United States: Supreme Court Strikes Down Presumption of Illegality for Tying Arrangements Involving a Patented Product

Today’s unanimous Supreme Court opinion in Illinois Tool Works, Inc. v. Independent Ink, Inc. (No. 04-1329) holds that a patent does not necessarily confer market power upon the patentee, and that in cases involving a tying arrangement, the plaintiff must prove that the defendant has market power in the alleged tying product. Today’s decision rejects the previously settled presumption that a tying arrangement involving a patented product is per se illegal and aligns federal antitrust law with the contemporary thinking of economists, antitrust scholars, and the federal antitrust enforcement agencies.

Illinois Tool Works, Inc. ("Illinois Tool") manufactures and markets printing systems that include a patented printhead and ink container, as well as unpatented ink. The company sells the systems to original equipment manufacturers ("OEMs") who agree that they will purchase ink exclusively from Illinois Tool and not refill the patented ink containers with ink of any other kind. Independent Ink, Inc. ("Independent Ink") is a distributor and supplier of printer ink products who developed an ink with the same chemical composition as Illinois Tool’s and sold it to OEMs as refill ink. Independent Ink brought an antitrust action against Illinois Tool, alleging that Illinois Tool unlawfully tied the sale of its unpatented ink with the sale of its patented printhead system. The District Court granted summary judgment to Illinois Tool on the tying claim, holding that a plaintiff who alleges tying involving a patented product must prove market power, just like any other plaintiff who alleges tying. On appeal, the Court of Appeals for the Federal Circuit reversed and held that the possession of a patent raises a rebuttable presumption of market power in a tying case.

The Supreme Court vacated the judgment of the Court of Appeals and held that, "in all cases involving a tying arrangement, the plaintiff must prove that the defendant has market power in the tying product."

• The presumption of illegality for tying arrangements involving patented goods first migrated from the Court’s patent misuse cases to the antitrust laws in International Salt Co. v. United States (1947). The patent misuse cases that formed the underpinnings for the holding in International Salt assumed, without any analysis of market conditions, that a patented good conferred the requisite market or economic power to enable the patentee to restrain competition or secure a monopoly over unpatented products by tying unpatented goods to the sale of the patented product.

• The Court acknowledged that International Salt and other early opinions consistently assumed that "tying arrangements serve hardly any purpose beyond the suppression of competition." Indeed, the Court noted that its presumption of per se illegality for tying arrangements involving a patented product was a "vestige" of this historical distrust. In more recent opinions, however, the Court’s distrust and disapproval of tying arrangements has diminished substantially. Rather than relying on assumptions of illegality, the Court has required a showing of market power in the tying market.

• Since Congress amended the Patent Act in 1988 to eliminate the market power presumption in patent misuse cases, the Court indicated this legislation invited "a reappraisal of the per se rule announced in International Salt." The Court, therefore, found that "it would be anomalous to preserve the presumption in antitrust after Congress has eliminated its foundation." For instance, the Court noted that it would be absurd to uphold the presumption of illegality under the antitrust laws, which makes such conduct a federal crime punishable by up to 10 years in prison, when the same conduct is not deemed to be misuse of a patent that prevents patentees from enjoining infringers.

• Besides overturning the International Salt rule of per se illegality, the Court expressly rejected the plaintiff’s request to adopt a rebuttable presumption of market power for tying arrangements involving patented goods, including for so-called "requirements ties." (A "requirements tie" involves the purchase of unpatented goods over a period of time and provides a means for the seller to price-discriminate between large and small purchasers of the unpatented goods.) In refusing to adopt this presumption or alternative rule, the Court noted that the "vast majority of academic literature recognizes that a patent does not necessarily confer market power" and that price discrimination "also occurs in fully competitive markets." Thus, according to the Court, "many tying arrangements, even those involving patents and requirements ties, are fully consistent with a free, competitive market." Consequently, the Court declined to adopt a rebuttable presumption of market power for these types of tying arrangements.

• The Court concluded that tying arrangements involving patented products should be evaluated under the same standards that apply to all other tying arrangements, as set forth in Jefferson Parish Hospital District No. 2 v. Hyde (1984). Thus, it is not per se unlawful for owners of patented products to engage in tying arrangements that condition the sale of their patented goods on the purchase of unpatented products, unless there is proof that the patent owner has market power in the relevant market for the tying product.

• Along with the Court’s decision yesterday in Dagher, the Court’s holding further limits the type of conduct that is deemed per se unlawful under the antitrust laws. While tying arrangements can still be per se unlawful under current antitrust precedent if a party with market power enters into such an arrangement, the Court’s opinion raises the burden for plaintiffs seeking to establish per se liability by requiring actual proof of defendant’s market power. Courts cannot presume this power from the existence of the patent or from the mere fact that the tying arrangement provides a means to price-discriminate among different purchasers.

• The Court’s decision today aligns the law’s treatment of tying arrangements involving patented products with the stated views of the federal antitrust enforcement agencies and most economists. The Department of Justice and the Federal Trade Commission’s Antitrust Guidelines for the Licensing of Intellectual Property already state that the enforcement agencies "will not presume that a patent, copyright, or trade secret necessarily confers market power upon its owner."

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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