Intellectual Property v. Antitrust: A False Dilemma

By Ronald S. Katz, Janet Arnold Hart and Adam J. Safer

I. Introduction

Many courts and commentators have suggested that there is a conflict between intellectual property rights and the antitrust laws. In reality, however, the two are not in conflict. There is a simple formula that will ensure that the purposes of each statute are fulfilled. Where there is one market involved, a patent and/or copyright holder has the exclusive right to exploit his invention. However, where two markets exist and the patent or copyright holder seeks to extend his "legal monopoly" into the second market, antitrust liability is likely.

Although not previously stated in such terms, the concept is not a novel one. In 1953 the Supreme Court held in Times-Picayune 1 that power gained through some natural and legal advantage, such as a patent or a copyright, can give rise to antitrust liability if "a seller exploits his dominant position in one market to expand his empire into the next."2 The Court has thus long recognized that patents and copyrights do not confer immunity from antitrust liability, and that such liability is particularly likely where two markets exist.

A prime example of this is the essential facilities cases brought by MCI Communications Corporation ("MCI") and the U.S. Government respectively against American Telephone and Telegraph Company ("AT&T").3 As a result of these litigations, AT&T was required to make its phone switches available to competitors notwithstanding the fact that those switches no doubt contained much intellectual property. 4 The intellectual property, however, was for phone switches, and MCI did not want to copy that intellectual property in order to make phone switches. Rather MCI wanted to compete in a second market for transmission of long distance phone calls. The Seventh Circuit reorganized that an antitrust violation could stem from AT&T's conduct, if such conduct had the effect of "smothering" competition in markets "adjacent" to the one in which AT&T possessed monopoly power.5

More recently, in Eastman Kodak Co. v. Image Technical Services, Inc.,6 the Supreme Court reaffirmed the principle articulated in Times-Picayune. Faced with increasing competition in the market for maintenance of Kodak-brand equipment from independent service organizations ("ISOs"), Kodak stopped selling its own replacement parts to ISOs and secured agreements with other parts manufacturers not to sell parts to ISOs. The district court granted Kodak's motion for summary judgment because, among other reasons, it concluded that although Kodak's patents gave Kodak a "natural monopoly over the market for parts it sells under its name," Kodak's unilateral refusal to sell those parts did not constitute monopolization under the antitrust laws. The Supreme Court specifically rejected the district court's analysis (which the dissent adopted).

The dissent urges a radical departure in this Court's antitrust law. It argues that because Kodak has only an "inherent monopoly in parts for its equipment . . . the antitrust laws do not apply to its efforts to expand that power into other markets. The dissent's proposal to grant per se immunity to manufacturers competing in the service market would exempt a vast and growing sector of the economy from the antitrust laws. . . .

Even assuming, despite the absence of any proof from the dissent, that all manufacturers possess some inherent market power in the parts market, it is not clear why that should immunize them from the antitrust laws in any other market. The Court has held many times that power granted through some natural and legal advantage such as a patent, copyright, or business acumen can give rise to liability if "a seller exploits his dominant position in one market to expand his empire into the next." [quoting Times-Picayune]7

Since the Supreme Court's decision in Kodak, some recent cases have unnecessarily struggled with the interaction of the intellectual property and antitrust laws. This unnecessary struggle appears limited to monopolization cases arising under Section 2 of the Sherman Act. Under Section 2, a monopolist may defend an antitrust claim by asserting a legitimate business justification for its anticompetitive conduct. The issue on which the cases appear to focus is whether a monopolist's desire to withhold its intellectual property rights from others is in itself a sufficient business justification to justify the otherwise anticompetitive conduct.8

One recent case that illustrates this struggle is the Ninth Circuit's second decision in Kodak, which was rendered after the case was remanded by the Supreme Court and after a jury verdict against Kodak.9 The Ninth Circuit's decision reached the right result, but for the wrong reasons. Application of the one market, two market analysis would have obviated the need for a lengthy and confusing examination of the supposedly conflicting purposes of the intellectual property and antitrust laws. Application of this analysis should also obviate this need in cases currently pending against Microsoft and Intel.

