Center for Advanced Study & Research on Intellectual Property

 

CASRIP Newsletter - Spring 2007, Volume 14, Issue 2

"Patent Equals Market Power" Presumption in Tying Cases Overruled in the U.S.;
Remarks from the European Experience1

By Rita Coco2

In Illinois Tool Works, Inc. v. Independent Ink, Inc.3 (“Illinois Tool”) the United States Supreme Court held that, for antitrust purposes under § 1 of the Sherman Act, whether a patented product in a tying arrangement entails market power upon the patentee cannot be presumed, it must be proved. It is hence not a matter of law, but of fact.4

The case arose because the petitioner had tied the sale of patented printer machine components with the purchase of unpatented ink, through licensing agreements entered into with original equipment manufacturers. A rival ink manufacturer challenged these agreements as illegal tying under the Sherman Act.

Illinois Tool is the last of many Supreme Court opinions addressing tie-in, most of which occurred in patent infringement litigation.5 It redresses a criticized unbalance with no economic ground6 , clarifying that patent ties do not deserve a stricter regime than the non-patent ties for the market power requisite. It does not go further, however, to address whether patent ties also deserve a more lenient treatment, in the view of the special function of patents.7 With this regard, the opinion contains some inconsistencies. Whereas in its analysis of precedent the Court seems to suggest the maintenance of the per se rule for tying patent, providing the market power requisite exists, while other parts of the opinion suggest that patent tie-ins matter only in specific cases, i.e. when they are realized by dominant firms or when they stem from horizontal agreements amid competitors. Neither is it clear how far the opinion pushes the untwining between antitrust and the patent misuse doctrine,8 very distinctive of the American system.

How would the decision have come out had the case been dealt with by European competition bodies? The answer is not straightforward, as these bodies (European Courts and Commission) have decided few cases involving patents, and especially patent tie-ins. Nonetheless, the slight case law and the current legal framework give some useful insights on the subject.

Broadly speaking, the European system has shifted from a per se approach, to a more economic-oriented regime, whereby the rule of reason applies consistently to tie-in in general and to tie-in involving patent (and other IP rights) in particular. Under this modern regime, laid down by two block exemption regulations, cooperative tie-ins require a certain degree of market power -- distinct from the dominant position required for abusive unilateral tie-ins, although it is not clear to what extent -- and they are subject to the anti-competitive vis à vis pro-competitive effects balance test. However, this regime embeds overwhelming definitions and standards, whose usefulness has to be gauged with the fact that data and figures for markets and market shares are often not quite easily discernable, especially in the knowledge / technology economy.

The first section of this article will review the main features of the Illinois Tool ruling, while tracking through its analysis the judicial and legislative history of patent tie- in the U.S. The second section will outline the European experience with tie-in involving patents. The third section will draw conclusive remarks on the comparison of the U.S. and European experiences.

I. Patent, market power and tying: Illinois Tool and its background

A. The Facts

Trident Inc. (“Trident”) and its parent Illinois Tool Works Inc. (“Illinois Tool”) manufactured and marketed printing systems that included three components: (1) a patented piezoelectric impulse ink jet printhead; (2) a patented ink container; and (3) unpatented replacement ink, specifically designed for the system.9

Trident entered into license agreements with original equipment manufacturers (OEMs), who were authorized to incorporate the printing system into barcode printers, upon the condition that they purchase original ink exclusively from the system’s sellers, and that neither they nor their customers would purchase the ink from another source.

A rival printing ink company, Independent Ink, Inc. (“Independent Ink”) developed an equivalent ink with the same composition as the original one. After a previous lawsuit between the parties,10 the same facts triggered a civil antitrust action, in which Independent Ink alleged that Trident and Illinois Tool were engaged in illegal tying and monopolization under § 1 and § 2 of the Sherman Act.11

Those facts were first examined by the District Court for the Central District of California. The District Court granted summary judgment in favor of the defendants, rejecting the plaintiff’s argument that the defendants necessarily had market power as a matter of law, solely by virtue of the patent on their printhead system. Finding that the plaintiff had not submitted affirmative evidence defining the relevant market and establishing defendants’ power within it, the court concluded plaintiff could not prevail on either antitrust claim. On appeal, the Court of Appeals for the Federal Circuit reversed and remanded but only with regard to the § 1 claim,12 concluding it was the Federal Circuit’s duty to follow Supreme Court precedent on the matter.13

After granting certiorari to undertake a “fresh examination of the history of the judicial and legislative appraisal of tying arrangements,” Justice Stevens delivered the opinion of the Court, expressing the unanimous view of all the participating members (absent J. Alito).

