If an antitrust plaintiff alleges that a competitor unlawfully tied a patented product to an unpatented product, must she also prove that the defendant had sufficient power to control the price or quantity of products in the patented good's market?
The Sherman Antitrust Act forbids product-tying arrangements by companies that possess substantial market power in the tying-product's market. While the party alleging the violation must generally prove such market power exists, market power is assumed when a company holds a valid patent on the tying product. Illinois Tool Works ("Illinois") makes the availability of licensing agreements for its patented products contingent on the exclusive use of other, unpatented products. It urges the Court to overturn the patent-based market-power presumption. Independent Ink, an Illinois licensee, claims that the tying arrangement improperly forces it to buy Illinois' ink, despite the availability of cheaper, effective substitutes, thereby stifling beneficial competition. The direct impact of the Court's decision, whether it preserves the status quo or changes its rule, making antitrust violations harder to prove, will be felt by sellers who tie patented products to unpatented ones, firms who buy products from such companies, and the consumers who ultimately purchase products from either company. Indirectly, the case may mark the Roberts Court's first foray into the doctrine of stare decisis, which provides insight into the current Court's view on when and how to defer to its past decisions. As a result, the effects of the decision may be felt in many areas of the Court's jurisprudence which don't deal with the antitrust law.
Questions as Framed for the Court by the Parties
Whether, in an action under the Sherman Act, 15 U.S.C. ? 1, alleging that the defendant engaged in unlawful tying by conditioning a patent license on the licensee's purchase of a non-patented good, the plaintiff must prove as part of its affirmative case that the defendant possessed market power in the relevant market for the tying product, or market power instead is presumed based solely on the existence of the patent of the tying product?
Trident is a wholly owned subsidiary of Illinois Tool Works, Inc. ("Illinois"). Independent Ink, Inc. v. Illinois Tool Works, Inc.
, 396 F.3d 1342, 1344 (Fed. Cir. 2005). Illinois manufactures patented inkjet printheads, patented ink containers, and non-patented ink for use in its printheads and ink containers. Id. at 1344?45. Illinois licenses its patented products to manufacturers as a package, and the patent license agreements require those manufacturers using Illinois's printheads and ink containers to purchase their ink exclusively from Illinois. Id. at 1345.
Independent Ink, Inc. ("Independent") is an independent distributor and supplier of printer ink products. Id. Independent filed suit against Trident in the U.S. District Court for the Central District of California, claiming that Trident was engaged in illegal tying in violation of Section 1 of the Sherman Act, 15 U.S.C. ? 1. Id. Generally, tying arrangements arise when a seller conditions the sale of one product (the "tying product") on the purchase of another product (the "tied product"). See Id. The parties do not dispute that the terms of Trident's licensing agreement create a "tying" arrangement between its non-patented ink and its patented printheads. See Id. In most situations, the party alleging the antitrust violation bears the burden of showing that such market power exists. Id. at 1347. Under the established rule, endorsed most recently by a plurality of the Supreme Court in Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2 (1984), ownership of a patent raises a rebuttable legal presumption of market power in a tying case under ?1 of the Sherman Act. Id. at 1345. This presumption may, however, be rebutted by the opposing party upon a showing of facts. See Id. at 1351?52.
The district court, however, ruled that, instead of relying on this presumption, a plaintiff alleging illegal product tying must affirmatively prove market power over the patented product. Id. at 1345. Since Independent submitted no affirmative evidence defining the relevant market or proving Trident's power to adjust prices within that market, it could not prevail on its antitrust claim. Id. The district court rejected Independent's arguments that Illinois should (because of its patents) be presumed to possess market power in the printhead and ink container markets.
