Patents No Longer Carry a Presumption Of Market Power in Tying Cases

The United States Supreme Court's recent decision in Illinois Tools Works v. Independent Ink, 126 S. Ct. 1281 (2006), reversed almost 50 years of precedent holding that the owner of a patent was presumed to have market power in patent-related tying cases brought under the Sherman Act. The Court noted that Congressional amendments to the patent code explicitly finding that tying was not a per se patent misuse, coupled by the widely accepted view in academia that patents did not inherently lead to market power, had so eroded the legal doctrine supporting the presumption of market power in patent-related tying cases, that a new rule was appropriate. The Court held that in all future tying cases, the plaintiff must allege and prove that the defendant has actual market power in the tying product ' the mere existence of a patent is no longer sufficient.

The District Court Decision

The dispute centered on an arrangement included in license agreements between Trident and its customers, original equipment manufactures (OEMs). The OEMs used Trident's printhead system to manufacture printers that printed bar codes on cartons and paper. In the license agreement, Trident agreed to provide its patented printhead system and unpatented ink cartridges, in exchange for the OEMs agreeing to purchase their ink exclusively from Trident. The agreement also prohibited the OEM or any later distributor from refilling the patented printhead with a competitor's ink. The license agreement thus created a tying agreement basing the sale of a patented product (in this case, the patented printerhead) on the purchase of unpatented product (here, the ink).

In 1998, Independent Ink, a producer and distributor of replacement ink to be used with the Trident printhead system, sought a declaratory judgment in the Central District of California asserting that its sale of replacement ink did not cause it to infringe Trident's patents. Trident responded with a patent infringement claim against Independent Ink. That company then amended its original claim to include allegations that Trident violated '1 and '2 of the Sherman Act by illegally conditioning the sale of its patented printhead system upon the purchase of Trident's unpatented ink.

After discovery, Independent Ink and Trident filed cross-motions for summary judgment on the '1 claim, and Trident moved for summary judgment on the '2 claim. (Independent Ink added Illinois Tools Works [ITW] as a party to the action after Illinois Tool Works acquired Trident as a whole owned subsidiary approximately 6 months after the original action commenced.)

The District Court began by noting that market power is the 'power to force a purchaser to do something that he would not do in a competitive market.' 210 F.Supp.2d at 1163. The primary argument between the parties in this regard centered on whether a presumption of market power should apply in this patent-related tying case. Independent Ink argued that Trident's patent established market power as a matter of law, without any additional consideration or showing needed. ITW argued that a patent alone is insufficient evidence to prove market power.

The District Court rejected Indepen-dent Ink's arguments based on its analysis of the most current tying law. Although the District Court noted that early patent-related tying cases held that there was a presumption of market power in these types of cases, the court rejected those cases as vintage and unnecessary to its analysis.

Giving Independent Ink the benefit of the doubt, the court noted that even if the standard to determine market power in patent-related tying cases was a rebuttable presumption, ITW had provided sufficient evidence to rebut the presumption and Independent Ink had failed to provide any contrary evidence beyond the mere existence of the patent to try to prove market power. At the end, the District Court found that Independent Ink failed to show that ITW had sufficient market power in the tying product (printheads), and that its failure of evidence prevented Independent Ink from proving a violation of '1 of the Sherman Act.

The District Court denied Independent Ink's motion for summary judgment on the '1 claim, and granted Trident/ITW's motions for summary judgment on both the '1 and '2 claims. The parties then dismissed all their remaining claims, with prejudice, and Independent Ink appealed the court's grant of summary judgment on the '1 and '2 claims.

The District Court decision can be found at 210 F.Supp.2d 1155 (C.D. Cal. 2002).

The Federal Circuit Decision

The appeal of this matter went to the United States Court of Appeals for the Federal Circuit, since the district court's jurisdiction was based, in part, on the patent statutes. The Federal Circuit reversed and remanded the District Court's decision as to Independent Ink's '1 claim, but affirmed the '2 holding. 396 F.3d 1342 (Fed. Cir. 2005).

In its decision, the Federal Circuit addressed the question of whether patent tying is illegal per se (or presumptively illegal) under the Sherman Act, or whether a plaintiff is obligated to prove as part of its affirmative case that the patent confers market power in the relevant market for the tying product. Relying primarily on two Supreme Court cases, International Salt Co. v. United States, 332 U.S. 392 (1947) and United States v. Loew's, Inc., 371 U.S. 38 (1962), the Federal Circuit concluded that 'patent and copyright tying, unlike other tying cases, do not require [the plaintiff to provide] an affirmative demonstration of market power.' 396 F.3d at 1348. According to the Federal Circuit, under accepted jurisprudence, patents are presumed to establish market power.

