Antitrust - Supreme Court Unanimously Rules in Favor of Defendants Alleged to Have Engaged in Illegal Patent Tying Scheme: Illinois Tool Works, Inc. v. Independent Ink, Inc., No. 04-1329, 547 U.S. ___ (March 1, 2006)
Earlier this month, the United States Supreme Court ruled in Illinois Tool Works, Inc. v. Independent Ink, Inc., No. 04-1329, 547 U.S. ___ (March 1, 2006), that the mere fact that a tying product is patented does not support
a presumption of market power in the patented product for purposes of proving an antitrust claim. The Court recognized that such a presumption had been judicially created in the antitrust context based on the equivalent
presumption in patent misuse cases. However, the Court found that the presumption of market power in the patent misuse context had been eliminated by Congress, and it found that there was no longer a reason to maintain the
presumption in the antitrust context. In its opinion, the Court noted that its decision was consistent with the vast majority of academic commentators on the issue and the current policies of antitrust regulators.
The Tying Arrangement
Illinois Tool Works (through its subsidiary, Trident, Inc.) manufactures and markets printing systems that include a patented printhead, a patented ink container, and unpatented ink. The printing systems are sold to original
equipment manufacturers (OEMs) who are licensed to incorporate the printing systems into printers and, in exchange, agree that they and their customers will only purchase ink for the printers from Illinois Tool Works. Independent
Ink developed an ink with the same chemical composition as the ink manufactured by Illinois Tool Works and desired to market their ink to OEMs and purchasers of Trident printers.
Independent Ink’s Claims Against Illinois Tool Works and Trident
Independent Ink filed suit against Trident seeking a judgment of noninfringement and invalidity of Trident’s patents. Independent Ink also alleged in an amended complaint that Illinois Tool Works and Trident were
engaged in illegal tying and monopolization in violation of Sections 1 and 2 of the Sherman Act. The District Court granted the summary judgment motion of Illinois Tool Works and Trident, rejecting Independent Ink’s
contention that they “necessarily have market power in the market for the tying product as a matter of law solely by virtue of the patent on their printhead system, thereby rendering [the] tying arrangements per se violations of the antitrust laws.” Independent Ink, Inc. v. Trident, Inc., 210 F. Supp. 2d 1155, 1159 (C.D. Cal. 2002).
The Federal Circuit Decision
The Federal Circuit reversed the District Court’s decision with respect to Independent Ink’s Section 1 claim. The Federal Circuit held that it was bound to follow the Supreme Court’s decisions recognizing
the market power presumption in International Salt Co. v. United States, 332 U.S. 392 (1947), and United States v. Loews, Inc., 371 U.S. 38, 46 (1962). The Federal Circuit also relied on the Supreme Court’s
dictum that “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” in Jefferson Parish Hospital Dist. No. 2 v. Hyde,
466 U.S. 2, 16 (1984).
Supreme Court Decision
The Supreme Court noted that the presumption of market power arising out of a patent arose in the context of patent misuse cases and “migrated from patent law to antitrust law in International Salt Co. v. United States,
332 U.S. 392 (1947).” Illinois Tool Works, 547 U.S. __, slip op. at 9. Following the International Salt opinion, Congress amended the Patent Code to eliminate the presumption of market power
in the patent misuse context. Id. at 12 (citing 35 U.S.C. §271(d)(5)).
The International Salt Court based its analysis of market power on its conclusion that tying is anticompetitive and supported its presumption by four different rules of law: (1) “improper extensions of
the patent monopoly under the patent misuse doctrine”; (2) “unfair methods of competition under §5 of the Federal Trade Commission Act”; (3) “contracts tending to create a monopoly under §3 of
the Clayton Act”; and (4) “contracts in restraint of trade under §1 of the Sherman Act.” Id. at 4.
However, in Illinois Ink, the Court noted that its strong disapproval of tying arrangements has “substantially diminished.” Id. at 5. Indeed, the Court had earlier recognized that
tying may have procompetitive effects. United States Steel Corp. v. Fortner Enterprises, Inc., 429 U.S. 610, 622 (1977) (Fortner II).
Because the presumption of market power had been eliminated in the patent misuse context and the Court’s prior conclusion that tying was inherently anticompetitive had been repudiated, the Court held (in an 8-0 decision, with
Justice Alito not participating) that “tying arrangements involving patented products should be evaluated under the standards applied in cases like Fortner II and Jefferson Parish, rather than looking
at the per se rule in Morton Salt and Loew’s.” Illinois Tool Works, 547 U.S. __, slip op. at 13. As the Court put it “[w]hile some” tying arrangements involving
patent products “are still unlawful, such as those that are the product of a true monopoly or a marketwide conspiracy, see, e.g., United States v. Paramount Pictures, Inc., 334 U.S. 131, 145-46 (1948), that
conclusion must be supported by proof of power in the relevant market rather than by a mere presumption thereof.” Id.