On January 25, 2005, the United States Court of Appeals for the Federal Circuit reversed, reaffirming the rule from earlier Supreme Court decisions, including , 371 U.S. 38 (1962), that a patent establishes a rebuttable presumption of market power in tying cases. Id. at 1352?53. The court of appeals emphasized their duty to follow the precedents of the Supreme Court until the Court itself chooses to overrule them. Id. at 1351. Since the Supreme Court has established a presumption of market power in patent tying cases, Id. at 1351?52, the lower courts can only abandon such a rule once the Supreme Court itself sees fit to do so. Id. at 1351. On June 20, 2005 the Supreme Court granted certiorari to review the case. Illinois Tool Works, Inc. v. Independent Ink, Inc., 125 S.Ct. 2937 (2005).
Critically, Illinois Tool Works, Inc. ("Illinois"), effectively concedes that under current federal law, they lose this case. They do not argue against the existence of the market power presumption in patent tying cases. Instead, they insist that the rule must be overturned, first by attacking the foundation on which the presumption rests. In earlier tying cases, the Court concluded that, since a patent resembles a monopoly in some respects, it must convey market power the way a monopoly does. Brief for the Petitioners at 23. This conclusion ignores the fact that patents themselves only protect a unique form of a given product. Id. Even when a patented device is initially unique, it encourages competitors to develop substitute products that do not infringe on the patent. See Id. The market power requirement exists to distinguish between tying arrangements which serve benign, pro-competitive forces, and those where a company uses its dominance in one market to force a product on consumers in a different, generally competitive market. Id. at 12. By eliminating the market power requirement in patent tying cases, Illinois argues that the presumption robs federal courts of the ability to tell good tying from bad.
Illinois next argues that, historically, the Court's decisions establishing the presumption rule were based on a hostility to tying that the Court has since discarded. Id. at 20. Historically, the Court has grown increasingly aware of the beneficial effects of tying-buyers often prefer a package deal, and a seller may provide them merely to stay competitive, not to force its products on its customers. See Id. at 20?21. As a result, the Court's recent decisions have demanded a stronger showing of market power to support a finding of illegal tying. Id. at 21. In addition, the Court has never applied the presumption that a patent confers market power outside the tying context. Id. at 14. In sum, the rule has become obsolete-if the Court were deciding the issue for the first time, it would never adopt such a rule. Id. at 22.
Illinois also argues that "distinguished commentators from every point on the antitrust spectrum" feel that the Court should discard the presumption. Id. at 37. Obviously, scholarly opinion does not bind the Court. However, when the Court finds a general scholarly consensus against its past antitrust rules, it has relied on such consensus as one factor supporting a rule's abolition. Illinois urges the Court to do so in this case as well. Id. at 37. In State Oil Co. v. Khan, for example, the Court took notice of the "great weight" of scholarly authority in overruling a decision that vertical maximum price fixing constituted a per se violation of the Sherman Act. 522 U.S. 3, 12 (1997).
Regardless of the economic reality, Illinois argues that the presumption improperly distributes burdens in antitrust litigation. The presumption is difficult to rebut-parties cannot merely show that substitutes for the patented product exist, they must conduct and present a "full-blown antitrust market analysis," Id. at 31, an "enormous" expense. Id. at 32. As a result, many companies may decide to settle a claim, even when faced with "the sketchiest allegation[s]" of anti-competitive practices. Id. at 31. As a result, the rule encourages plaintiffs with sketchy claims to sue, in hopes of extorting a favorable settlement and thereby encourages frivolous litigation.
Finally, Illinois argues that other federal actors have seen the light and abandoned the presumption long ago. Federal antitrust enforcement agencies, in two presidential administrations with quite different political and economic ideologies, have refused to bring antitrust actions against companies, absent a showing of market power. Id. at 36. Again, while these agencies' actions do not bind the Court, it has found such evidence a relevant factor in past decisions, such as Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 777 (1984) (abandoning the intra-enterprise conspiracy doctrine with respect to corporations and their wholly owned subsidiaries).