In reaching its decision, the Federal Circuit rejected ITW's efforts to distinguish International Salt and Loew's on the grounds that both cases were brought by the United States as opposed to private parties, that both cases were no longer good law, and that numerous academic articles criticized these Supreme Court cases for relying on a presumption of market power in patent and copyright cases. According to the Federal Circuit, 'the fundamental error in all of defendants' [ITW's] 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.' 396 F.3d at 1351. Thus, despite acknowledging that the presumption of market power in tying arrangements involving patents may be outdated and perhaps should be abandoned, the Federal Circuit concluded that it was the responsibility of Congress or the Supreme Court to make that judgment.

Trying then to reach a decision within the confines of what appeared to be outdated Supreme Court precedent, the Federal Circuit concluded that the presumption of market power in patent-related tying arrangements must be a rebuttable presumption, shifting to the defendant the burden to rebut the presumption of market power and consequent illegality. 396 F.3d at 1352. In this case, however, the court found that ITW had not had sufficient opportunity to rebut the presumption of market power that stemmed from the patent, and the Federal Circuit reversed and remanded the '1 claim to give ITW an opportunity to present additional evidence on this issue.

With respect to the '2 claim, the court concluded that tied products in patent tying cases do not assume the same presumption of market power as the tying product, in a way that can establish a monopolization or attempted monopolization claim. The court believed that for a '2 claim, the plaintiff must define the market and prove defendant's power in that market to meet the burdens of their case. In this instance, the Federal Circuit agreed with the District Court that Independent Ink failed to define a relevant market, and affirmed the summary judgment in favor of ITW on the '2 claim.

The Supreme Court Decision

The Supreme Court, through Justice Stevens, began its analysis by examining the historical treatment given tying arrangements by the judiciary. 126 S. Ct. 1281 (2006).

The Court noted that the early presumptive per se illegality of all tying arrangements had gradually fallen away over time ' leaving only patent-related tying arrangements with a judicially-grafted presumption of market power. The Court then turned to the question of 'whether the presumption of market power in a patented product should survive as a matter of law.' 126 S. Ct. at 1284.

The Court's analysis began with an examination of the historical significance of International Salt ' the seminal case holding that patent-tying created a presumption of market power in the antitrust context. Because tying was, at the time of International Salt, deemed patent misuse, in International Salt the Supreme Court carried over the presumption of market power from patent misuse law into antitrust jurisprudence. However, afterwards, Congress codified and subsequently amended the patent laws expressly to eliminate the presumption of market power in the patent misuse context. Between then and now, however, no one had made the same modification in the antitrust arena.

Because Congress had removed the presumption of market power from the patent misuse statute, the Supreme Court noted that 'it would be anomalous to preserve the presumption in antitrust after Congress has eliminated its foundation [by eliminating the presumption in the patent misuse statute.]' 126 S. Ct. at 1291.

Throwing out the old rule, the Court then needed to state a new rule. Independent Ink urged that the Court discard the per se illegality rule in favor of a rebuttable presumption that patentees possess market power, or in the alternative, that tying arrangements involving the purchase of unpatented goods over a period of time sufficiently provide a showing of market power. The Court rejected the first argument by pointing out that most academic theories provide no basis to support the theory that patents inherently convey market power. It rejected the alternative argument by exposing the lack of support in the antitrust jurisprudence and associated cases.

Finally, the Court noted the cumulative effect of the Congressional amendments to the patent laws, and the general agreement between the Department of Justice, the Federal Trade Commission, and most economics scholars that patents do not confer a presumptive market power. The Court recognized that it was not bound by the decisions of these other government agencies, but it also noted that it would be unusual for the Judiciary to so obviously impose a more severe rule for a select group of antitrust cases than was recognized by the experts. The new rule is that patent cases are no different than other antitrust cases, and the plaintiff must prove the defendant has market power.

Conclusion

Importantly, the Court's decision does not eliminate patent-related tying as a cause of action. The Court merely concluded that when challenging patent-related tying arrangements, plaintiffs must allege and prove that the defendant has market power in the tying product, just as they must in other antitrust cases. The Supreme Court vacated the Federal Circuit's decision, and remanded the case specifically to allow Independent Ink to introduce additional evidence to establish ITW's relevant market power. It now remains to be seen whether the plaintiff will be able to adduce sufficient evidence to rebut a motion for summary judgment, allowing the case to proceed to trial.

