All Tied Up: Independent Ink, Inc. v. Illinois Tool Works, Inc. and Trident, Inc.

On June 20, 2005, the Supreme Court granted certiorari in an important case for intellectual property holders seeking to navigate the sometimes-conflicting dictates of patent and antitrust law. In Independent Ink, Inc. v. Illinois Tool Works, Inc., and Trident, Inc., 396 F.3d 1492 (Fed. Cir. 2005), the U.S. Court of Appeals for the Federal Circuit held that a patent establishes a rebuttable presumption of market power in a tying case brought under Section 1 of the Sherman Act. The ruling has put the Federal Circuit at odds with several lower courts, the Antitrust Division of the Department of Justice, the Federal Trade Commission and a host of academic critics, each of which maintain that patent rights do not, by themselves, give rise to an inference of market power, and that any rule to the contrary has the potential to reduce legitimate incentives to innovate.

The Federal Circuit's ruling has been widely criticized because it makes it easier to bring tying suits against intellectual property holders, thereby further complicating life for companies already ensnared in various patent thickets. Moreover, because the Federal Circuit has taken a particularly expansive view of its own jurisdiction, the ruling in Independent Ink has a potentially greater impact on the law of tying than would a ruling by any other Court of Appeal.

Tying is regulated by the antitrust laws and may violate Section 1 of the Sherman Act where the practice serves to diminish competition in the sale of one of the bundled products by tying the sale of one product to the sale of the other. Such tying is illegal where the bundler has market power in one product (the “tying product”) and conditions its purchase on the purchase of a separate, unwanted product (the “tied product”). Under the traditional law of tying, a tying plaintiff can establish a violation of Section 1 if it can demonstrate: 1) the existence of two separate products; 2) that the defendant conditions the sale of the desired (tying) product on the sale of a second (tied) product; 3) that the arrangement affects a substantial volume of interstate commerce; and 4) that the defendant has market power in the market for the tying product. Of course, traditionally, tying is a per se offense; if the plaintiff can demonstrate the above elements, there is no need for a court to further analyze whether the defendant's practice negatively affected the market or whether the defendant proffered legitimate pro-competitive justifications for its bundle.

We discuss the Federal Circuit's decision in Independent Ink and how it has exacerbated confusion in the law of tying in IP cases.

The Facts of Independent Ink

Trident, a subsidiary of Illinois Tool Works, manufactures ink jet printheads that it sells to original equipment manufacturers (“OEMs”). The end users of the printheads typically are customers who use printers containing the printheads to place bar codes on cartons. Trident also manufactures ink for use with its patented printheads. Trident conditions sale of its printheads on purchase and exclusive use of Trident ink in all Trident-based printing systems. Specifically, the licensing agreement with OEMs grants the right to “manufacture, use, and sell … ink jet printing devices supplied by Trident” only “when used in combination with ink and ink supply systems supplied by Trident.” Trident did not claim that its ink was protected by patents. Thus, the tying arrangement explicitly conditions, or ties, sale of a patented tying product (the printheads) on the sale of an unpatented tied one (the ink).

Independent Ink manufactures ink compatible with Trident printheads. It sued in federal district court in Los Angeles, alleging that Trident was engaged in illegal tying and monopolization in violation of Sections 1 and 2 of the Sherman Act. The district court granted Trident's motion for summary judgment, holding that in order to constitute a violation of the antitrust laws under Section 1 or 2, a plaintiff must affirmatively prove market power in the tying product. The court reasoned that merely alleging that a product is protected by patent was insufficient by itself to make out a claim of market power. More was needed, including allegations about the competitive dynamics within the relevant market: “Any presumption of market power must be based upon a discussion of the products at issue, their substitutes, and the relevant markets … ” 210 F. Supp. 2d 1155, 1165 (C.D.Cal., 2002).

The Federal Circuit's Reversal

The Federal Circuit tackled the Section 1 tying claim by first rehearsing the long history of Supreme Court analysis of tying. In non-intellectual property cases, that history has evolved from a per se condemnation of tying to an approach that today calls for an affirmative demonstration of market power by the plaintiff alleging harm to competition.

In the realm of intellectual property, however, the Federal Circuit found consistency in more than 50 years of Supreme Court precedent. According to the Federal Circuit, these cases consistently have held that the statutory grant of a patent or copyright gives rise to the presumption of market power. Thus, the court held that a different standard ' one that required the court to presume market power because Trident's inkhead printer was protected by patent ' applied to tying cases like this one that involved patented intellectual property.