B. The Decision

The Supreme Court held that, because a patent does not necessarily confer market power upon the patentee, in order to apply § 1 of the Sherman Act to tying arrangements, the plaintiff must prove that the defendant has market power in the patented tying product. Significantly, the Court stated:

- “[T]ying arrangements involving patented products should be evaluated under the standards applied in cases like Fortner II and Jefferson Parish rather than under the per se rule applied in Morton Salt and Loew’s. While some such arrangements are still unlawful, such as those that are the product of a true monopoly or a marketwide conspiracy … that conclusion must be supported by proof of power in the relevant market rather than by a mere presumption thereof”.14

- “Congress, the antitrust enforcement agencies, and most economists have all reached the conclusion that a patent does not necessarily confer market power upon the patentee. Today, we reach the same conclusion, and therefore hold that, in all cases involving a tying arrangement, the plaintiff must prove that the defendant has market power in the tying product.”15

Accordingly, the Court vacated the Federal Circuit’s judgment and remanded for further proceedings, so that the plaintiff could offer evidence defining the relevant market and proving that defendants possess power therein, as well other issues relevant to the remaining § 1 Sherman Act claim.

C. Reasoning and background of the decision

The opinion outlines a thorough review of the Supreme Court precedent on tying arrangements, which also presents a history of the patent misuse doctrine and its intertwining with antitrust law.16

Briefly, the Court first considered that the presumption of market power in patent tying arrangements -- i.e., arrangements in which the sale of a patented product (the “tying” product) is conditioned upon the purchase of a second product (the “tied” product) -- was originally borrowed from the patent misuse doctrine. Yet, later on the presumption was undermined in the context of patent misuse through amendment by Congress of the Patent Act in 1988. For that reason, and considering that many tying agreements, even those involving patents, are “fully consistent with a free competitive market,”17 the Court considered the rule to be superseded.

More in detail, the Court previously addressed the development of its own case law. In a former patent infringement case,18 the Court had to decide whether unpatended ink was illegally tied to the use of a patented product through a licensing agreement -- a set of facts very similar to Illinois Tool. The Court held that the use of competitor’s ink in violation of the agreement constituted infringement of the patent on the machine. A strong dissenting opinion in the same case, expressing disapproval of tying arrangement19 , was followed by the enactment of § 3 of the Clayton Act, prohibiting tying arrangements involving patented and unpatented goods.20

Subsequent cases dealt with by the Supreme Court embraced the disapproval for tie-ins, seen either as improper extensions of the patent monopoly under the patent misuse doctrine, or as alternative illegal conduct under additional provisions which embedded the same disfavor.21 In doing so, the Court consistently assumed the per se illegality of tying arrangements, the rationale being that they “serve hardly any purpose beyond the suppression of competition”.22 Starting from Morton Salt, 23 the presumption that “patent equals market power” migrated from the patent misuse field to antitrust law and the same patent misuse and antitrust jurisprudence became intertwined.24

Over the years, the Supreme Court’s strong disapproval of tying arrangements has substantially diminished and some dissenting opinions in former cases have grounded subsequent holdings that tying arrangements may well be pro-competitive. Consequently the Court gradually moved from relying on assumptions to requiring a showing of market power in the tying product. In this sense, Fortner II and Jefferson Parish rejected the per se rule of illegality for tying arrangements25 . Even though both rulings did not involve patents, the Court declared them as applicable to Illinois Tool. Namely, the Court read Jefferson Parish as only embedding the rule that “a contract to sell a patented good on condition that the purchaser buy unpatented goods exclusively from the patentee is per se violation of § 1 of the Sherman Act”26 , whereas not as implying any market power presumption for patent.

In the proceeding of the reasoning, the Court also considered the legislative history of patent tie-in.27 When Congress codified the patent laws, as 35 U.S.C. § 1 et seq., as well as the patent misuse doctrine, it narrowed the scope of this doctrine. First it excluded some conduct from the patent misuse scope (sale of tied “essential” or “non staple” products that have no use except as part of the patented product or method); then, with the 1988 amendment of 35 U.S.C. § 271(d)(5), it exempted a patent owner from patent misuse or illegal extension of the patent right by reason of a tying arrangement “unless in view of the circumstances, the patent owner has market power in the relevant market for the patent or the patented product on which the license or sale is conditioned.”28 This wording makes it clear, in the reasoning of the Court, that Congress did not intend the mere existence of a patent to constitute the requisite market power. Even if this amendment does not refer to antitrust law, the Court considered it as an invitation for reappraisal of the per se rule of illegality of tying arrangement. The Court reasoned that if the presumption that patent equals market power does not apply any longer to patent misuse (considered a lower offense), it would be “absurd” to preserve the presumption in the antitrust context (a worse offense, punished under criminal law), as well as “anomalous,” considering Congress eliminated its foundation in the patent misuse context29 .