The United States Supreme Court's recent decision in Illinois Tools Works v. Independent Ink , 126 S. Ct. 1281 (2006), reversed almost 50 years of precedent holding that the owner of a patent was presumed to have market power in patent-related tying cases brought under the Sherman Act. The Court noted that Congressional amendments to the patent code explicitly finding that tying was not a per se patent misuse, coupled by the widely accepted view in academia that patents did not inherently lead to market power, had so eroded the legal doctrine supporting the presumption of market power in patent-related tying cases, that a new rule was appropriate. The Court held that in all future tying cases, the plaintiff must allege and prove that the defendant has actual market power in the tying product ' the mere existence of a patent is no longer sufficient.

The District Court Decision

The dispute centered on an arrangement included in license agreements between Trident and its customers, original equipment manufactures (OEMs). The OEMs used Trident's printhead system to manufacture printers that printed bar codes on cartons and paper. In the license agreement, Trident agreed to provide its patented printhead system and unpatented ink cartridges, in exchange for the OEMs agreeing to purchase their ink exclusively from Trident. The agreement also prohibited the OEM or any later distributor from refilling the patented printhead with a competitor's ink. The license agreement thus created a tying agreement basing the sale of a patented product (in this case, the patented printerhead) on the purchase of unpatented product (here, the ink).

In 1998, Independent Ink, a producer and distributor of replacement ink to be used with the Trident printhead system, sought a declaratory judgment in the Central District of California asserting that its sale of replacement ink did not cause it to infringe Trident's patents. Trident responded with a patent infringement claim against Independent Ink. That company then amended its original claim to include allegations that Trident violated '1 and '2 of the Sherman Act by illegally conditioning the sale of its patented printhead system upon the purchase of Trident's unpatented ink.

After discovery, Independent Ink and Trident filed cross-motions for summary judgment on the '1 claim, and Trident moved for summary judgment on the '2 claim. (Independent Ink added Illinois Tools Works [ITW] as a party to the action after Illinois Tool Works acquired Trident as a whole owned subsidiary approximately 6 months after the original action commenced.)

The District Court began by noting that market power is the 'power to force a purchaser to do something that he would not do in a competitive market.' 210 F.Supp.2d at 1163. The primary argument between the parties in this regard centered on whether a presumption of market power should apply in this patent-related tying case. Independent Ink argued that Trident's patent established market power as a matter of law, without any additional consideration or showing needed. ITW argued that a patent alone is insufficient evidence to prove market power.

The District Court rejected Indepen-dent Ink's arguments based on its analysis of the most current tying law. Although the District Court noted that early patent-related tying cases held that there was a presumption of market power in these types of cases, the court rejected those cases as vintage and unnecessary to its analysis.

Giving Independent Ink the benefit of the doubt, the court noted that even if the standard to determine market power in patent-related tying cases was a rebuttable presumption, ITW had provided sufficient evidence to rebut the presumption and Independent Ink had failed to provide any contrary evidence beyond the mere existence of the patent to try to prove market power. At the end, the District Court found that Independent Ink failed to show that ITW had sufficient market power in the tying product (printheads), and that its failure of evidence prevented Independent Ink from proving a violation of '1 of the Sherman Act.

The District Court denied Independent Ink's motion for summary judgment on the '1 claim, and granted Trident/ITW's motions for summary judgment on both the '1 and '2 claims. The parties then dismissed all their remaining claims, with prejudice, and Independent Ink appealed the court's grant of summary judgment on the '1 and '2 claims.

The District Court decision can be found at 210 F.Supp.2d 1155 (C.D. Cal. 2002).

The Federal Circuit Decision

The appeal of this matter went to the United States Court of Appeals for the Federal Circuit, since the district court's jurisdiction was based, in part, on the patent statutes. The Federal Circuit reversed and remanded the District Court's decision as to Independent Ink's '1 claim, but affirmed the '2 holding. 396 F.3d 1342 (Fed. Cir. 2005).

In its decision, the Federal Circuit addressed the question of whether patent tying is illegal per se (or presumptively illegal) under the Sherman Act, or whether a plaintiff is obligated to prove as part of its affirmative case that the patent confers market power in the relevant market for the tying product. Relying primarily on two Supreme Court cases, International Salt Co. v. United States, 332 U.S. 392 (1947) and United States v. Loew's, Inc. , 371 U.S. 38 (1962), the Federal Circuit concluded that 'patent and copyright tying, unlike other tying cases, do not require [the plaintiff to provide] an affirmative demonstration of market power.' 396 F.3d at 1348. According to the Federal Circuit, under accepted jurisprudence, patents are presumed to establish market power.