II. The Relevant Laws and Their Purposes

The patent laws are intended to foster innovation by granting to inventors the limited right to exclude others from profiting by the patented invention for a limited period of time. 10 The patent laws have a constitutional basis. The Constitution grants to Congress the power "[t]o promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries." 11 As the Supreme Court explained, the patent laws promote this progress by: offering a right of exclusion for a limited period as an incentive to inventors to risk the often enormous costs in terms of time, research and development. The productive effort thereby fostered will have a positive effect on society through the introduction of new products and processes of manufacture into the economy, and the emanations by way of increased employment and better lives for our citizens.12

The copyright laws grant to copyright holders certain exclusive rights relating to their copyright, including the right to reproduce the copyrighted work and to distribute copies of it. 13 The copyright laws are intended to "stimulate artistic creativity for the general public good" by providing authors with "a fair return for an author's creative labor." 14

The primary purpose of the antitrust laws is to foster competition, which in turn is intended to foster lower prices, better products, and more efficient production methods. Justice Hugo Black articulated this purpose when he observed that the Sherman Act, the original antitrust legislation was designed to be a comprehensive charter of economic liberty aimed at preserving free and unfettered competition as the rule of trade. It rests on the premise that the unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices, the highest quality and the greatest material progress, while at the same time providing an environment conducive to the preservation of our democratic political and social institutions. The policy unequivocally laid down by the [Sherman] Act is competition.15

The overall purpose of the patent, copyright, and antitrust laws is the same: the promotion of the public good. The patent laws are designed to achieve this objective by encouraging innovation, the copyright laws by encouraging artistic creativity, and the antitrust laws by encouraging competition. Despite this identity of purpose, commentators and judges have wrestled with the seeming complexity of balancing the apparently conflicting means by which these laws achieve their objective. As explained below, this complexity is self-inflicted; the proper analysis is relatively straightforward. The rights granted by the patent laws and copyright laws serve an important public interest; however, if the patent or copyright holder misuses those rights to "exploit[] his dominant position in one market to expand his empire into the next,"16 he or she may have violated the antitrust laws.

III. The Struggle to Balance the Intellectual Property and Antitrust Laws

A. Image Technical Services,, Inc. v. Eastman Kodak Co.17

After the Supreme Court remanded Kodak, the jury rendered a verdict in favor of the independent service organizations and against Kodak. After the trebling required by the antitrust laws, the ISOs obtained a judgment for $71.8 million. Kodak again appealed to the Ninth Circuit, which in large part affirmed the jury's decision as well as the injunction entered by the district court. The Supreme Court declined Kodak's request to hear the case for a second time. Kodak raised many issues in its second appeal to the Ninth Circuit. Perhaps the most controversial decision of the court was its ruling on intellectual property rights. The court recognized that parts for Kodak-brand equipment and service for Kodak-brand equipment comprised separate antitrust markets, and that "intellectual property rights do not confer an absolute immunity from antitrust claims."18 The court also concluded that Kodak had monopoly power and engaged in exclusionary conduct.19

However, the court concluded that these factors were not of themselves dispositive. Kodak's conduct, the court reasoned, would not be actionable if it were supported by a legitimate business justification.20 Kodak claimed that its desire to protect its intellectual property was of itself a valid business justification immunizing its exclusionary conduct.21 To assess the sufficiency of Kodak's purported business justification, the court attempted to identify and then to harmonize the general principles of antitrust, copyright, and patent law. 22 The court distilled the problem to what it viewed as two conflicting principles: (1) neither patent nor copyright holders are immune from antitrust liability, and (2) patent and copyright holders may refuse to sell or license their protected work.23

The court recognized that the ISOs' monopolization claim was based on Kodak's attempt to monopolize a market that was distinct from the one in which it held its intellectual property rights. "Section 2 of the Sherman Act condemns exclusionary conduct that extends natural monopolies [i.e., patent rights] into separate markets."24 However, the court also concluded that intellectual property holders require an additional layer of protection from the potential proliferation of monopolization claims.25 Apparently, the court believed that existing antitrust jurisprudence was inadequate.

