CASRIP Newsletter - Winter 2006, Volume 13, Issue 1
Should a Court Presume that a Patented Tying Product Confers Market Power? Illinois Tool Works v. Independent Ink
By David Orange
On March 1, 2006, the United States Supreme Court reversed a long-standing presumption. In deciding Illinois Tool Works, Inc. v. Independent Ink, Inc., the Supreme Court held that an antitrust plaintiff is not entitled to presume that a patent confers market power. The Court determined that antitrust law entangled itself with the patent misuse doctrine by adopting this presumption, and used this opinion to undo that entanglement.
II. The Invention and the Tying Arrangement
Trident, a wholly owned subsidiary of Illinois Tool Works, holds U.S. Patent No. 5,343,226 (the '226 patent) directed toward an impulse ink jet cartridge that can store and deliver a large amount of ink. Prior cartridge makers have faced difficulty finding an economical way to store a large amount of ink, such that small amounts could be precisely released. Trident solved this problem and licensed its technology to printer manufacturers. The manufacturers were then able to build devices that could print barcodes on corrugated cardboard and kraft paper.
The issue was that printing onto a carton or other object requires a significant amount of ink and a fair amount of precision. The goal was to provide enough pressure to force the ink out on demand, but to ensure that no ink leaked at any other time. Trident's patent covers a tubular structure that forces the ink out in small quantities, even though there it contains a large reservoir of ink. A key innovation was that Trident's design is hand pumped, and the cost savings from this feature makes it an economically feasible alternative.
Trident also manufactures ink for use in these cartridges. When a manufacturer licenses the '226 patent it must sign Trident's standard form contract. This contract requires "OEMs to purchase their ink for Trident-based systems exclusively from Trident." The agreement specifies that a manufacturer only has patent rights to the printhead when it is used in combination with ink purchased from Trident. The Federal Circuit noted that Trident's patent suit over the ink was dismissed with prejudice.
Independent Ink competes with Trident by manufacturing ink that can be used in Trident's print systems. On August 14, 1998, Independent Ink brought a declaratory judgment action in the Central District of California asking the court to find that Trident's patents did not infringe and were invalid. Later, Independent Ink amended its claim to further allege that Trident violated Sections 1 and 2 of the Sherman Antitrust Act.
III. Procedural History
Both parties moved for summary judgment, and the court granted Trident’s summary judgment motion with respect to the antitrust claims. The District Court required Independent Ink to prove that Trident had the requisite market power to sustain its claim of illegal tying under Section 1 of the Sherman Antitrust Act. The District Court was not persuaded by contrary Supreme Court precedent, describing it as “vintage.”
The Federal Circuit reversed, rejecting the defendants' arguments that the presumption of market power residing in a patent has been subject to heavy criticism. “The fundamental error in all of defendants' 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.” The key question is whether the plaintiff needs to prove that the patented product has market power.
IV. Supreme Court’s Holding
The Supreme Court overturned its prior rulings, holding that the presumption of market power derives from the patent misuse doctrine, not antitrust law. The Court explained that Congress began unwinding these doctrines with the codification of 35 U.S.C. 271(d), and that this decision furthers this work. The Court also rejected Respondent's arguments for a rebuttable presumption of market power.
The Court's decision can be broken into four parts: (1) the Court has become significantly less likely to reject tying arrangements; (2) an explanation of how the presumption came into antitrust law; (3) why it ought to be separated from antitrust law; and (4) why a rebuttable presumption is not appropriate.
A. The Court has become significantly less likely to reject tying arrangements
In 1977, the Supreme Court reviewed a case concerning the market for prefabricated homes (Fortner II). The Home Division of the United States Steel Corporation had financed the purchase and development of land if the buyer agreed to buy prefabricated homes for the land from the Home Division. In Fortner II, the Court determined that the tying product was the loan, not the homes. The Court noted that the Home Division was simply changing its profit structure to assume more risk, and that this sort of tactic was available to others whom they were competing against. Fortner II rejected the notion that “[t]ying arrangements serve hardly any purpose beyond the suppression of competition.” The Supreme Court has not endorsed this assumption since Fortner II.
The Independent Ink Court offered litigators an idea of how it would evaluate per se violations in the future by citing to prior precedent. The Court stated, “Per se condemnation—condemnation without inquiry into actual market conditions—is only appropriate if the existence of forcing is probable. Thus, application of the per se rule focuses on the probability of anticompetitive consequences. . . . ”
B. An explanation of how the presumption came into antitrust law
The Court begins its discussion of the presumption's move from patent misuse to antitrust by noting Justice O'Connor's early recognition of this move in her Jefferson Parish concurrence. The Court then highlights three decisions, Morton Salt, Mercoid, and Carbice Corporation all of which had rejected a tying arrangement without performing an economic analysis. The concern had been that the patentee could leverage its patent monopoly to cover non-patented articles, a key concern of the patent misuse doctrine.
International Salt solidified the presumption within antitrust law. Before discussing how this occurred, the Court recognizes that it did not engage in a market analysis and instead assumed that “[t]he volume of business affected by these contracts cannot be said to be insignificant or insubstantial and the tendency of the arrangement to accomplishment of monopoly seems obvious.” The Court explained that this concept came from the Government's brief in that case, which argued that the facts of International Salt were virtually identical to Morton Salt. The Government persuaded the Supreme Court that while Morton Salt had been decided without reference to antitrust laws, its reasoning was sound in antitrust law. The Supreme Court accepted this invitation, and tying arrangements involving a patented tying product became a per se violation of the Sherman Act.
C. Why patent ought to be separated from antitrust law
The 1952 codification of the Patent Laws began the disentanglement of the patent misuse doctrine from antitrust laws. Title 35 United States Code Section 271(d) excluded certain conduct from the patent misuse doctrine, including using a patented product as a tie to an article whose only use was with a patented product. The 1988 amendment, which created §271(d)(5), is italicized and quoted in full by the Court. The Court summarizes this change: “It would be absurd to assume that Congress intended to provide that the use of a patent that merited punishment as a felony would not constitute misuse.'”
D. Why a rebuttable presumption is not appropriate
However, the Supreme Court rejects making the presumption of market power rebuttable for two reasons. First, the Supreme Court did not find that its earlier rulings created a basis for such a presumption, as opposed to the Federal Circuit, which found that earlier rulings left room for such a rebuttable presumption. Second, the Court concluded that, separately, neither a patent nor above market prices prove market power. The Court reasoned that since neither is sufficient on its own, there is no reason that the two would be sufficient when combined. The Court also commented on how Congress, the antitrust enforcement agencies and most economists had all previously realized that a patent does not confer market power.
Certainly, this case means that antitrust plaintiffs will always need to prove market power. The Court also continues its efforts to differentiate patent misuse and antitrust law. For example, the Court noted that patent misuse does not require economic analysis, whereas antitrust law is about restraint of trade. In addition, patent misuse requires analyzing the powers granted under the patent, as opposed to antitrust's focus on the effects on the entire economy.