Estates Litigation

Proving Market Power in Patent Tying Cases After Illinois Tool Works

May 8, 2006
Joseph T. Lukens and Barry L. Refsin
Special to the Legal, PLW

In Illinois Tool Works Inc. v. Independent Ink, the U.S. Supreme Court reversed decades of its own antitrust jurisprudence that held or suggested that a presumption of market power exists in patent tying cases. The decision was not a big surprise given the criticism of the presumption by the academic community and the modern court’s more permissive attitude towards tying.  In this article, we describe the issue in Illinois Tool Works, the reasoning behind the ruling, and its implications for patent tying cases.

In a tying arrangement, a party sells one product (the tying product) on the condition
that the buyer purchase a different (or tied) product. Early Supreme Court cases looked very skeptically at tying arrangements finding them to be per se illegal under sections 1 and 2 of the Sherman Act and Section 3 of the Clayton Act. In cases like Standard Oil Co. v. United States, the court reasoned that tying arrangements serve little purpose beyond suppressing competition. In International Salt Co. v. United States, this general distrust of tying
gave rise to the presumption of market power in cases where the tying product was subject to a patent.

More recently, in U.S. Steel Corp. v. United States (Fortner II) and Jefferson Parish Hospital District No. 2 v. Hyde, the court moved away from a traditional antitrust per se rule for product tying cases. Although the court still referred to a per se rule against tying, the standards that it actually applied more closely resembled a rule of reason under which liability depends upon consideration of all of the circumstances including the seller’s market power. Even while it relaxed the restrictions on product ties generally, however, the court reaffirmed in dicta that the requisite market power for a per se illegal tie is presumed when the tying product is patented or copyrighted.

Against this background, the court granted certiorari in Illinois Tool Works to consider the continued vitality of the presumption in patent tying cases.

THE FACTS

In Illinois Tool Works, the defendant Trident owned a patent on printheads and ink containers used to print barcodes on cartons and packaging materials. It conditioned its sale of the printheads and ink containers to printer manufacturers upon their agreement to use only Trident’s specially formulated, but unpatented, ink.
Independent Ink developed ink usable in Trident’s products. It sued Trident for a declaration of non-infringement and invalidity of Trident’s patents and challenged the licensing scheme as an illegal tie under the Sherman Act.

The district court granted summary judgment to Trident, rejecting the argument that Trident had market power for the tying product solely because of its patents on the printhead system. Because Independent Ink submitted no evidence of the relevant market or establishing market power, the court concluded that it could not prevail on its antitrust claims.

On appeal, the Federal Circuit reluctantly reversed. It reviewed the history of Supreme Court tying cases and concluded that they mandated a presumption of market power in patent tying cases, which could support a holding of per se illegality.

THE COURT’S ANALYSIS

Justice John Paul Stevens began the court’s analysis by tracing the history of tying. The court first encountered a product tie in a patent infringement case in 1912 which, like Illinois Tool Works, involved unpatented ink tied to the sale of a patented printing apparatus. There, the court held that the use of a competitor’s ink in violation of the license on the patented machine infringed the patent. Two years later, Congress passed Section 3 of the Clayton Act proscribing certain kinds of tying and exclusive dealing arrangements. This marked the beginning of the court’s strong disapproval of tying arrangements in cases such as Standard Oil.  That period of disapproval ended with Fortner II and Jefferson Parish.

Stevens then traced the rise of the market power presumption. It arose in the context of the judicially created patent misuse doctrine, which is a defense to infringement actions when a patentee uses a patent to restrain competition with an unpatented product. The theory of the patent misuse cases was that by tying the purchase of unpatented products to the sale of a patented product, the patentee was extending its monopoly in the patented product into the market for the unpatented product.

Stevens asserted that the presumption migrated from patent law into antitrust law in International Salt. There, the court affirmed a decision that leases of patented machines requiring use of the defendant’s unpatented salt products violated Section 1 of the Sherman Act and Section 3 of the Clayton Act as a matter of law. Although Stevens recognized that International Salt did not discuss market power, he noted that it assumed that the volume of business affected was not insignificant and emphasized that “the tendency of the arrangement
to accomplishment of monopoly seems obvious.”