Specifically, the Court of Appeals concluded that because the Supreme Court held in United States v. Loew's, Inc., 371 U.S. 38 (1962), that intellectual property confers a “presumption of uniqueness,” the Court intended to establish that patents also give rise to a presumption of market power. To hold otherwise, the court reasoned Independent Ink would require it to ignore the plain language of Loew's, even if the Loew's holding has fallen into disfavor.

Many disagree, and argue that the Supreme Court never intended a different standard to apply in patent cases and, in fact, has never definitively held that the possession of patent power should give rise to a rebuttable presumption of market power sufficient to give rise to a Section 1 claim. The most recent articulation of the rule that the possession of a patent creates a rebuttable presumption of market power came in a plurality opinion in Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2 (1984). Citing Loew's, the Court held: “For example, if the government has granted the seller a patent or similar monopoly over a product, it is fair to presume that the inability to buy the product elsewhere gives the seller market power.” Justice Sandra Day O'Connor dissented vigorously. The recent release of Justice Harry Blackmun's papers has revealed the depth of Justice O'Connor's hostility to this rule, and she has been thought for many years to be on the look out for an opportunity to hold definitively to the contrary. It is ironic that the Court will finally address the issue in the term following Justice O'Connor's retirement.

In addition, those concluding that intellectual property cases are not different take issue with the Federal Circuit's interpretation of Loew's. This view is bottomed on Justice O'Connor's concurring opinion (joined by Justice William Rehnquist) in Jefferson Parish, and had been endorsed by numerous academic and legal commentators. Judge Richard Posner, for example, has written that “[M]ost patents confer too little monopoly power to be a proper object of antitrust concern. Some patents confer no monopoly power at all.” Richard A. Posner, Antitrust Law, 197-98 (2d ed. 2001).

The Federal Circuit was unconvinced: “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.” The court explained that it was bound to follow precedent even if riddled with “infirmities” and resting on “wobbly moth-eaten foundations.” Thus, to the court, the rule in Loew's was dispositive. All that remained for the court was the task of determining the scope of the rule. The court summarized its holding:

Thus, 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 arrangement, it is the defendant's burden to rebut the presumption of market power and consequent illegality that arises from patent tying.

According to the Federal Circuit, the presumption that patents confer market power was rebuttable, but the rule placed a high burden on defendants to overcome the presumption. The court made it clear that the mere presence of competing substitutes for the tying product would be insufficient to rebut the presumption of market power. Rather, the court explained: “The presumption can only be rebutted by expert testimony or other credible economic evidence of the cross-elasticity of demand, the area of effective competition, or other evidence of lack of market power.”

Predicted Outcome

Since the Federal Circuit's decision in Independent Ink, there has been an outcry in the antitrust and intellectual property communities calling for its reversal. Notably, to date not a single amicus brief in support of the Federal Court's reasoning has been filed, although a host of commentators have weighed in on behalf of reversal. In a speech in Europe, Hew Pate, then outgoing director of the Department of Justice's Antitrust Division, joined the calls for reversal, noting that both U.S. antitrust agencies have rejected the rule that intellectual property rights by themselves give rise to market power.

We expect the Supreme Court to reverse the Federal Circuit and hold that the possession of intellectual property rights creates no presumption of market power sufficient to support a Section 1 tying claim. It will be interesting to see whether the Court takes the opportunity to look at the special characteristics of technology industries and examine whether different antitrust treatment is appropriate for high-tech markets. Indeed, some have argued that because innovation proceeds at an accelerated rate in technology industries, market power conferred by intellectual property rights seldom gives rise to market power and, consequently cannot cause antitrust injury.

In addition, many in the antitrust and intellectual property community are hoping that the Supreme Court will take the opportunity to modernize the law of tying more generally. Tying claims are still technically subject to per se condemnation under the Sherman Act, even though courts jump through hoops to avoid swift application of this standard, most notably in United States v. Microsoft, where the D.C. Circuit Court held that “technology ties” ' there, the integration of functionality onto the Windows platform ' are not per se illegal, and in fact could very well benefit consumer welfare. In light of developments in economic theory that suggest tying can be pro-competitive and growing condemnation from lower courts of the per se rule, many have waited for the day a tying case would again reach the Court.

Although technology companies should get some relief from the Supreme Court's anticipated ruling, it remains to be seen whether the Court will confine itself to the issue most narrowly presented, or take the opportunity to offer more general guidance on the interplay between intellectual property rights and antitrust law.