The Court also rejected Independent Ink’s argument that it should retain the presumption of market power in a patented product as a rebuttable presumption. The Court noted that “the vast majority of academic literature
recognizes that a patent does not necessarily confer market power.” Id. at 15. The Court further reasoned: “Many tying arrangements, even those involving patents and requirements ties, are
fully consistent with a free, competitive market.” Id. at 16. Finally, the Court referred to “antitrust guidelines issued jointly by the Department of Justice and the Federal Trade Commission”
stating “that in the exercise of their prosecutorial discretion they ‘will not presume that a patent, copyright, or trade secret necessarily confers market power upon its owner.’” Id. (citing
U.S. Dept. of Justice and FTC, Antitrust Guidelines for the Licensing of Intellectual Property §2.2 (Apr. 6, 1995)). Based on these factors, the Court determined that there was no basis to create a rebuttable presumption
of market power.
In its disposition of the case, the Court did not simply reverse. Instead, it noted that “respondent reasonably relied on our prior opinions in moving for summary judgment without offering evidence defining the relevant
market or providing that petitioners possess power within it.” Id. at 16-17. Accordingly, the Court remanded the case to the District Court to permit Independent Ink to produce evidence defining the relevant
market and proving that Illinois Tool Works and Trident possess market power in the relevant market. Id. at 17.
Conclusion – Unanimous, But In What Direction?
Illinois Tool Works is the third case just this year in which the Supreme Court has ruled unanimously in favor of defendants in antitrust claims. Unanimous decisions are, of course, gratifying for (half) of the
litigants; and, at first blush, they may suggest strong agreement on important principles. In fact, however, at the Supreme Court, unanimity may indicate almost the opposite – that the decision is narrow and limited
to those issues upon which all the justice could agree.
Illinois Tool Works is clearly important because it reversed prior authority on an issue that genuinely matters to litigants. A rule that a patent per se connotes market power means that plaintiffs do
not need to define a market and demonstrate a power in it.
At the same time, as the Court notes, the precise issue on which Illinois Tool Works reversed prior law had grown to be an anomaly in the law. It is common sense that patents do not automatically produce market power.
As counsel from Morrison & Forrester put it in a recent ABA CLE, “you can patent a pen. That doesn’t mean that no one else can compete effectively.” Most commentators expected the Supreme
Court to recognize this point. And the fact that Justice Stevens could speak for a unanimous court illustrates that the reasoning cuts across judicial philosophy.
Ironically, the unanimous decision in favor of the defendants in Illinois Tool Works might actually end up being cited as much or more by plaintiffs than defendants in future cases. The Court’s obviously approving
reference to Paramount Pictures is interesting. Paramount Pictures is a 1948 decision written by Justice Douglas that upheld findings in favor of the Government in a lawsuit seeking to enjoin a wide array
of practices in the motion picture industry. Some quotes may help to illustrate the tenor of the decision. Paramount Pictures is a ruling that “start[s], of course from the premise that so far as the
Sherman Act is concerned, a price-fixing combination is illegal per se.” 334 U.S. at 143. Paramount Pictures finds “incontestable” that a vertical conspiracy between movie distributors
and their licensees to set a minimum admission price for movies is indistinguishable and that the rewards that flow from this attempt to use copyrights to obtain this result, like the use of a patent “are not reasonably and
normally adapted to secure pecuniary award for the [intellectual property holder’s] monopoly.” Id. at 144. In the two pages, the Illinois Tool Works court specifically references in its
citation, Paramount Pictures finds that requirements by movie distributors that exhibitors obtain a clearance to show files were “unreasonable,” where they “acquired a fixed an uniform character and
were made applicable to situations without regard to the special circumstances which are necessary to sustain them as reasonable restraints of trade. Id. at 145-46. Paramount Pictures also condemns certain
pooling arrangements and joint ownership as “fruits of monopolistic practices or restraints of trade” that “should be divested.” Id. at 152. And, analogizing the law to patents, Paramount Pictures “approve[s]” an injunction on block-booking arrangements in which the distributors licensed a particular movie on condition that the exhibitors agree to license other movies as “illegal” because “it
adds to the monopoly of a single copyrighted picture that of another copyrighted picture.” Id. at 156-57. It remains to be seen how the Court’s reference to Paramount Pictures may be cited
in future cases. Indeed, in light of the fact that the Illinois Tool Works Court permitted plaintiffs to plead and to prove market power on remand, the application of the principles of Paramount Pictures would
seem to be a significant issue on remand.