In light of this perceived litigation proliferation potential, and what the court referred to as "the procompetitive effects and statutory rights extended by the intellectual property laws," the court concluded that "a monopolist's `desire to exclude others from its [protected] work is a presumptively valid business justification for any immediate harm to consumers.'" 26 The court claimed that its analysis was a "modified version" of the rebuttable presumption by the First Circuit articulated in Data General Corp. v. Grumman Systems Support Corp.27

After reanalyzing the facts, the court concluded that the ISOs had rebutted the presumption by showing that it was more probable than not that Kodak's presumptively-valid business reason -- i.e., that Kodak sought to protect its intellectual property rights from others -- was pretextual.28 Although only sixty-five of the thousands of parts used in Kodak equipment were patented, Kodak attempted to restrict ISOs' access to all Kodak parts. 29 Moreover, Kodak's parts manager testified that patents "did not cross [his] mind" at the time that Kodak implemented its restrictive parts policy.30

Thus, upon finding that Kodak's asserted business reasons were more probably pretextual, the court affirmed the jury's determination that Kodak was liable under the antitrust laws.31

B. Post-Kodak Lower Court Decisions: Intergraph v. Intel; CSU v. Xerox

Two lower court cases that were rendered after the Ninth Circuit's decision in Kodak have also dealt with the "conflict" between the intellectual property and antitrust laws. Intergraph Corp. v. Intel Corp.32; CSU v. Xerox.33

i) Intel

In Intel, which concerned Intergraph's motion for a preliminary injunction, the court drafted a detailed factual opinion analyzing the relevant markets involved and Intel's conduct. Intel is the world's largest manufacturer of high-performance computer microprocessor chips, also referred to as central processing units ("CPUs").34 Intel had (and has) monopoly power in the market for these CPUs. 35 At the time of the court's decision, Intel also was a recent entrant and a direct competitor of Intergraph in the market for graphic subsystems, which provide high-performance graphics capabilities for high-end workstations. Information related to Intel-manufactured CPUs was essential to competing in the graphic subsystem market.36

Until a dispute that is not directly relevant to this discussion, Intergraph was one of a number of favored Intel customers. As a favored Intel customer, Intergraph received advance and confidential information relating to Intel-manufactured microprocessors that allowed it to compete in the graphic subsystem market. Based at least in part on its dispute with Intergraph, Intel decided to cut off or delay Intergraph's access to information relating to Intel-manufactured microprocessors.37

Although the court's factual analysis relating to relevant market and Intel's conduct was detailed, its legal analysis applying the antitrust laws to Intel's alleged intellectual property rights was simple and straightforward. The court concluded that Intel was misusing its intellectual property to harm Intergraph's ability to compete in the graphic subsystem market. 38 The court recognized that Intel's patents did not immunize it from the antitrust laws, and, citing Kodak, it held that "[u]nlawful `exclusionary conduct can include a monopolist's unilateral refusal to license a [patent or] copyright or to sell a patented or copyrighted work."39

Unlike Kodak, the court did not wrestle with balancing the intellectual property laws and the antitrust laws. Nor did the court accord Intel an analytically-confusing presumption. Because of the potential harm Intel's conduct could cause to Intergraph, the court fashioned broad injunctive relief primarily directing Intel to provide Intergraph with information and Intel products at the same time and on the same terms as it offered such information and products to Intergraph's competitors. The injunction is currently on appeal to the Eleventh Circuit.

ii) CSU

The facts of CSU, a multi-district class action antitrust lawsuit, are strikingly similar to the facts of Kodak. In the face of increasing competition from ISOs for the service of Xerox-brand copiers, Xerox established a "parts policy" in which it refused to sell parts to CSU and other ISOs. 40 However, unlike Kodak, the district court -- despite the long procedural history of Kodak, the Supreme Court's decision ordering a trial on the merits in that case, the jury's damage award to the ISOs and the Court of Appeals' affirmance of Kodak's liability -- dismissed CSU's claims without a trial.

