The U.S. Supreme Court agreed to consider limiting antitrust suits against pharmaceutical companies, computer makers and other patent holders. The justices said they will hear an appeal by Illinois Tool Works Inc., which is trying to block a lawsuit over devices it sells for use in industrial printers.

On Jan. 25, 2005, the U.S. Court of Appeals for the Federal Circuit issued a decision in Independent Ink Inc. v. Illinois Tool Works Inc. that held that in certain circumstances, patent and copyright owners will be presumed to possess market power. The concept of market power plays a crucial role in most antitrust cases. Generally, it means the ability to raise prices above competitive levels without sacrificing profits, e.g., by losing significant sales to competitors. Monopoly power represents a heightened form of market power and, as a practical matter, exists only where a single company controls the vast majority, if not all, of the sales in a market.

In most instances, to establish a cause of action under Section 1 of the Sherman Act (which condemns any concerted action between or among economically independent actors with an overall anti-competitive effect), the plaintiff must prove that the parties to the concerted action possess market power. This follows from the notion that parties lacking market power simply cannot force an anti-competitive result on the market. If a company without market power tries to increase its prices substantially above the market price, customers will defect to competitors’ products.

In an action brought under Section 2 of the Sherman Act (which prohibits deliberate attempts to obtain or maintain monopoly power), the plaintiff must prove that the defendant has an even higher degree of market power than what would suffice under Section 1, that is, either monopoly power or something dangerously close to it.

IP protection in patents and copyrights are often described as monopolies but these are not necessarily economic monopolies in the marketplace. After all, just because you have the exclusive right to sell a bad product doesn’t mean the marketplace must buy it instead of better alternatives. The patent grant may or may not contribute to a market monopoly but it’s not a certainty and each instance must be looked at on a case-by-case basis.

In 1962, the Supreme Court in United States v. Loew’s Inc. the “block-booking” of motion pictures, where studios would only license rights to copyrighted films in a package, as illegal tying. The Court held that “[t]he requisite economic power is presumed when the tying product is patented or copyrighted.” The Court relied on its 1947 opinion in International Salt Co. v. United States, a case in which the defendant tied the lease of a patented machine to the lessee’s purchase of an unpatented product. But International Salt doesn’t mention market power as a necessary element of a tying claim nor does it describe a market power presumption due to ownership of a patent.

In 1988, Congress amended the Patent Act to provide that parties asserting the defense of patent misuse must affirmatively prove that the patentee has market power if the misuse claim rests on a tying theory. This seems to have removed any market power presumption that may have existed under the misuse doctrine.

The present case involves claims of “tying,” which is when a company illegally conditions the sale of a sought-after product on the purchase of a second item. Tying is illegal when the seller has market power in selling the desired product and, therefore, can raise prices on that product without losing sales. Here, the patent owner Illinois Tool holds a patent for a device used to print bar codes on cartons. Trident’s standard licensing agreement requires printer manufacturers also to buy their ink from Trident. The contract also prohibits refilling the printheads. Independent Ink Inc., which sells ink that can be used in Trident’s printheads, sued, saying the licensing agreement is an illegal tying arrangement.

The U.S. Court of Appeals for the Federal Circuit said courts should presume that a company with a patent has market power in that field. In its appeal, ITW said the appeals court’s approach “is the very embodiment of formalism over economic substance.” ITW said that in many cases the patented product has competition that keeps down prices.

The District Court in California dismissed both the Section 1 and Section 2 Sherman Act claims on the basis that Independent Ink failed to show that Illinois Tool had the Section 1 statutorily required market power over the tying product or the required monopoly power under Section 2.

Acknowledging its mandate to follow Supreme Court precedent, the Federal Circuit made clear that unless and until changed by the Supreme Court or the legislature, the precedent was binding, stating:

The fundamental error in all of defendants’ arguments is that they ignore the fact that it is the duty of a court of appeals to follow the precedents of the Supreme Court until the Court itself chooses to expressly overrule them. This message has been conveyed repeatedly by the Court. The Court’s “decisions remain binding precedent until [it] see[s] fit to reconsider them, regardless of whether subsequent cases have raised doubts about their continuing vitality.” Hohn v. United States, 524 U.S. 236, 252-53 (1998). “If a precedent of th[e] Court has direct application in a case, yet appears to rest on reasons rejected in some other line of decisions, the Court of Appeals should follow the case which directly controls, leaving to th[e] Court the prerogative of overruling its own decisions.” Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477, 484 (1989). Even where a Supreme Court precedent contains many “infirmities” and rests upon “wobbly, moth-eaten foundations,” it remains the “Court’s prerogative alone to overrule one of its precedents.” State Oil Co. v. Khan, 522 U.S. 3, 20 (1997). None of the authorities that defendants present, whether it be the language of Walker Process, the concurrence in Jefferson Parish, or the dissent from denial of certiorari in Data General, constituted an express overruling of International Salt or Loew’s. We conclude that the Supreme Court has held that there is a presumption of market power in patent tying cases, and we are obliged to follow the Supreme Court’s direction in this respect. The time may have come to abandon the doctrine, but it is up to the Congress or the Supreme Court to make this judgment.

However, addressing what it characterized as an unresolved issue, the Federal Circuit held that the presumption of market power was rebuttable, permitting the patent owner the opportunity to overcome it. As well, the CAFC held that the presumption of market power does not create a presumption of monopoly power, which is a requirement of Section 2, stating that:

The presumption of illegality in patent tying arises in section 1 cases. Neither International Salt nor Loew’s dealt with section 2 of the Sherman Act. See Int’l Salt, 332 U.S. at 393 & n.1; Loew’s, 371 U.S. at 39 & n.1. To establish a monopolization claim under section 2 of the Sherman Act, there must be monopoly power in the relevant market and the willful acquisition or maintenance of that power. Verizon Communications, Inc. v. Law Offices of Curtis V. Trinko, LLP, 124 S. Ct. 872, 878-79 (2004). To establish an attempted monopolization claim, plaintiff must demonstrate that the defendant had specific intent to monopolize a relevant market and a “dangerous probability of success.” Spectrum Sports Inc. v. McQuillan, 506 U.S. 447, 455 (1993). It follows that in section 2 cases a definition of the relevant market and consideration of the defendant’s power within that market are required. Id. at 455-56; Walker Process, 382 U.S. at 177-78.

In this case, the alleged monopolization is over the tied product, the ink, not the tying product, the printhead technology. 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. See Fortner II, 429 U.S. at 619. In section 2 cases, the plaintiff bears the burden of defining the market and proving defendant’s power in that market. See Spectrum Sports, 506 U.S. at 455-56. As the district court found, plaintiff makes only the conclusory allegation of a geographic market without supporting economic evidence. Indep. Ink, 210 F. Supp. 2d at 1175. Such conclusory statements are not sufficient to define a relevant market. Morgan, Strand, Wheeler & Biggs v. Radiology, Ltd., 924 F.2d 1484, 1490 (9th Cir. 1991). Therefore, there is no genuine issue of material fact as to the section 2 claim and summary judgment was properly granted.

But this is not the case under Section 1 of the Sherman Act. Thus the Section 1 Sherman Act cause of action was sustained and remanded for further fact finding and the dismissal of the Section 2 Sherman Act claim was affirmed.

The Federal Circuit’s decision in Independent Ink v. Illinois Tool Works, Inc. is available here.

AIPLA amicus brief is here.

ABA amicus brief is here.

IPO amicus brief is here.

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