On June 20, 2005, the Supreme Court granted certiorari in an important case for intellectual property holders seeking to navigate the sometimes-conflicting dictates of patent and antitrust law. In Independent Ink, Inc. v. Illinois Tool Works, Inc., and Trident, Inc., 396 F.3d 1492 (Fed. Cir. 2005), the U.S. Court of Appeals for the Federal Circuit held that a patent establishes a rebuttable presumption of market power in a tying case brought under Section 1 of the Sherman Act. The ruling has put the Federal Circuit at odds with several lower courts, the Antitrust Division of the Department of Justice, the Federal Trade Commission and a host of academic critics, each of which maintain that patent rights do not, by themselves, give rise to an inference of market power, and that any rule to the contrary has the potential to reduce legitimate incentives to innovate.

The Federal Circuit's ruling has been widely criticized because it makes it easier to bring tying suits against intellectual property holders, thereby further complicating life for companies already ensnared in various patent thickets. Moreover, because the Federal Circuit has taken a particularly expansive view of its own jurisdiction, the ruling in Independent Ink has a potentially greater impact on the law of tying than would a ruling by any other Court of Appeal.

Tying is regulated by the antitrust laws and may violate Section 1 of the Sherman Act where the practice serves to diminish competition in the sale of one of the bundled products by tying the sale of one product to the sale of the other. Such tying is illegal where the bundler has market power in one product (the “tying product”) and conditions its purchase on the purchase of a separate, unwanted product (the “tied product”). Under the traditional law of tying, a tying plaintiff can establish a violation of Section 1 if it can demonstrate: 1) the existence of two separate products; 2) that the defendant conditions the sale of the desired (tying) product on the sale of a second (tied) product; 3) that the arrangement affects a substantial volume of interstate commerce; and 4) that the defendant has market power in the market for the tying product. Of course, traditionally, tying is a per se offense; if the plaintiff can demonstrate the above elements, there is no need for a court to further analyze whether the defendant's practice negatively affected the market or whether the defendant proffered legitimate pro-competitive justifications for its bundle.

We discuss the Federal Circuit's decision in Independent Ink and how it has exacerbated confusion in the law of tying in IP cases.

The Facts of Independent Ink

Trident, a subsidiary of Illinois Tool Works, manufactures ink jet printheads that it sells to original equipment manufacturers (“OEMs”). The end users of the printheads typically are customers who use printers containing the printheads to place bar codes on cartons. Trident also manufactures ink for use with its patented printheads. Trident conditions sale of its printheads on purchase and exclusive use of Trident ink in all Trident-based printing systems. Specifically, the licensing agreement with OEMs grants the right to “manufacture, use, and sell … ink jet printing devices supplied by Trident” only “when used in combination with ink and ink supply systems supplied by Trident.” Trident did not claim that its ink was protected by patents. Thus, the tying arrangement explicitly conditions, or ties, sale of a patented tying product (the printheads) on the sale of an unpatented tied one (the ink).

Independent Ink manufactures ink compatible with Trident printheads. It sued in federal district court in Los Angeles, alleging that Trident was engaged in illegal tying and monopolization in violation of Sections 1 and 2 of the Sherman Act. The district court granted Trident's motion for summary judgment, holding that in order to constitute a violation of the antitrust laws under Section 1 or 2, a plaintiff must affirmatively prove market power in the tying product. The court reasoned that merely alleging that a product is protected by patent was insufficient by itself to make out a claim of market power. More was needed, including allegations about the competitive dynamics within the relevant market: “Any presumption of market power must be based upon a discussion of the products at issue, their substitutes, and the relevant markets … ” 210 F. Supp. 2d 1155, 1165 (C.D.Cal., 2002).

The Federal Circuit's Reversal

The Federal Circuit tackled the Section 1 tying claim by first rehearsing the long history of Supreme Court analysis of tying. In non-intellectual property cases, that history has evolved from a per se condemnation of tying to an approach that today calls for an affirmative demonstration of market power by the plaintiff alleging harm to competition.

In the realm of intellectual property, however, the Federal Circuit found consistency in more than 50 years of Supreme Court precedent. According to the Federal Circuit, these cases consistently have held that the statutory grant of a patent or copyright gives rise to the presumption of market power. Thus, the court held that a different standard ' one that required the court to presume market power because Trident's inkhead printer was protected by patent ' applied to tying cases like this one that involved patented intellectual property.