In reaching its decision, the Federal Circuit rejected ITW's efforts to distinguish International Salt and Loew's on the grounds that both cases were brought by the United States as opposed to private parties, that both cases were no longer good law, and that numerous academic articles criticized these Supreme Court cases for relying on a presumption of market power in patent and copyright cases. According to the Federal Circuit, 'the fundamental error in all of defendants' [ITW's] 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.' 396 F.3d at 1351. Thus, despite acknowledging that the presumption of market power in tying arrangements involving patents may be outdated and perhaps should be abandoned, the Federal Circuit concluded that it was the responsibility of Congress or the Supreme Court to make that judgment.

Trying then to reach a decision within the confines of what appeared to be outdated Supreme Court precedent, the Federal Circuit concluded that the presumption of market power in patent-related tying arrangements must be a rebuttable presumption, shifting to the defendant the burden to rebut the presumption of market power and consequent illegality. 396 F.3d at 1352. In this case, however, the court found that ITW had not had sufficient opportunity to rebut the presumption of market power that stemmed from the patent, and the Federal Circuit reversed and remanded the '1 claim to give ITW an opportunity to present additional evidence on this issue.

With respect to the '2 claim, the court concluded that tied products in patent tying cases do not assume the same presumption of market power as the tying product, in a way that can establish a monopolization or attempted monopolization claim. The court believed that for a '2 claim, the plaintiff must define the market and prove defendant's power in that market to meet the burdens of their case. In this instance, the Federal Circuit agreed with the District Court that Independent Ink failed to define a relevant market, and affirmed the summary judgment in favor of ITW on the '2 claim.

The Supreme Court Decision

The Supreme Court, through Justice Stevens, began its analysis by examining the historical treatment given tying arrangements by the judiciary. 126 S. Ct. 1281 (2006).

The Court noted that the early presumptive per se illegality of all tying arrangements had gradually fallen away over time ' leaving only patent-related tying arrangements with a judicially-grafted presumption of market power. The Court then turned to the question of 'whether the presumption of market power in a patented product should survive as a matter of law.' 126 S. Ct. at 1284.

The Court's analysis began with an examination of the historical significance of International Salt ' the seminal case holding that patent-tying created a presumption of market power in the antitrust context. Because tying was, at the time of International Salt, deemed patent misuse, in International Salt the Supreme Court carried over the presumption of market power from patent misuse law into antitrust jurisprudence. However, afterwards, Congress codified and subsequently amended the patent laws expressly to eliminate the presumption of market power in the patent misuse context. Between then and now, however, no one had made the same modification in the antitrust arena.

Because Congress had removed the presumption of market power from the patent misuse statute, the Supreme Court noted that 'it would be anomalous to preserve the presumption in antitrust after Congress has eliminated its foundation [by eliminating the presumption in the patent misuse statute.]' 126 S. Ct. at 1291.

Throwing out the old rule, the Court then needed to state a new rule. Independent Ink urged that the Court discard the per se illegality rule in favor of a rebuttable presumption that patentees possess market power, or in the alternative, that tying arrangements involving the purchase of unpatented goods over a period of time sufficiently provide a showing of market power. The Court rejected the first argument by pointing out that most academic theories provide no basis to support the theory that patents inherently convey market power. It rejected the alternative argument by exposing the lack of support in the antitrust jurisprudence and associated cases.

Finally, the Court noted the cumulative effect of the Congressional amendments to the patent laws, and the general agreement between the Department of Justice, the Federal Trade Commission, and most economics scholars that patents do not confer a presumptive market power. The Court recognized that it was not bound by the decisions of these other government agencies, but it also noted that it would be unusual for the Judiciary to so obviously impose a more severe rule for a select group of antitrust cases than was recognized by the experts. The new rule is that patent cases are no different than other antitrust cases, and the plaintiff must prove the defendant has market power.

Conclusion

Importantly, the Court's decision does not eliminate patent-related tying as a cause of action. The Court merely concluded that when challenging patent-related tying arrangements, plaintiffs must allege and prove that the defendant has market power in the tying product, just as they must in other antitrust cases. The Supreme Court vacated the Federal Circuit's decision, and remanded the case specifically to allow Independent Ink to introduce additional evidence to establish ITW's relevant market power. It now remains to be seen whether the plaintiff will be able to adduce sufficient evidence to rebut a motion for summary judgment, allowing the case to proceed to trial.