United States: Federal Circuit Holds Patent Over Tying Product Creates Rebuttable Presumption Of Market Power In Antitrust Tying Action

On January 25, 2005, the Federal Circuit held, in Independent Ink, Inc. v. Illinois Tool Works, Inc., No. 04- 1196, 2005 WL 147399 (Fed. Cir. Jan. 25, 2005), that, in the context of a "tying" claim under the antitrust laws, a patentee’s intellectual property rights trigger a presumption that the patent owner has market power over the patentee’s product.

Tying arrangements usually refer to coercive bundling practices, whereby a supplier will only sell a desired, highly demanded product if the purchaser also agrees to buy a second, less-desirable product from the supplier. To prove a tying arrangement in violation of Section 1 of the Sherman Act, a plaintiff must establish the following elements: 1) two distinct products—one "tying" product and one "tied" product; 2) an agreement to sell the tying product only on the condition that the tied product is also purchased; 3) market power in the tying product market; and 4) the tied product involves a "not insubstantial" amount of interstate commerce. Under Independent Ink , a plaintiff can prove the third element simply by establishing that the tying product is patented.

The Federal Circuit felt bound to follow the somewhat dated and often criticized Supreme Court precedent. That precedent, however, conflicts with the more contemporary and widely held beliefs that intellectual property rights do not necessarily confer market power nor should they give rise to a presumption of market power, a belief expressed by the Federal Circuit in non-tying Sherman Act cases. Indeed, the last occasion the Federal Circuit addressed the issue, it expressly held that the "[m]ere possession of a patent, or a family of patents, does not establish a presumption of antitrust market power." Schlafly v. Caro-Kann Corp., No. 98-1005, 1998 WL 205766, at *7 (Fed. Cir. Apr. 28, 1998). In this case, the Federal Circuit acknowledged that although "[t]he time may have come to abandon the doctrine,…it is up to the Congress or the Supreme Court to make this judgment." Independent Ink, Inc., 2005 WL 147399, at *7. By this decision, the Federal Circuit may have set the stage for the Supreme Court to bring the law in line with modern thinking. In the meantime, intellectual property owners that offer their products in bundles or package arrangements face a greater risk of litigation and of those arrangements being found illegal.

Plaintiff Independent Ink, Inc. ("Independent") appealed the district court’s grant of summary judgment. See Independent Ink, Inc. v. Trident, Inc., 210 F. Supp.2d 1155, 1158 (C.D. Cal. 2002). Independent is a printer ink supplier. Defendant Trident, Inc. ("Trident") manufactures both a patented printhead and printer ink. Trident licenses its patented printhead technology to OEMs on the condition that they also purchase their ink exclusively from Trident. Independent alleged that Trident’s licensing agreements constituted unlawful tying arrangements in violation of Section 1 of the Sherman Act. Independent also alleged that Trident violated Section 2 of the Sherman Act by monopolizing or attempting to monopolize the market for printhead ink.

The district court rejected Independence’s tying claim because it relied exclusively on the existence of Trident’s patent to establish that Trident had market power in the market for printheads. Likewise, the court rejected Independence’s Section 2 claims because Independence failed to provide evidence of Trident’s market power in the ink market.

The Federal Circuit affirmed the district court’s ruling on Independent’s monopolization and attempted monopolization claims, holding that the presumption does not apply to Section 2 claims. For those claims, a plaintiff must still affirmatively prove market power in the tied product market.

On the tying claim, however, the Federal Circuit reversed and remanded the district court’s grant of summary judgment, holding that Trident’s patent over the printhead technology raised a rebuttable presumption of market power in the tying product market.

The Federal Circuit’s analysis relied on two Supreme Court cases, International Salt Co. v. United States, 332 U.S. 392 (1947) and United States v. Loew’s, Inc., 371 U.S. 38 (1962), which hold that the possession of a patent over a tying product establishes a presumption of market power. The court also concluded that dictum from two non-patent tying cases decided by the Supreme Court, United States Steel Corp. v. Fortner Enterprises, Inc., 429 U.S. 610, 619 (1977) ("Fortner II") and Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2, 16 (1984), reaffirmed the vitality of the presumption.