Having linked patent misuse to the antitrust presumption, Stevens used Congress’s amendment of the Patent Code four years after Jefferson Parish to justify reconsidering the presumption in patent tying cases. The amendment limited the patent misuse defense to cases where “the patent owner has market power in the relevant market for the patent or patented product on which the license or sale is conditioned.”

Because it “would be absurd to assume that Congress intended to provide that the use of a patent that merited punishment as a felony [under the antitrust laws] would not constitute ‘misuse’” under the patent laws, Stevens concluded there was no longer any basis for the presumption in tying cases. Consequently, patent tying
cases should be judged under the standards applied in cases such as Fortner II and Jefferson Parish.

IMPLICATIONS

So what does this mean to parties in patent tying cases?

First, the opinion seems to move the analysis of product ties further away from a per se rule and towards a rule of reason.  The court did not hold that a tie can never be per se illegal, but its conclusion that tying arrangements should be evaluated under the standards applied in cases like Fortner II and Jefferson Parish, rather than the per se rule of other precedents, suggests that the court views those two cases as rule of reason cases.

Second, there is still room for challenges to patent ties whether the analysis is labeled per se or rule of reason.  To do so, however, plaintiffs must prove market power in the tying market. 

So what does a plaintiff need to do to prove market power?

A plaintiff may prove market power directly or circumstantially.

Under the direct method, a plaintiff can show that a restraint led to increased prices or decreased output. This method, however, usually will not apply to tying cases. In a tying case, the allegation is that market power in the tying market permitted the seller to compel the sale of the tied product. It is unlikely that any data will exist to
measure any direct effect of the tie or patent on prices or output in the tying market.  However, there may be cases in which such direct evidence will exist.

Illinois Tool Works stands for the proposition that a patent standing alone confers no market power. The court recognized academic studies that most patents face competition from other patented and unpatented products and thus confer no power to raise prices or restrict output. But some patents clearly do confer such market power. If a seller tries to compel the purchase of a second product near the end of the patent life of a patented product, direct evidence might be available to show that the seller had market power in the tying product.

As an example, a manufacturer of a patented pharmaceutical product near the end of the patent term might decide to increase its return by tying the sale of that product to a newer product. In that case, when the patent on the tying product expires, there may be direct evidence of market power as an unpatented generic drug enters at a lower price. The fact that this particular patent allowed the seller to keep the price high shows that this was a
patent that conferred market power. More typically, however, a plaintiff will try to prove market power by circumstantial or indirect evidence. Under this method, a plaintiff must establish a “relevant product market” and show that the seller of the tying product controls a dominant share of that market. If a plaintiff can do so, it is reasonable to infer that the seller has the ability to control prices and/or output.

Under the U.S. Department of Justice merger guidelines, a relevant market is the smallest group of products such that a firm that controlled the output for those products could profitability raise or maintain prices substantially above competitive levels for a significant period of time.

As a practical matter, product markets are usually determined by expert testimony about whether two or more products are reasonably interchangeable functionally and economically. This test of reasonable interchangeability seeks to determine the set of substitutes that constrain pricing for a product. In economic terms, the question is one of cross-elasticity of demand between the products. That is, if the price of one product increases, will the sales of the other increase (all other things being held equal)? If the expert can conclude that
the answer is “yes,” the price of the second acts as a constraint on the price of the first, and the two products are in the same product market.

Once a market is shown, the question is whether the seller controls a dominant share of that market. The precise market share necessary to support a tying claim is unclear. In Jefferson Parish, the court summarized
its prior rulings on market power and concluded that a market share of 30 percent does not confer market power.
Since then, no court has found a market share under 30 percent to be sufficient to show market power. The point at which market power will be found is not clear and may depend upon other characteristics of the market such as the existence of barriers to entry. Once the market share surpasses 50 percent, the chances of finding significant market power in the tying market increase significantly.

CONCLUSION

Illinois Tool Works does not give patentees carte blanche to tie patented products to other patented or unpatented products.  Rather, it brings the standard for patent tying cases into line with the general standard for tying cases requiring challengers to provide evidence establishing market power.

This article is reprinted with the permission from the May 8, 2006 issue of The Legal Intelligencer.  Copyright 2006 ALM Properties, Inc.  Further duplication without permission is prohibited.  All rights reserved.