Contrary to the Ninth Circuit's decision in Kodak, or for that matter the Supreme Court's earlier decisions in Kodak and in Times-Picayune, the CSU court surprisingly concluded that a monopolist's refusal to sell or license its patented or copyrighted product can never give rise to antitrust liability on the ground that such a refusal to sell or license is immune from antitrust scrutiny. 41 In other words, the court decided that the intellectual property laws trump the antitrust laws regardless of whether two markets are involved. The Supreme Court in Kodak rejected the CSU court's narrow analysis when it held that a manufacturer's inherent power in the parts market does not immunize the manufacturer from the antitrust laws in any other market. The CSU court failed to distinguish its facts from those in Kodak, and failed to support the zone of immunity it created for intellectual property holders.

The practical effect of the CSU opinion is that no ISOs will be able to compete in any service market because they will be precluded from obtaining access to parts. For all practical purposes, customers who own high-tech equipment will have to use the manufacturer for service. Obviously, having no choice harms consumers and competition. Although plainly contrary to Kodak, CSU is at least instructive to show how courts generally have difficulty applying the antitrust laws when intellectual property issues are also involved.

IV. One Market, Two Market Analysis

The Ninth Circuit in Kodak, and the First Circuit in Grumman, attempted to resolve what they viewed as the conflicting principles of the intellectual property laws and the antitrust laws. Specifically, the courts recognized the general principle that patent and copyright holders may refuse to sell or license their protected works. The courts also recognized that a refusal to sell or license is potentially anticompetitive. To resolve this apparent conflict, the circuit courts devised a novel legal presumption to apply to Section 2 claims where the defendant's anticompetitive conduct stems from its alleged misuse of intellectual property rights.

This legal presumption is analytically confusing because the courts failed to articulate any clear manner in which the presumption could be rebutted. Thus, courts and juries will be faced with a multitude of differing and unique factual circumstances, and will have to determine whether such circumstances are sufficient to overcome the ill-defined presumption. Also, shifting the factual inquiry from its proper focus to the legitimacy of the monopolist's purported business justification does not simplify, and in fact complicates, the analysis. The legal presumption is unnecessary because the antitrust laws already provide the proper analysis for monopolization claims whether or not intellectual property rights are also involved. If only one market is implicated, the intellectual property holder generally has the exclusive right to exploit his invention. However, the intellectual property holder may not use the power granted by his intellectual property rights to expand his empire into a separate and distict market.

The legal presumption is unwarranted because it creates a zone of immunity for intellectual property holder's anticompetitive conduct. Such a zone of immunity contradicts the Supreme Court's admonition in Kodak and Times Picayune against permitting intellectual property holders from exploiting their inherent power to expand their "empire" into a second market.

The proper focus, as the Supreme Court recognized in Kodak, is a detailed factual analysis of the relevant markets, of market power, and of illegitimate conduct. There is no reasoned basis for allowing the intellectual property holder, to the exclusion of all other competitors, the opportunity to exploit its inherent power in one market in order to expand such power into a second and distinct market.

Copyright and patent holders are, of course, entitled to exploit their inventions. In the cases discussed above, for example, Kodak, Intel, and Xerox should under no circumstances be required to provide schematics or designs to ISOs or other competitors for their patented parts or copyrighted software. This would enable the ISOs or others to compete with these manufacturer's for the sale of such intellectual property. To require the manufacturers to do so would probably stifle the incentive to create new inventions. However, requiring these manufacturers to provide parts or software for use in another market, especially a distinct market in which the manufacturer itself competes with the plaintiff, is an entirely different matter.42

In Kodak and CSU, the ISOs competed with Kodak and Xerox, respectively, in the market for service. In Intergraph, Intergraph competed with Intel in the graphic subsystem market. Allowing the manufacturers to prohibit these aftermarket competitors from having access to the parts or information necessary to compete in the aftermarkets creates two monopolies: one in the parts, and one in the service or graphic subsystem market. This is precisely what the Supreme Court intended to prevent. Indeed, without access to the parts, ISOs and others would have to enter two markets in order to compete in one, a result that is antithetical to the antitrust laws.43

ENDNOTES

1. Times-Picayune Pub. Co. v. United States, 345 U.S. 594 (1953).

2. 345 U.S. at 608-611 (1953).

3. See MCI v. AT&T, 708 F.2d 1081 (7th Cir. 1983); United States v. AT&T, 552 F. Supp 131 (1982).

4. MCI, 708 F.2d at 1151-53.

5. Id. at 1149.

6. 504 U.S. 451 (1992).