Specifically, the Court of Appeals concluded that because the Supreme Court held in United States v. Loew's, Inc ., 371 U.S. 38 (1962), that intellectual property confers a “presumption of uniqueness,” the Court intended to establish that patents also give rise to a presumption of market power. To hold otherwise, the court reasoned Independent Ink would require it to ignore the plain language of Loew's, even if the Loew's holding has fallen into disfavor.

Many disagree, and argue that the Supreme Court never intended a different standard to apply in patent cases and, in fact, has never definitively held that the possession of patent power should give rise to a rebuttable presumption of market power sufficient to give rise to a Section 1 claim. The most recent articulation of the rule that the possession of a patent creates a rebuttable presumption of market power came in a plurality opinion in Jefferson Parish Hospital District No. 2 v. Hyde , 466 U.S. 2 (1984). Citing Loew's, the Court held: “For example, if the government has granted the seller a patent or similar monopoly over a product, it is fair to presume that the inability to buy the product elsewhere gives the seller market power.” Justice Sandra Day O'Connor dissented vigorously. The recent release of Justice Harry Blackmun's papers has revealed the depth of Justice O'Connor's hostility to this rule, and she has been thought for many years to be on the look out for an opportunity to hold definitively to the contrary. It is ironic that the Court will finally address the issue in the term following Justice O'Connor's retirement.

In addition, those concluding that intellectual property cases are not different take issue with the Federal Circuit's interpretation of Loew's. This view is bottomed on Justice O'Connor's concurring opinion (joined by Justice William Rehnquist) in Jefferson Parish, and had been endorsed by numerous academic and legal commentators. Judge Richard Posner, for example, has written that “[M]ost patents confer too little monopoly power to be a proper object of antitrust concern. Some patents confer no monopoly power at all.” Richard A. Posner, Antitrust Law, 197-98 (2d ed. 2001).

The Federal Circuit was unconvinced: “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.” The court explained that it was bound to follow precedent even if riddled with “infirmities” and resting on “wobbly moth-eaten foundations.” Thus, to the court, the rule in Loew's was dispositive. All that remained for the court was the task of determining the scope of the rule. The court summarized its holding:

Thus, 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 arrangement, it is the defendant's burden to rebut the presumption of market power and consequent illegality that arises from patent tying.

According to the Federal Circuit, the presumption that patents confer market power was rebuttable, but the rule placed a high burden on defendants to overcome the presumption. The court made it clear that the mere presence of competing substitutes for the tying product would be insufficient to rebut the presumption of market power. Rather, the court explained: “The presumption can only be rebutted by expert testimony or other credible economic evidence of the cross-elasticity of demand, the area of effective competition, or other evidence of lack of market power.”

Predicted Outcome

Since the Federal Circuit's decision in Independent Ink, there has been an outcry in the antitrust and intellectual property communities calling for its reversal. Notably, to date not a single amicus brief in support of the Federal Court's reasoning has been filed, although a host of commentators have weighed in on behalf of reversal. In a speech in Europe, Hew Pate, then outgoing director of the Department of Justice's Antitrust Division, joined the calls for reversal, noting that both U.S. antitrust agencies have rejected the rule that intellectual property rights by themselves give rise to market power.

We expect the Supreme Court to reverse the Federal Circuit and hold that the possession of intellectual property rights creates no presumption of market power sufficient to support a Section 1 tying claim. It will be interesting to see whether the Court takes the opportunity to look at the special characteristics of technology industries and examine whether different antitrust treatment is appropriate for high-tech markets. Indeed, some have argued that because innovation proceeds at an accelerated rate in technology industries, market power conferred by intellectual property rights seldom gives rise to market power and, consequently cannot cause antitrust injury.

In addition, many in the antitrust and intellectual property community are hoping that the Supreme Court will take the opportunity to modernize the law of tying more generally. Tying claims are still technically subject to per se condemnation under the Sherman Act, even though courts jump through hoops to avoid swift application of this standard, most notably in United States v. Microsoft, where the D.C. Circuit Court held that “technology ties” ' there, the integration of functionality onto the Windows platform ' are not per se illegal, and in fact could very well benefit consumer welfare. In light of developments in economic theory that suggest tying can be pro-competitive and growing condemnation from lower courts of the per se rule, many have waited for the day a tying case would again reach the Court.

Although technology companies should get some relief from the Supreme Court's anticipated ruling, it remains to be seen whether the Court will confine itself to the issue most narrowly presented, or take the opportunity to offer more general guidance on the interplay between intellectual property rights and antitrust law.