Moreover, as expressly acknowledged by the Court, its decision is informed by extensive scholarly comment and a change in position by the administrative agencies charged with the enforcement of the antitrust laws. Regarding the first, the Court considered the conclusion consistent with the vast majority of academic literature on the subject;30 regarding the second, the Court relied on the Guidelines on intellectual property licensing issued jointly by the DOJ-FTC in 1995,31 which do not presume that a patent, copyright, or trade secret necessarily confers market power upon its owners.32

The Court also rejected two other arguments by the plaintiff: one that, if not in any case, the rebuttable presumption that a patent confers market power must apply at least relatively (referred to the licensee) instead of absolutely (referred to the market), where tying patented products entails patentee to exerting significant pressure upon the licensee; the other, that the market power must be presumed by the above-market price for the tied package. In rejecting these arguments, the Court endorses a Chicago-style approach, holding that many tying arrangements, even those involving patents, “are fully consistent with a free, competitive market.”33

Lastly, the Court recognises that the Illinois Tool case -- the first, since the presumption “patent equals market power” took place on 1947, in which it granted review to consider the presumption’s continuing validity -- as the ultimate step of the untwining process between patent misuse and antitrust claims.34

D. Framework for the evaluation of tying agreements in the U.S.

Framing the opinion within the general issue of the assessment of patent and non-patent tying agreements in the U.S. experience, it can be observed that the different forms of tie-in35 have been attacked as antitrust violations under several provisions, such as: § 1 of the Sherman Act (prohibiting anticompetitive agreements), § 2 of the Sherman Act (prohibiting monopolization, attempt to monopolize and conspiracy for the same purpose36 ), § 3 of the Clayton Act (prohibiting specifically anticompetitive tie-ins), and § 5 of the FTC Act (prohibiting unfair methods of competition). Depending on the circumstances, they have been assessed under the rule of per se illegality or the rule of reason.37

Under § 1 Sherman Act, the relevant provision in the present analysis, there are essentially four element of per se illegal ties: (1) the tying and the tied products are two distinct products; (2) there is an agreement or condition, expressed or implied, that establishes a tie; (3) the accused party has an “appreciable economic power in the tying product market”38 -- to distort consumers’ choices with respect to the tied product; and (4) “the arrangement affects a substantial volume of commerce in the tied market”.39 Depending on the court, a fifth element is possibly required, i.e. anticompetitive effects in the tied market.40

Similar tests are required under section 5.3 of the DOJ-FTC Antitrust Guidelines for the Licensing of Intellectual Property, addressing tying arrangements, which also specify that, in the exercise of their prosecutorial discretion, the Agencies will look at the structure of the market as well as to justifications when assessing tying, tie-in and tied sale, and they will consider both the anticompetitive effects and the efficiencies attributable to them. As seen above, these Agencies do not presume that a patent, copyright, or trade secret necessarily confer market power upon its owner.41

In sum, in the U.S. experience the case law on tie-ins and patent tie-ins is very extensive, patent tie-ins case law is intertwined with the patent misuse doctrine, and many provisions might apply. In any case, after Illinois Tool, the evaluation of both, patent tie-ins and non-patent tie-in, rely on the seller’s power to coerce the buyer to do something he would not do were such power absent. Similar outcome can now be observed within the European system, even if only at regulatory level, being the relative case law very narrow.

II. Patent, market power and tying: The European experience

The Illinois Tool case raises three related issues: (1) whether a patent entails market power, in general; (2) whether a patent product in a tying arrangement entails market power; and (3) whether and how patent tying is relevant under antitrust law.

As for the first, the finding that the legal monopoly based upon a patent, as such, does not entail any economic monopoly or market power is now widely recognized, as the same Illinois Tool acknowledges.42 Thus, the following analysis of the European experience will address only the second and third issues43 .

A. Tying, patents and market power at the junction of Article 81 and Article 82 EC Treaty

In the European system, tying practices are subject to scrutiny as restrictive agreements under Article 81 (formerly 85) EC, 44 and as abuse of dominant position under Article 82 (formerly 86) EC.45 Generally speaking, the market power requisite applies to the latter, yet not to the former. Indeed, Article 81.1 EC -- almost the counterpart of § 1 Sherman Act -- prohibits agreements between undertakings which have as their object or effect an appreciable restriction or distortion of the competition within the common market, provided the interstate trade is affected appreciably, i.e., above a de minimis threshold.46 When anticompetitive agreements occur, nonetheless they might be allowed under Article 81.3 EC if their efficiency gains outweigh the anticompetitive effects, while allowing consumers to share the resulting benefits. Article 82 EC -- almost the counterpart of § 2 Sherman Act -- addresses unilateral conduct and prohibits any exploitative or exclusionary abuse of a dominant position47 by one or more undertakings,48 where the abuse has an effect on interstate trade.