The court rejected Defendant’s three major arguments as to why the presumption is no longer good law. The first argument was that Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172 (1965), a patent antitrust case, overturned the presumption. The Federal Circuit found Walker Process is inapplicable, because it involved a Section 2 monopolization claim, rather than a tying claim.

Second, the Defendant argued that language on which the district relied, from Justice O’Connor’s concurrence in Jefferson Parish and Justice White’s dissent from denial of certiorari in Data General Corp. v. Digidyne Corp., 473 U.S. 908, 908 (1985) (White, J., joined by Blackmun, J., dissenting from denial of certiorari), indicated that the presumption was no longer valid. Rejecting this argument as "nose-counting," the Federal Circuit found nothing in the Jefferson Parish or Data General language that repudiated the presumption.

Finally, the Defendant argued that the presumption has been rejected by academics, the DOJ and the FTC in their joint guidelines for intellectual property licensing, a Sixth Circuit case, and dictum from two Seventh Circuit cases. The basis for this rejection is that economic theory does not predict that a patent, by itself, confers market power over the tying product market, especially where adequate substitutes for the patented product exist or where it is relatively easy to design around the patent. This increased burden on intellectual property owners in the tying context conflicts with the prevailing view in cases analyzing other types of antitrust violations that the mere possession of a patent or copyright does not give rise to a presumption of market power. As a matter of economics, an intellectual property owner may lack actual market power because there are many available substitutes for the seller’s product, even though it is patented or copyrighted. An intellectual property owner may also lack actual market power because it may be easy for a prospective entrant to design around a patent, or because there may be little demand for the patented or copyrighted product.

While acknowledging the heavy criticism leveled against the presumption, the Federal Circuit noted that none of these sources of criticism were empowered to overturn binding Supreme Court precedent. "Even where a Supreme Court precedent contains many ‘infirmities’ and rests upon ‘wobbly, moth-eaten foundations,’ it remains the ‘Court’s prerogative to overrule one of its precedents.’" Independent Ink , Inc., 2005 WL 147399, at *7 (quoting State Oil Co. v. Khan, 522 U.S. 3, 20 (1997)).

After finding that the presumption remains good law, the Federal Circuit had to decide the scope of the rule. Relying on dictum from Loew’s and Jefferson Parish, and similar decisions from the Second and Ninth Circuits, the court found that the presumption was rebuttable. Under the specific rule fashioned by the Federal Circuit,

a patent presumptively defines the relevant market as the nationwide market for the patented product itself, and creates a presumption of power within this market. Once the plaintiff establishes a patent tying agreement, it is the defendant’s burden to rebut the presumption of market power and consequent illegality that arises from patent tying.

Independent Ink, Inc., 2005 WL 147399, at *8.

A defendant may rebut this presumption either by expert testimony or other credible economic evidence that it lacks of market power.

Independent Ink has erased any remaining doubt as to the continued validity of International Salt and Loew’s. By doing so, the Federal Circuit signaled intellectual property owners contemplating bundling or tying their products, including those selling their patented products in highly competitive markets, that they run the risk of having to prove affirmatively, by either expert testimony or other evidence, that they lack market power in order to avoid Section 1 liability.

Due to the unique burden Independent Ink now places on intellectual property owners, bundling a patented product (regardless of ability to coerce customers into buying the tied good) may be less likely. Where tying arrangements serve pro-competitive purposes, the effect of this decision may be to dampen innovation and consumers might be deprived of cost savings generated by bundling or tying products.

Intellectual property owners contemplating tying arrangements will have to consider the increased risks of Section 1 litigation until the Supreme Court takes up the Federal Circuit’s thinly veiled invitation in Independent Ink to decide the continued validity of International Salt and Loew’s.