One form of tying arrangements—those in which the "tying product" is protected by a patent—just got a lot harder for plaintiffs to challenge successfully.

On March 1, 2006, the United States Supreme Court in Illinois Tool Works Inc. v. Independent Ink, Inc., 126 S. Ct. 1281 (2006), eliminated the presumption of market power in patent tying cases. As a result, patent holders (and exclusive patent licensees) lacking sufficient economic power in their patented products can now enter agreements to sell or license such products in combination with some other unpatented item without concern that the arrangement will be struck down as an illegal tie.

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 (tied) product, or at least agrees that he will not purchase that product from any other supplier.1 Tying arrangements have been held to be "per se" violations of section 1 of the Sherman Act where the seller has market power in the tying product and a not insignificant amount of commerce in the tied product is foreclosed.2

The facts of Illinois Tool Works are typical. Illinois Tool Works and its affiliate (collectively, ITI) manufactured and marketed printing systems that included three relevant components: (1) a patented ink jet printhead; (2) a patented ink container that attached to the printhead; and (3) specially designed, but unpatented, ink. ITI sold the printing systems to original equipment manufacturers (OEMs) who were licensed to incorporate the printheads and containers into printers that were in turn sold to companies for use in printing barcodes on cartons and packaging materials. The OEMs agreed that that they would purchase their ink exclusively from ITI, and that neither they nor their customers would refill the patented containers with ink of any kind.

Independent Ink had developed an ink with the same chemical composition as the ink sold by ITI. In response to a patent infringement action brought by ITI, Independent Ink alleged, among other claims, that ITI’s arrangements with the OEMs were illegal ties in violation of the Sherman Act, relying, in part, on the market power presumption.

Prior to the Illinois Tool Works decision, the official state of the law was that the existence of a patent on the tying product created a presumption that the seller possessed sufficient market power.3 Indeed, in the Supreme Court’s early decisions, such market power was conclusively presumed.4

The law had been moving away from this standard for some time. In their 1995 "Antitrust Guidelines for the Licensing of Intellectual Property," the Antitrust Division of the Department of Justice and the Federal Trade Commission took the position that in enforcing the antitrust laws they will not presume market power from the existence of a patent, copyright, or trade secret.5 Most economists and academics have long supported this view since it is consistent with the business reality that many patents have little or no value.

Moreover, the original foundation of the market power presumption—the doctrine of patent misuse (under which an alleged infringer can assert as a defense that the patent owner improperly required him to purchase an unpatented product in order to receive the patented product, and thus the patent should be rendered unenforceable)—was changed by a 1988 Congressional amendment to section 271(d) of the Patent Act.6 Specifically, section 271(d)(5) now provides that the sale of a patented product or license of rights in one patent conditioned upon the license of another patent or the purchase of a separate product shall not constitute misuse unless it is demonstrated that the patent owner has "market power in the relevant market for the patented product."

Observing these developments, the Supreme Court ruled in Illinois Tool Works that courts may no longer presume that a patent confers market power for purposes of a tying claim under Section 1 of the Sherman Act.7 The Court also rejected the suggestion in the earlier decision by the Federal Circuit that the existence of a patent creates at least a rebuttable presumption in patent tying cases (which would have placed the burden on a challenged patent holder to show that it does not have market power).

Rather, the Court held that "in all cases involving a tying arrangement, the plaintiff must prove that the defendant has market power in the tying product." This means the plaintiff must undertake the burdensome exercise of establishing the relevant market definition, and of analyzing the barriers to entry and the competitive effects of the tying arrangement. Depending on the facts at the time of any such challenge, this might not be an insurmountable task, but it would be vastly more difficult for the plaintiff than simply relying upon the former patent-equals-market power presumption.

Footnotes

1. Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451, 461 (1992).

2. Northern Pac. Ry. Co. v. United States, 356 U.S. 1, 3 (1958). Nevertheless, many plaintiffs in tying cases fail because, among other reasons, they cannot demonstrate that there are two separate products, or that the defendant forced the plaintiff to purchase the two products together. See, e.g., Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2 (1984). These elements have provided some courts with an opportunity to conduct an analysis that comes close to a "rule of reason" analysis. See, e.g., U.S. v. Microsoft Corp., 253 F.3d 34, 87-97 (D.C. Cir. 2001) (en banc). In other words, courts are generally willing to consider the business justifications for, or economic effects of, a challenged tie-in, something they are not at all willing to do in price fixing cases.

3. International Salt Co. v. United States, 332 U.S. 392, 395-96 (1947); IBM v. United States, 298 U.S. 131, 135-37 (1936); United States v. Loew’s Inc., 371 U.S. 38 (1962); Jefferson Parish, 466 U.S. at 16 (dicta).

4. See International Salt, 332 U.S. 392; IBM, 298 U.S. 131.

5. See U.S. DEP’T OF JUSTICE & FEDERAL TRADE COMM’N, ANTITRUST GUIDELINES FOR THE LICENSING OF INTELLECTUAL PROPERTY § 2.2 (1995), reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,132 (the DOJ/FTC Guidelines).

6. 35 U.S.C. § 271(d).

7. Although the facts of the case concerned products protected by patents, and the Court’s ruling arguably speaks in terms of tying arrangements involving patented products only, the market power presumption is likely no longer available for challenges to tying arrangements involving tying products protected by any intellectual property right (whether that be patent, copyright, trade secret, or some other intellectual property right). Indeed, the Court disapproved of its decision from 1962 that had extended the market power presumption to copyright tying cases, Loew’s, 371 U.S. 38, and approved of the DOJ/FTC Guidelines that had rejected the market power presumption in patent, as well as copyright and trade secret, scenarios. Moreover, the Court’s final holding (restated in the final paragraph to this alert) is seemingly unlimited, applying to "all cases involving a tying arrangement…."

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