Exceptional to the no-market-power-requisite for restrictive agreements (applicable to horizontal agreements, i.e. agreements among competitors), however, is the case of vertical agreements,49 to which tie-ins belong. This is a recent outcome coinciding with the endorsement of an economical approach by the Commission, most recently via enactment of the Block Exemption Regulation on Vertical Restraints and the Technology Transfer Block Exemption Regulation.50 Previously, a per se rule mostly applied and vertical tying cases were deemed as illegal, regardless of market power. Both the case law reported in the following section and the history of block exemption regulations for technology transfer agreements illustrate this evolution.51

Said that, two landmark European decisions can be considered, one outlawing a tying agreement under Article 85 (now 81) EC, the other outlawing a unilateral tying case by a dominant firm under Article 86 (now 82) EC. This latter is interesting for the definition of the relevant market, which is a common prong for the evaluation of cooperative tie-ins under Article 81 and unilateral tie-ins Article 82. Then, the criteria endorsed by the modern economical approach to vertical tie-ins will also be outlined.

1. The former approach: tie-in “per se” illegal in Windsurfing case

In Windsurfing International v. Commission52 (“Windsurfing”) the European Court of Justice (“ECJ”) upheld a European Commission (“Commission”) decision53 finding incompatible with Article 85.1 (now 81.1) a patent licensing agreement containing obligations placed on the licensees only to use components approved by the licensor and to sell the patented product in conjunction with a product outside the scope of the patent clauses.

Windsurfing International was an American company manufacturing sailboards, an apparatus composed of a “board” (a hull made of synthetic material equipped with a centre-board) and a “rig” (an assemblage consisting essentially of a mast, a joint for the mast, a sail and spars) which make it possible to combine the art of surfing with the sport of sailing. After having been granted patents for the sailboard in Germany and other European countries, the company licensed exclusive temporary licenses for the production and sale of sailboards in Europe, incorporating its know-how. Windsurfing conditioned such licenses upon certain obligations, including: (a) the obligation of the licensee to exploit the licensed patents only for the purpose of mounting the patented rig on certain types of board specified in the agreement and the obligation to submit for the licensor’s approval, prior to their being placed on the market, any new board types on which the licensees intended to use the rigs; (b) the obligation of the licensees not to supply rigs manufactured under the German patent separately and without the boards approved by Windsurfing International’s prior approval. In fact, the licensing agreement defined the product as a complete sailboard consisting of the rig and “a precisely-defined type of board manufactured by the licensee,” subject therefore to its approval under the terms of the agreement.

The Commission found, and the ECJ upheld, that those clauses were restrictive of competition, in that the German patent granted to Windsurf covered only the “rig” for a sailboard and not the board. Consequently, tying the license to the rig upon the sale or the approval of the board was considered anticompetitive under Article 85.1. (now 81.1). In doing so, the ECJ upheld as a “reasonable assessment,” the Commission’s view that the scope of the patent covered only the right of the sailboard but not the board.54

The rig and the board were deemed to identify two separate product markets and, since the patent was deemed as confined to the rig, the Court considered the “arbitrarily placed” obligation on the licensee only to sell the patented product in conjunction with a product “outside the scope of the patent” because it was not “indispensable to the exploitation of the patent”55 .

Another interesting case is Vaessen/Moris.56 Similar to the later Windsurf case, the Commission outlawed tying clauses placed in a licensing agreement, whereby the tying products were a patented machine and a patented process and the tied product was unpatented casings for meat sausages, particularly saucissons de Boulogne. The case was only decided by the Commission and not appealed57 . However, in other cases cleared by the Commission in the past, such as Campari58 , tying arrangements were considered justifiable for a satisfactory exploitation of the technology or for ensuring quality standards.

2. Patent tying as abuse of dominant position and the prongs of the definition of the relevant market: Hilti case

When the firm practicing tie-ins has a high degree of market power, an abuse of dominant position under Article 82 EC might occur. Namely, accordingly to the settled case law, a tie-in may constitute an abuse of dominant position when it is not objectively justified by the nature of the products or commercial usage.

In the landmark case involving the Swiss firm Hilti AG, the Commission found that the firm breached Article 86 (now 82) EC by tying the sale of nail guns to the sale of nails and cartridges strips (consumable goods) used therein.59 The decision was upheld by the Court or First Instance60 (“CFI”) and by the ECJ.61 The arguments in the review of the case before the ECJ centered essentially on the definition of the relevant product market for determining whether a dominant position by Hilti existed.

The Commission decision relied upon a definition of three separate product markets for nail guns, cartridge strips and nails, since these two latter consumable goods were “specifically manufactured, and purchased by users, for a single brand of gun”.62 Hilti was then found dominant on the market of nails, designed for Hilti nail guns, and deemed as abusing such position therein, within the meaning of Article 86 (now 82) EC, in pursuing courses of conduct intended either to hinder the entry into or the penetration of independent producers of compatible nails or to damage directly or indirectly their business.

