Tying, Patents and Market Power: Independent Ink

In Illinois Tool Works Inc v Independent Ink Inc(1) the Supreme Court will consider whether a patent should be presumed to create market power. The case involves the criteria for finding an antitrust violation when a patent holder ties a second product to a patented product. Tying is unlawful only if the seller has sufficient market power in the market for the desired product (the patented product) to coerce the sale of the unpatented product (the tied product).

In Independent Ink, the US Court of Appeals for the Federal Circuit held that a rebuttable presumption of market power arises from the possession of a patent in a tying case.(2) The rebuttable presumption of market power appears to mean that an antitrust plaintiff does not need to offer evidence of market power unless the defendant patent holder first offers sufficient evidence to rebut the presumption that market power exists.

The Federal Circuit relied primarily on two Supreme Court opinions - International Salt Co v United States(3) and United States v Loew's Inc(4) - in holding that Supreme Court precedents require a presumption of market power. The Federal Circuit explained the Supreme Court's directive as follows:

"[T]he court made clear that, where the tying product is patented or copyrighted, market power may be presumed rather than proven. Loew's involved the tying of less popular films to popular copyrighted films by movie distributors in their licences to television stations."

The more recent opinion in Jefferson Parish Hospital District No 2 v Hyde(5) also suggested a presumption that a patent confers market power. Based on Jefferson Parish, the Federal Circuit further found that this presumption was rebuttable:

"'[I[f 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.' 466 US at 16... It would stretch the language of 'fair to presume' beyond the breaking point to say that such a presumption is irrebuttable."

Much case law and academic literature is contrary to Independent Ink, instead supporting the view that a presumption of market power from a patent makes no economic sense.

Under the Federal Circuit's standard, if a plaintiff merely alleged a tying arrangement involving a patent, market power would be presumed and no initial proof of market power would be required; but such evidence would be necessary if the patent holder offered evidence to rebut the presumption. The relative ease of pleading patent tying would likely lead to an increase in antitrust tying claims in patent litigation that would probably not be amenable to a motion to dismiss.

The petition for Supreme Court review raised two issues: (i) that the circuits are divided on the issue of whether market power can be presumed from a patent; and (ii) that the Federal Circuit erred because a presumption of market power is contrary to a strong and growing recognition by commentators, other courts and even sitting members of the Supreme Court that patents do not necessarily create market power.

A speech by then-Assistant Attorney General for Antitrust R Hewitt Pate recognized that "there is still some debate in [the] courts" over the question presented in Independent Ink and indicated that a grant of certiorari would "provide a good opportunity to settle the question once and for all".(6)

Several circuits have recognized that a 'patent monopoly' is not necessarily a commercial monopoly of any relevant market. For example, the Sixth Circuit in AI Root Co v Computer Dynamics Inc(7) analyzed patent tying as follows:

"We find the pronouncement in Loew's which states '[t]he requisite economic power is presumed when the tying product is patented or copyrighted' to be overbroad and inapposite to the instant case. Accordingly, we reject any absolute presumption of market power for copyright or patented product."

The Seventh Circuit has also mentioned in dicta that "not every patent confers market power".(8) Similarly, in the Fifth Circuit, while acknowledging that a patent is "usually enough to create a presumption of market power", district courts have held that a patent did not compel a finding of market power when the plaintiff failed to offer evidence that the patents actually did affect the market.(9)

Moreover, the US Department of Justice and Federal Trade Commission Antitrust Guidelines for the Licensing of Intellectual Property, which set forth the government's approach to antitrust enforcement related to intellectual property, state that the Department of Justice and the Federal Trade Commission will not presume market power arising from patents, copyrights or trade secrets, and note the lack of clarity in the law surrounding the presumption of market power.

Dichotomies exist even within the Federal Circuit between the presumption of market power in an antitrust tying claim and the lack of such a presumption in a monopolization claim and a patent-misuse defence. The patent statute(10) requires a showing of market power for a patent-misuse defence based on tying - no presumption of market power exists for misuse. Under current Federal Circuit law, it would be easier to bring an antitrust claim for tying (with the possibility of treble damages) than to assert a defence of patent misuse based on tying (which would merely render the patent unenforceable).

There also is a dichotomy between the presumed market power from a patent in a tying claim and proof required for a monopolization claim. The Federal Circuit specifically noted in Independent Ink that the presumption of market power for tying does not apply to a monopolization case involving patents:

"The patent tying cases do not create any presumption that market power over the tying product confers the degree of market power over the tied product necessary to establish a monopolization or attempted monopolization claim... In Section 2 cases, the plaintiff bears the burden of defining the market and proving [the] defendant's power in that market."

The debate over whether a patent should be presumed to give market power has gone on for several decades. Most commentators agree that it makes little sense to presume market power from a patent since no such market power exists in most instances. The Supreme Court likely will use Independent Ink to abolish the presumption, bring this area of law into accord with current economic thinking and bring much-needed clarity to this area of the law. Regardless whether the Federal Circuit's rebuttable presumption is good or bad policy, the law will benefit from Supreme Court review.

For further information on this topic please contact Janet L McDavid or Bruce Chapman at Hogan & Hartson LLP by telephone (+1 202 637 5600) or by fax (+1 202 637 5910) or by email (jlmcdavid@hhlaw.com or bgchapman@hhlaw.com).

Endnotes

(1) No 04-1329, cert granted, 2005 WL 770269 (June 20 2005).

(2) Independent Ink Inc v Illinois Tool Works Inc, 396 F 3d 1342 (Fed Cir 2005).

(3) 332 US 392 (1947).

(4) 371 US 38 (1962).

(5) 466 US 2 (1984).

(6) "Competition and Intellectual Property in the United States: Licensing Freedom and the Limits of Antitrust" (June 3 2005).

(7) 806 F 2d 673 (6th Cir 1986).

(8) USM Corp v SPS Technologies Inc, 694 F 2d 505 (7th Cir 1982).

(9) See, for example, Klo-zik Co v General Motors Corp, 677 F Supp 499 (ED Tex 1987); Rockbit Indus USA Inc v Baker Hughes Inc, 802 F Supp 1544 (SD Tex 1991).

(10) 35 USC Section 271(d).