On Tuesday the Court will hear oral argument in Illinois Tool Works, Inc. v. Independent Ink, Inc., No. 04-1329. The case pits decades-old precedent at the intersection of antitrust and patent law against subsequent conceptual changes in both fields.
Petitioner Illinois Tool Works, supported by the Government as amicus curiae, argues that a plaintiff alleging unlawful tying of a patent license to the purchase of a non-patented good, in violation of section 1 of the Sherman Antitrust Act, should have to prove that the defendant has market power in the market for the tying product. Respondent Independent Ink argues that the Court’s precedents presuming market power when patents are involved should be reaffirmed. The Federal Circuit felt bound by those precedents below despite its concerns that they “contain many ‘infirmities’ and rest upon ‘wobbly, moth-eaten foundations.'”
Andrew Pincus of Mayer Brown in Washington will argue for petitioners. Kathleen Sullivan of Quinn Emanuel in Redwood Shores, CA will argue for respondent. Thomas Hungar, Deputy Solicitor General, will argue for the United States in support of petitioners.
Parties’ briefs (except petitioners’ reply) can be found here.
The Government’s brief can be found here.
The opinion below can be found here.
Petitioner Trident, now a division of petitioner Illinois Tool Works, produces specialized inkjet printheads and inks, which it then sells to OEMs (original equipment manufacturers) who incorporate them into larger pieces of printing equipment, mostly used for bar coding and product labeling. The OEMs then sell packaging assembly-lines using the printers to end-users. Trident holds several patents covering the printing technology used in its printheads. Trident has conditioned the licensing of its printhead technology on an agreement that both the OEM and the end-user customer use only Trident-manufactured ink in systems incorporating its technology. This type of arrangement — in which the sale of one product (here, the printhead technology license) is conditioned on the sale of another (ink) — is known in the antitrust world as “tying.” More specifically, this is a “requirements tie,” which requires a customer who wants to buy a product also to purchase supplies needed to use that product from the same manufacturer on an ongoing basis.
Respondent Independent Ink manufactures specialty inks — including one that it markets as a substitute for the ink Trident sells for its printheads – and sells this ink at prices significantly below those charged by Trident. After a patent infringement suit brought by Trident against Independent and other replacement ink manufacturers was dismissed on jurisdictional grounds, Independent brought this suit against Trident. It initially sought a declaratory judgment of non-infringement and invalidity and then added antitrust claims, including the one at issue in the Court: violation of Section 1 of the Sherman Act, which proscribes any “contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce.” Under modern antitrust law, tying arrangements are considered “per se illegal” when the plaintiff can prove that the defendant has market power in the relevant market for the tying product. Market power means that the producer can raise prices above competitive levels, and is typically shown by the use of expert testimony involving complex economic analysis.
In 1947, in International Salt Co. v. United States, the Court upheld a judgment that the defendant violated the Sherman Act when it conditioned the lease of its patented salt-processing machines on the purchase of salt. It did so without any discussion of the defendant’s market power. In subsequent decisions, the Court characterized International Salt as creating a presumption of market power when the tying product is patented. In 1962, United States v. Loew’s, Inc. made this rule express and applied it to a case involving a copyrighted tying product. The presumption has been acknowledged in various of the Court’s opinions, at least as recently as 1984.
Petitioners’ argument (as well as the Government’s) is essentially that any basis for the judicially created presumption has disappeared. Petitioners first argue that the presumption was created without careful analysis and is therefore due little deference, particularly because Congress has delegated to the courts the responsibility of developing the antitrust field in common-law fashion. Early precedent was created in the context of two understandings that have since been rejected. First, tying arrangements were once considered per se illegal under the Sherman Act in the more usual sense, without the plaintiff having to demonstrate market power to the extent required under modern law. Tying was then viewed with deep suspicion, while today it is thought to often have procompetitive justifications. A presumption in the old regime thus would have been of little importance, whereas today it relieves the plaintiff of a significant burden and subjects potentially procompetitive activity to sanction. Second, the Court drew on cases involving the equitable doctrine of patent misuse, which once permitted courts to invalidate patents used in tying arrangements without a demonstration of anticompetitive effect, because the patentee was trying to extend the scope of his patent into nonpatented products in violation of patent law’s underlying public policy. That rationale does not support a presumption in the antitrust context, and in any event has been overruled by act of Congress.
The Government goes further on this point, arguing that the Court has never squarely held that patents create a presumption of market power, and should not hesitate to overturn dicta. Indeed, in one case between International Salt and Loew’s, the Court rejected any distinction between patented and nonpatented tying products, suggesting that market power is irrelevant in both cases.
Petitioners next attack the notion that market power can rationally be presumed from the existence of a patent. Most patents (perhaps 97%) are simply valueless, and even those with some value do not necessarily confer market power. While a patentee holds a “monopoly” on his invention, in the sense that she may exclude others from making or using it, there are typically noninfringing substitutes available in the market. The patentee no more automatically violates the antitrust law than does a landowner who excludes others from his real property. The vast majority of scholarly commentary has rejected the presumption, and no empirical evidence directly supports it. Petitioners also note that the presumption is in tension with the rest of the law. The Court has refused to hold that patents create a presumption of market power in any other antitrust context besides tying. Where tying products are unpatented, plaintiffs must make a difficult showing of market power. Congress has also declared that courts not find patent misuse because of tying unless the infringer shows that the patentee has market power.