Hilti contended that the three parts of the system formed an indivisible whole and that the single product market comprised all products used for fastening materials in place that were substitutable to Hilti’s three-pieces fastening system. Subsequently, relying on this broadening of the scope of the relevant market, it alleged its position could not be deemed as dominant. It also contended that, according to the case law, and the Hugin case in particular63 , in order to find that there was a separate market for Hilti nails, there should be evidence that the purchase of nails was independent from the purchase of nail guns, which was not the case.

Remarkably, the Court did not find any inconsistencies in the findings of the Commission related to the relevant market and distinguished the case before it from the Hugin case, considering this latter as a special case for aftermarket monopolization,64 not applicable to Hilti. Furthermore, based on the role of the ECJ,65 the Court dismissed Hilti’s pleas that certain facts on the relevant market should be investigated further, and accepted the findings of fact as determined by the Commission and supported by the CFI.66

Other interesting cases of abusive tying practises are that Tetra Pack II,67 in which the sale of cartons tied to the sale of filling machine were found as abusive, and the famous Microsoft Commission Decision,68 in which the company was deemed illegally leveraging its near monopoly in the market for PC operating systems by tying the sale of Windows PCs with the sale of Windows Media Player.

Notably, in a latter effort, the European Commission has issued a comprehensive framework within which to assess tying behaviors by dominant firms. In the Discussion Paper on the application of Article 82,69 intended to offer guidance in the finding of exclusionary abuses of dominant position, an entire section is addressed to “tying and bundling”.70 While the Commission acknowledges that those practices, by companies with or without market power, do not have per se anticompetitive consequences, it warns that they can lead to possible anticompetitive effects, such as foreclosure, price discrimination and higher prices. The Discussion Paper then lays down several criteria to assess tying practices by dominant firms which create foreclosure effects. For such practices to be prohibited under Article 82, usually the following requirements must be fulfilled: (1) the company concerned is dominant in the tying market; (2) the tying and tied goods are two distinct products; (3) the tying practices is likely to have a market distorting foreclosure effect; (4) the tying practice is not objectively justified. Each of these requisites is further analysed in the Paper.

3. The modern economical approach: Vertical tying assessed under a (conditional) rule of reason

In the past few years the European competition bodies have shifted from a formalist approach to a new one more economic-oriented, like their American counterpart, with reference to both restrictive agreements and abuses of dominant position. The Discussion Paper above referred to made this shift clear in the field of Article 82. Similarly, in the field of vertical agreements, the shift is reflected by the replacement of the per se approach, with a rule of reason. Namely, within the modern approach, vertical tying agreements are relevant under two sets of rules, both applying a conditional rule of reason.

When tie-ins occur in vertical restraints and result “in a single branding type of obligation … for the tied product,”71 they are assessed under the Block Exemption Regulation no. 2790/99 on Vertical Restraints (“BER”)72 and the Commission Notice Guidelines on Vertical Restraints (“BER Guidelines”).73

When tie-ins occur in the context of particular technology transfer agreements, such as licensing agreements concerning patent and know-how, copyright software licensing agreements (and assignment agreements when part of the risk remains on the assignor) and they are entered into with two (and no more) undertakings to permit the production of the contract product (i.e. the “product incorporating or produced with the licensed technology”), they fall within the scope of application of the Technology Transfer Block Exemption Regulation no. 772/04 (“TTBER”)74 and the relative Commission Notice Guidelines on the application of Article 81 of the EC Treaty to Technology Transfer Agreements75 (“TTBER Guidelines”).

Both the BER and TTBER Regulations (with relative Guidelines) provide a rather complex and detailed (especially if compared with the Sec. 5.3 of the DOJ-FTC Guidelines) set of rules and standards, with regard to the market power requisite and the assessment of the effects of tie-ins.

Namely, within the BER and relative Guidelines, tying is defined as the vertical agreement, that exists when the supplier makes the sale of one product (tying product) conditional upon the purchase of another distinct product (tied product) from the supplier or someone designed by the latter.76 Notably, for the BER Guidelines to be applicable, the tying and the tied product must be distinct: the sale of shoes and laces is not a tying practice, because of the commercial usage and since costumers want to buy shoes with laces. According to the general provision for vertical restraints, tying agreements are block exempted from the application of Article 81.1 when the market share of the supplier “on both the market of the tied and of the market of the tying product does not exceed 30%.” Above this threshold, individual tying arrangements are evaluated according to the cost/benefit balancing tests provided for in the BER Guidelines.

For the purpose of applying the TTBER, tying is defined as those arrangements occurring in the context of technology licensing when the licensor makes the licensing of one technology (tying product) conditional upon the licensee taking a licence for another technology or purchasing a product from the licensor or someone designated by him (tied product),77 whereas bundling occurs when two technologies, or a technology and a product, are only sold together as a bundle. The same provisions apply to both tying and bundling, subject to the condition, however, that the two technologies or products are distinct, i.e. that there is a distinct demand for each of them, whereas there is not tying, normally, when there is a necessary link between such technologies or products, so that both parts of the tying or bundle cannot be exploited without the other.