Independent Ink, Inc. ("Independent") responds by emphasizing the virtues of stare decisis: it promotes stability by encouraging consumers and businesses to rely on past decisions, it fosters public confidence in the courts, and it "improves judicial decision-making" by acknowledging that longstanding precedents reflect the institutional wisdom of the Supreme Court. Brief for Respondent at 12. The doctrine applies with full force here because the decisions recognizing a market power presumption do not merely reflect evolving common law reasoning, but judicial interpretations of explicit congressional commands embodied in federal antitrust law. Id. at 12. As a result, the party challenging the rule must show that it defies "practical workability," that changes in the law make the rule obsolete, or that changed circumstances have rendered the rule insignificant or unjustified. Id. at 11?12 (citing Planned Parenthood v. Casey, 505 U.S. 833, 854?55 (1992)).
First, Independent claims that while many patents may have little or no value, and thus confer no market power, patents used in tying arrangements are a unique subset of patents. Every patent, because it embodies a limited government-granted monopoly, contains the potential for market power. Patents used in tying arrangements have realized this potential-if such products were not valuable, the tying requirement would be useless. Since consumers would normally prefer an unconditional license to a conditional one, their acceptance of a conditional license demonstrates the value of the patented product. Because valuable products confer market power, it is therefore quite reasonable to presume, in the context of patent tying, that the existence of a patented product demonstrates the existence of market power. Id. at 22.
Independent also asserts that the presumption rule itself increases efficiency and fairness. Generally, proving a positive assertion is easier than proving a negative one, but the opposite is true when proving market power. Courts normally require parties to present elaborate and costly market share analysis to establish market power. Id. at 34 To rebut a presumption of market power, however, a party need only show that effective substitutes for its goods are available. Id. at 32. The current presumption therefore puts the burden on the party best positioned to bear it, advancing meritorious claims while promptly dispatching meritless ones. Id. at 34
Next, Independent addresses Illinois' policy concerns. First, abolishing the rule would mark a substantial change in statutory policy, suggesting this is a decision that Congress, not the Court, should make. Id. at 34?35. Congress's enactment of the Patent Misuse Protection Act does not undermine the presumption-since the House deleted provisions in the Senate Bill designed to eliminate the presumption, the resulting act should be interpreted as intent to affirm the presumption. Id. at 40. The Department of Justice enforcement guidelines relied on by Illinois provide no illumination-they deal with governmental enforcement policy, reflecting administration priority, not evidentiary burdens in civil litigation. Id. at 41. Empirically, the presumption does not discourage innovation-since the Court affirmed Jefferson Parish in 1984, patent applications have only skyrocketed. Id. at 37. The law, regardless of the presumption, has other mechanisms to protect beneficial tying arrangements. For example, the requirement that illegal tyings bind economically separate products protects legitimate tying arrangements that are created to capitalize on economies of scale. Id. at 37?38.
Finally, even if the rule changes, Independent argues that it affirmatively proved Illinois' market power, and is, therefore, entitled to its verdict. Id. 45. Market power can be proven by "direct evidence" of its exercise, which the record in this case clearly reflects-how else could Illinois have persuaded Independent and other companies to buy its ink, when chemically identical alternatives offered by other companies sold for roughly one-third of their price? Id. at 46
The case raises two questions, a policy question and a legal question. The first is the soundness of the presumption that tying a patented product to an unpatented one demonstrates market power. A company wields market power when it has significant influence over the price of goods in a particular market. A monopolist, for example, clearly has market power. Since it is the only entity selling a particular good, it can price the good at the highest price that consumers are willing to pay regardless of lower prices by competitors. Illinois contends that presuming the existence of market power in tying arrangements involving patents simply fails to reflect economic reality. Since many patents have no value (and thus no demand), patent protection alone cannot establish the existence of market power. Independent counters that tying cases do not involve "most patents," they involve patents on unique and valuable products. When a company patents a valuable product, they are, in effect, exercising a government-granted monopoly over a desirable good. In such circumstances, it is perfectly reasonable to presume that they have market power, especially where the presumption is rebuttable. As a result, a rule requiring their opponents in litigation to prove such power would be absurd.