Petitioners give several policy reasons for getting rid of the presumption. As economists have come to realize, tying arrangements may well have procompetitive justifications. By making it easier to bring suit, a market power presumption encourages costly, meritless litigation and discourages efficient tying and maybe even invention. The Government also argues that it makes little sense to have a presumption only in the tying context, since multiple antitrust claims are often joined in a single suit, and proof of market power will be required for the others.
Petitioners finally point to what the other branches have done. The agencies charged with public enforcement of the antitrust laws, the FTC and DoJ, have by joint policy for the last ten years refused to presume market power from the existence of a patent. And although Congress hasn’t done anything about the presumption despite having clearly considered it on several occasions, petitioners argue that little should be inferred from that ambiguous inaction, as Congress’s failure to override the presumption stems from untimely amendments and Congress’ belief that the issue would be appropriately resolved by the courts.
Respondent naturally emphasizes the importance of stare decisis in statutory interpretation, and argues that petitioners have not met the heavy burden required to overturn it. It first argues that the presumption is indeed well-established, having been based on the Court’s substantial experience with patent tying arrangements and having been repeatedly acknowledged and reaffirmed in the Court’s opinions.
Respondent then turns to its argument that the presumption is sensible. It attacks respondent’s analysis for focusing on the wrong target. The question is not whether most patents convey market power, but rather whether patents that are used to impose tying arrangements and that are the subject of lawsuits are likely to create market power. While most patents are valueless, a very few are very valuable, and these patents are likely to be used in tying arrangements. Further, patent tying arrangements are likely to be requirements ties, a more suspect type of tie likely to be motivated at best by price discrimination, itself evidence of market power. Patents involved in litigation are also likely to be among the most valuable. And because plaintiffs are likely to be small businesses or consumers who cannot afford the expert testimony needed to prove market power, the presumption furthers enforcement of the antitrust laws by shifting the burden to the defendant who likely has market power and is in the best position to efficiently prove or disprove the fact. The presumption will not create meritless suits and discourage efficient arrangements because the plaintiff still must have standing and make out the other elements of a tying claim, and because the defendant still has affirmative defenses available to it (such as procompetitive effects). Moreover, the presumption has existed for decades and petitioners cannot show that it has already had this effect.
Given the role of stare decisis, respondent also argues that petitioners’ arguments are better addressed to Congress, which has repeatedly rejected proposals to explicitly eliminate the presumption even while it rationally chose to eliminate the presumption in the patent misuse context. Further, respondent suggests that when Congress passed Section 3 of the Clayton Act in 1914, making it unlawful to engage in tying arrangements that substantially lessen competition, whether involving “patented or unpatented” products, it took this area of antitrust law out of the common-law-style development elsewhere envisioned.
Respondent finally argues that the decision below should be affirmed even if the Court eliminates the presumption because it sufficiently demonstrated market power. Record evidence suggests that Petitioner dominates the inkjet printhead market, holds valuable patents, engaged in a requirements tie, and imposed ink prices that its customers would not have paid in a competitive market. Market power can be shown directly and need not be proven indirectly by economic analysis, although it usually is. The problem is that the trial court found no evidence of market power.
In their reply, petitioners reaffirm the Court’s power to overturn bad precedent, and emphasize that the precedent here has not been applied by the Court in 42 years and was not based on the types of empirical arguments made by petitioners. They also argue that respondents’ rationales for the presumption fail to distinguish patent tying cases from other tying cases (or at least other requirements ties cases), or patent from other patent antitrust cases. Courts and Congress have rejected the presumption for these other types of cases. They also accuse respondent of confusing valuable patents with patents that confer market power; even if patents involved in tying litigation are likely to be valuable, that does not itself establish that such patents confer market power. The presumption does have bad consequences because it enables plaintiffs to survive summary judgment even where the tying is procompetitive. Plaintiffs are sufficiently encouraged to bring suits by the prospect of attorney’s fees and treble damages, and the burden of proving market power is not excessive (as confirmed by respondent’s assertion that it has satisfied the burden). Finally, petitioners point to the lower courts’ findings that respondent offered no evidence of market power.
Petitioners and the Government appear correct in suggesting that it’s very unlikely that the Court would adopt the presumption if it were deciding the issue for the first time today. The question is whether the law and our understanding of economics have changed so much as to justify overturning precedent. The court has at least once before refused to overturn a problematic piece of antitrust precedent on stare decisis grounds. In Flood v. Kuhn, the Court refused to overturn precedent exempting professional baseball from the antitrust laws, even though the precedent originated in a holding that baseball did not involve interstate commerce, and even though the Court had refused to extend the exemption to any other professional sport. There, too, the Court looked to Congressional inaction. Respondent will emphasize that the burden is on petitioners to overcome stare decisis, not on it to support precedent, and we will see if the Court thinks petitioners have done so.
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