According to the TTBER general provisions,78 tying arrangements are block exempted from the application of Article 81.1, when the market share thresholds are below 20% in the case of agreements between competitors (combined) and of 30% in the case of agreements between non-competitors (individually), referred either to the tying or the tied product or technology79 . To figure out the threshold, special standards are laid down for defining the relevant product or technology markets.

Above the market share thresholds, the need to balance the anticompetitive and pro-competitive effects of tying is invoked. The main restrictive effect of tying is assumed to be the foreclosure of competing suppliers of the tied product. Other anticompetitive effects include the raising of barriers to entry in the market of the tying product, where new entrants are forced to enter contemporarily in several markets, or the raising of royalties to pay to licensors, when the tying product and the tied product are partly substitutable and the two products are not used in fixed proportions.

For such anticompetitive tying arrangements to produce “likely anti-competitive effects,” however, the TTBER Guidelines require a “significant degree of market power” in the tying product as to restrict competition in the tied product;80 furthermore, “for appreciable foreclosure effects to occur” the tying must cover a certain proportion of the market for the tied product.

With regard to the pro-competitive effects, according to the TTBER Guidelines, tying arrangements can give rise to efficiency gains, as when the tied product is necessary for a technically satisfactory exploitation of the licensed technology or for ensuring that the production under the licence conforms to quality standards respected by the licensor and other licensees. Tying is also considered likely to be pro-competitive where the tied product allows the licensee to exploit the licensed technology significantly more efficiently. Such arrangements are thus considered either not restrictive or eligible for individual exemption under Article 81.3.81

In sum, in Europe the assessment of tying agreements, both patents and non-patents related, relies heavily on the market power requirement, in order to identify the antitrust safety zone and the prohibited foreclosure.

III. Conclusive remarks

On the whole the American and European experiences are running parallel regarding the market power requisite in the antitrust evaluation of tying arrangement involving patents.

In fact, the lesson from both is that for an antitrust plaintiff or a competition agency to be successful in tying claims involving patents (or other IP rights) it has to prove, first of all, that the patentee holds a certain degree of market power. Yet to what extent such power must be is still uncertain. Illinois Tool does not set any criteria on the subject. The European experience can be more illuminating in this regard. If the patentee is in the safety zone (i.e., below 20% or 30%, depending on the circumstances), normally its tying practices are not subject to antitrust scrutiny, providing all the conditions set out in the relevant rules are fulfilled. If, on the other hand, the market share of the patentee is higher than this, and other concurring circumstances occur (existence of barriers to entry, oligopoly structure of the market), the tying practices might be subject to antitrust scrutiny, as both a restrictive agreement (where the market share is above the safety zone and in the grey area between 20-30% and 50-60%) or as an abuse of dominant position (where the market share is above 50-60%). Therefore, the definition of the relevant market and the proof of the firm’s economic power therein are key factors, while the efficiency defense might be relied upon as a justification.

The rationale of such a uniform regime is that, as long as competitors of the tying supplier are sufficiently numerous and strong, no appreciable anti-competitive effects can be expected, as buyers have sufficient alternatives to purchase the tying product without the tied product, unless other suppliers are also applying tying arrangements. In other terms, where the inter-brand competition is enough strong, no risk for the competition in the market can be expected to stem from the tying arrangement.

If the rationale of the regime is clear, however, nor the structure of the relevant market neither the efficiency defense might be quite easy to prove and evaluate, in concrete, for parties, competition courts and agencies, and possibly jury (this latter only in the U.S.).

Another specific issue may arise when the seller’s power stem from the tie itself, instead of the market structure, i.e. in cases presenting buyers’ informational and motivation deficiencies. Even in these cases, drawing the line between benign and anticompetitive tie-ins might not be an easy task.

Moreover, what it is still uncertain, for both the U.S. and E.U. systems, is the future of the assessment of patent tie-ins on the whole. None of them, in fact, clearly lay down specific standards for tie-ins involving patents (and other IP rights). Although it might be doubtful whether this is necessary, it is certain that an antitrust policy for tie-ins involving cutting-edge and high-tech will play an important role for the future of key industrial sectors of innovation.