7. Id. at 479-80 n.29.

8. Unlike Section 2 claims, the circuit courts appear to assess the elements of tying claims arising under Section 1 of the Sherman Act without creating a special zone of deference to anticompetitive conduct merely because of the existence intellectual property rights. See, e.g., Data General Corp. v. Grumman System Support Corp., 36 F.3d 1147, 117981 (1st Cir. 1994); Service & Training, Inc. v. Data General Corp., 963 F.2d 680, 684-88 (4th Cir. 1992).

9. 125 F.3d 1195 (9th Cir. 1997).

10. 35 U.S.C. ? 154.

11. U.S. Const., art. I, ? 8, cl. 8.

12. Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 480 (1974).

13. 17 U.S. C. ? 106.

14. Twentieth Century Music Corp. v. Aiken, 422 U.S. 151, 156 (1975).

15. Northern Pacific Ry. Co. v. United States, 356 U.S. 1, 4 (1958).

16. Times Picayune, 345 U.S. at 611.

17. 125 F.3d 1195 (9th Cir. 1997).

18. Id. at 1215-16.

19. Id. at 1212.

20. Id. at 1212.

21. Id. In MCI's case against AT&T, the Seventh Circuit did not engage in a detailed discussion of business justification. MCI's essential facilities claim, which arose under Section 2 of the Sherman Act, required MCI to prove:

(1) control of the essential facility by a monopolist; (2) a competitor's inability practically or reasonably to duplicate the essential facility; (3) the denial of the use of the facility to a competitor; (4) the feasibility of providing the facility.

MCI, 708 F.2d at 1132-33. The Seventh Circuit concluded that MCI had produced sufficient evidence to support a claim and "[n]o legitimate business or technological reason was shown for AT&T's denial of the requested interconnections. " Id. at 1133.

22. Id. at 1214.

23. Id. at 1215.

24. Id. at 1216.

25. Id. at 1217-18.

26. Id. at 1218 (quoting Data General Corp. v. Grumman System Support Corp., 36 F.3d 1147, 1187 (1st Cir. 1994)).

27. In Grumman, Data General Corporation ("DG") refused to allow ISOs to use certain copyrighted maintenance software, referred to as ADEX, that DG created to service DG computers. DG did allow self-maintaining computer owners to use ADEX. The First Circuit, similar to the Kodak court, concluded that an intellectual property holders desire to exclude others from its intellectual property was a "presumptively valid business justification for any immediate harm to consumers." 36 F. 3d 1 147, 1187 (1994). The First Circuit concluded that the presumption could be rebutted by showing that "imposing antitrust liability is unlikely to frustrate the objectives of the [intellectual property laws]. Id. at 1187 n.64.

28. Kodak, 125 F.3d at 1219-20.

29. Id. at 1219.

30. Id.

31. Id. at 1220.

32. 1998 WL 180606 (N.D. Ala. 1998).

33. In re Independent Service Organizations Antitrust Litigation, 1998-1 Trade Cases

72,065, at p. 81,395 (D. Kan. December 22, 1997).

34. 1998 WL 180606, at *2-3.

35. Id. at *2-3, *13-14.

36. Id. at *10.

37. Id. at *1l-12.

38. Id. at *19.

39. Id. at *20.

40. 1998-1 Trade Cases at 81,396.

41. Id. at 81,397.

42. In MCI v. AT&T, AT&T was not required to divulge proprietary information that would have allowed MCI to compete in the market for telephone switches. Rather, MCI was allowed to utilize AT&T's switches in order to compete in the distinct market for telephone tong distance service.

Similarly, in the ongoing U.S. v. Microsoft case, if Microsoft's operating system is deemed to be an essential facility the court will likely make it available to Microsoft competitors notwithstanding the fact that it contains Microsoft's intellectual property. The reason is that Microsoft's competitors do not want to compete in the manufacturing of operating systems but rather want to compete in a second market for applications software. The same analysis may apply to companies that require information about Intel microprocessors. These companies do not themselves produce microprocessors, but may require the use of Intel's microprocessors or information about them to compete in other computer-related markets.

43. Kodak, 504 U.S. at 485.
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