Even if the presumption represents economic reality, the question remains whether it provides a helpful rule for antitrust litigation. The presumption certainly increases an antitrust plaintiff's chance of success, simply because it has one less element to prove. Typically, litigants attempt to prove market power in court by conducting exhaustive market-share analysis, which demonstrates which firms sell products in a given market and the percentage of that market represented by each firm's products. Litigants must then pay economists to appear as expert witnesses and present this analysis at trial. Since the process costs a great deal, relieving plaintiffs of the burden of proving market power greatly reduces their litigation costs. Illinois and its supporters contend that the rule makes bringing suit too easy for antitrust plaintiffs, and, therefore, discourages companies from developing patent-worthy products, stifling innovation. It also discourages product tying, which can serve a number of legitimate purposes. Illinois Tool Works, Inc. ("Illinois"), for example, argues that tying its printheads to its own ink prevented customers from using inferior, and potentially damaging, substitute inks.
Independent Ink, Inc. ("Independent"), however, contends that the rule promotes the efficient litigation of meritorious antitrust claims, which result in lower prices and more innovating products by promoting competition. Additionally, a rule that discourages product tying is a good rule, because most product-tying arrangements improperly narrow consumer choice. Often, consumers demand patented products and cannot obtain reasonable substitutes on the open market. When companies tie a patented product to an unpatented one, they can force consumers to buy the unpatented product at a price much higher than the market price. According to the court of appeals, this is just what Illinois did-extended a legitimate monopoly on their printheads into an illegitimate monopoly on ink, even when competitors offered a chemically identical ink product at substantially lower prices.
Essentially, the parties agree that a rule requiring an affirmative showing of market power would make antitrust claims much harder to prove. Whether this is a good or bad thing depends on your view of the status quo-if you feel the current regime allows plaintiffs to force settlements on dubious antitrust claims, the new rule is a step in the right direction. However, if the current system already makes it too difficult for plaintiffs with valid claims to prevail, the rule proposed by Illinois will only make things worse.
The second question: if the current rule is not the best one, is the rule bad enough to justify overturning Supreme Court precedent? The doctrine of stare decisis dictates how much deference the Court must give to its prior decisions and generally prohibits rejecting an old rule unless it is completely unworkable or changing circumstances have rendered it illegal or unjust. The parties in this case don't really dispute what the law is-Illinois merely contends that the existing rule is wrong. As a result, the case could require the Court to revisit its stare decisis doctrine, and its decision could potentially affect its jurisprudence in a vast number of important and divisive topics. Indeed, the Court's last definitive pronouncement on stare decisis came in Planned Parenthood v. Casey, a controversial abortion-rights case that relied on stare decisis in affirming the core holding of Roe v. Wade. In theory, the Court could rely on the Casey framework either to uphold or alter the rule, depending on how it analyzes the competing policy arguments. Such deference to the Casey doctrine might indicate the Court's general reluctance to overturn even controversial precedents. Alternatively, the Court could find for Illinois by reinterpreting past decisions to find that they do not mandate the rule of presumption, or, more radically, announcing a change in the broader doctrine of stare decisis that would permit them to overturn cases like Jefferson Parish and Loew's. A decision reached in this way would indicate that many past decision now rest on shakier ground. Since this case will potentially allow two new Justices to weigh in on the doctrine, even commentators with no interest in antitrust law will be watching the decision closely.
Ultimately, congressional action in this realm seems too equivocal to bind the Court to a particular course of action. Additionally, the views of scholarly commentators and federal agencies will be important only to the extent that the Court finds their reasoning persuasive. As a result, the Court's decision will likely depend on its determination of the appropriate distribution of evidentiary burdens in antitrust litigation. Illinois and Independent offer very different views of how these burdens currently function. If the Court agrees with Illinois' view that a party can only rebut the presumption of market power with exhaustive market share analysis, it might indeed abolish the presumption or establish a rule making it easier to rebut. If it decides that Illinois is correct in contending that the current regime provides sufficient protections for legitimate tying arrangements, it may simply clarify and restate the decades-old presumption. Regardless of how it decides, a definitive ruling will undoubtedly resolve the confusion the presumption has engendered in the lower courts and will let future antitrust litigants know, for better or for worse, where they stand.Written by:
- LII Law about... Antitrust