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Footnotes

  1. The Author wants to thank the Center for Advanced Study and Research in Intellectual Property (CARISP) at the University of Washington School of Law and its faculty and staff for making possible the research underpinning this article. Many thanks go particularly to the Director, Prof. Toshiko Takenaka, for her kind invitation and substantial support.
  2. Official of the Italian Competition Authority (Rome). The views expressed herein are entirely those of the Author and do not reflect those of the Authority.
  3. Illinois Tool Works Inc. v. Independent Ink, Inc., (decided March 1, 2006) 126 S.Ct. 1281 (2006).
  4. From an economic standpoint, market power is the ability of a firm to increase its profits by reducing output and charging more than a competitive price for its product. H. Hovenkamp, Federal antitrust policy. The law of competition and its practice, West Group, St. Paul, 1999, at 78 ff., technically defines it as “a firm’s ability to deviate profitably from marginal cost (or competitive) pricing.” The same author observes that, as a matter of fact, courts rely on the fact that there is a positive correlation between market share and market power: thus, the market share stands as a good proxi to estimate the market power of a firm.
  5. See L.A. Sullivan and W.S. Grimes, The law of antitrust: an integrated handbook, West Book, S. Paul, 2000, at 387 ff.
  6. In fact, for the purposes of antitrust laws, a relevant product market is defined as including all interchangeable products, and usually a single technology does not exhaust all the possible choices.
  7. According to the widely known instrumental rationales, the patent system provides incentives for individuals to invent and disclose their inventions for the public benefit, and it stimulates technological and scientific innovation.
  8. In the U.S. experience, patent misuse is a defense in infringement litigation, which can be alleged when the patentee attempts improperly to expand the scope of the patent. Hence, it is a “shield” not a “sword,” in antitrust cases involving patent, and its purpose is to narrow the possibility for patent infringement claims. It does not repeal the right, but only chills it until “purged” from the improper use. See the leading case Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 37 S.Ct. 416, 61 L.Ed. 871 (1917). For the relationship between antitrust and patent misuse see R.C. Feldman, The insufficiency of Antitrust Analysis for Patent Misuse, in Hastings Law Journal, Vol. 55:399-450, 2003.
  9. Illinois Tool Works Inc. v. Independent Ink, Inc., 126 S.Ct. 1281, at 1284 and 1285.
  10. Namely, a former infringement action brought by Trident against Independent Ink was dismissed for lack of personal jurisdiction (meanwhile, Illinois Tool bought Trident); Independent Ink filed a suit against Trident, seeking a judgment of non-infringement and invalidity of Trident’s patent. This complaint was then amended in the antitrust allegation.
  11. 35 U.S.C. § 1 and § 2.
  12. Likely, the claim under § 2 of the Sherman Act was dropped or settled between the parties. The reported procedural history states the “the parties settled their other claims, and [Independent Ink] appealed.”
  13. Illinois Tool Works Inc. v. Independent Ink, Inc., 126 S.Ct. 1281, at 1284.
  14. Illinois Tool Works Inc. v. Independent Ink, Inc., 126 S.Ct. 1281, at 1291.
  15. Illinois Tool Works Inc. v. Independent Ink, Inc., 126 S.Ct. 1281, at 1293.
  16. Illinois Tool Works Inc. v. Independent Ink, Inc., 126 S.Ct. 1281, 1285 through 1289.
  17. Illinois Tool Works Inc. v. Independent Ink, Inc., 126 S.Ct. 1281, at 1292.
  18. Henry v. A.B. Dick Co. 224 U.S. 1, 32 S.Ct 364, 56 L.Ed. (1912).
  19. By Chief J. White, who regarded the practice of tying as “an attempt to increase the scope of the monopoly granted by a patent … which tend[s] to increase monopoly and to burden the public in the exercise of their common rights.”
  20. Under § 3 Clayton Act, “It shall be unlawful … to lease or make a sale or contract for sale of goods … or other commodities, whether patented or unpatented … on the condition … that the lessee or purchaser thereof shall not use or deal in the goods … or other commodities of a competitor or competitors of the lessor or seller, where the effect of such lease, sale, or contract … may be to substantially lessen competition or tend to create a monopoly in any line of commerce.” Unlike § 1 of the Sherman Act, it only applies to tangible goods, not to services.
  21. The opinion lists these provisions as follows: (1) unfair method of competition, under § 5 of the Federal Trade Commission Act (15 U.S.C. § 45); (2) contracts tending to create a monopoly under § 3 of the Clayton Act (15 U.S.C. § 13a); (3) contracts in restrain of trade under § 1 of the Sherman Act.
  22. Standard Oil Co. Cal. v. United States 69 S.Ct. 1051 (1949).
  23. In Morton Salt Co. v. G. S. Suppiger Co., 314 U.S. 402 (1942) (“Morton Salt”), the Court affirmed a district court decision holding that leases of a patented machine for salt products requiring the lessees to use the defendant’s unpatented salt product violated § 1 Sherman Act and § 3 Clayton Act as a matter of law.
