Decision limited to patent tying copyright market power presumption arguably intact But logic should extend to copyrights Exclusionary power of patents is broader, though briefer Second articulation of holding all cases involving a tying arrangement Mixed signals on per se rule when market power exists Tying arrangements still unlawful if the product of a true monopoly or a marketwide conspiracy (slip op. 13) Could raise issues for technologies incorporated in standards

15 The Per Se Rule Revived? Is the Court breathing life back into the per se rule? Are justifications unavailable when market power exists? Cf. NCAA, 468 U.S. 85, 104 (1984) ( [W]hile the Court has spoken of a per se rule against tying arrangements, it has also recognized that tying may have procompetitive justifications that make it inappropriate to condemn without considerable market analysis ) (citing Jefferson Parish, 466 U.S. at 11-12).