  24. Various cases have assumed that, by tying the purchase of unpatented goods to the sale of the patented good, the patentee was restraining competition, or securing the limited monopoly of unpatented material, and the requisite of market power over the tying products was presumed. For example, in United States v. Columbia Steel Co. 68 S.Ct. 1107 (1948), the Court held that the license of a “patented devise on condition that unpatented materials be employed in conjunction with the patentee device” was an example of a restraint that is “illegal per se”. In International Salt Co., Inc., v. United States, 68 S. Ct. 12 (1947), a case of tying between patented machines for the utilization of salt products and unpatented salt and salt tablets for the use therein, the Court held that the restraints imposed by the patentee or whether they lessened competition or created a monopoly were not an issue of fact, but could be presumed. In the quoted in United States v. Loew’s, Inc., 83 S. Ct. 97 (1962) (“Loew’s”), a case of block-booking of copyrighted features motion pictures for television exhibition, the Court held that the requisite economic power “will be presumed when the tying product is patented or copyrighted.”
  25. Illinois Tool Works Inc. v. Independent Ink, Inc., 126 S.Ct. 1281, at 1288. The reasoning of the Court on this point is puzzling. At odds, it observed “nothing in our opinion suggested a rebuttable presumption of market power applicable to tying arrangement involving a patent on the tying good,” whereas the dicta in Jefferson Parish stand for the opposite: “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 … For example, if 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 … [relying on Loew’s]. Any effort to enlarge the scope of the patent monopoly by using the market power it confers to restrain competition in the market for a second product will undermine competition on the merits in that second market”.
  26. Illinois Tool Works Inc. v. Independent Ink, Inc., 126 S.Ct. 1281, at 1288. So reasoning, the Court appraises and endorses the suggestion of J. O’Connor in a dissenting opinion expressed in Jefferson Parish. In her dissenting opinion, J. O’Connor questioned the propriety of treating any tying arrangements as a per se violation of the Sherman Act as well as the validity of the presumption that a patent always gives the patentee significant market power. She also argued that this presumption arose outside the antitrust context as part of the patent misuse doctrine.
  27. Illinois Tool Works Inc. v. Independent Ink, Inc., 126 S.Ct. 1281, at 1290.
  28. Under 35 U.S.C. § 271(d)(5) a patent owner shall not be denied relief for infringement or deemed guilty of misuse or illegal extension of the patent right by reason of his having “conditioned the license of any rights to the patent or the sale of the patented product on the acquisition of a license to rights in another patent or purchase of a separate product, unless, in view of the circumstances, the patent owner has market power in the relevant market for the patent or patented product on which the license or sale is conditioned.”
  29. Illinois Tool Works Inc. v. Independent Ink, Inc., 126 S.Ct. 1281, at 1291.
  30. Most of the authors quoted (Areeda, Burchfiel, Hovenkamp, Janis, Lemley, Landes, Posner) embrace the Chicago School theories, which advocate for a strict economic analysis of antitrust cases based on cost/benefit assessment.
  31. Section 5.3 of the FTC-DOJ Guidelines states that these Agencies “will not presume that a patent, copyright, or trade secret necessarily confers market power on the owner” when assessing tying agreements.
  32. The Court held, while this choice is not binding on it, “it would be unusual for the Judiciary to replace the normal rule of lenity that is applied in criminal cases with a rule of severity for special category of antitrust cases.”
  33. Illinois Tool Works Inc. v. Independent Ink, Inc., 126 S.Ct. 1281, at 1292.
  34. Illinois Tool Works Inc. v. Independent Ink, Inc., 126 S.Ct. 1281, at 1290.
  35. Ties can be “positive” (when the sale of the tying product is conditioned on the sale of the tied product), “negative” (when the sale of the tying product on an agreement not to purchase a second product from competing suppliers), and they can occur within “package” or “bundling” (when it is not possible to buy two or more products separately: for example, components of car vis à vis the same car).
  36. A landmark case of tie-in assessed under § 2 of the Sherman is United States v. Microsoft Corp., 253 F.3d (D.C. Cir. 2001), which partly confirmed and partly overruled the District Court’s judgment findings of monopolization and attempt to monopolize for various anticompetitive conduct (illegal tying and others) by Microsoft, under Sherman Act § 2.
  37. See L.A. Sullivan and W. S. Grimes, The law of antitrust: an integrated handbook, supra at XX, at 387 ff.; H. Hovenkamp, Federal antitrust policy. The law of competition and its practice, supra at XX, at 392 ff.; Hovenkamp H., Janis M.D. and Lemley M.A., IP and Antitrust. An Analysis of Antitrust Principles Applied to Intellectual Property Law, New York, Aspen Publisher (2002), § 21-1 ff.
  38. Eastman Kodak Co. v. Image Technical Services, Inc., 112 S. Ct. 2072 (1992) (“Kodak I”), at 2079. This opinion dealt with a particular case of monopoly leverage, namely a tie-in occurring in aftermarket monopolization with regard to spare parts for copier. Here the Supreme Court ruled against Kodak, manufacturer of copier and spare parts, holding it had market power upon the single brand spare parts, regardless of its position in the inter-brand market of copier. J. Scalia, supported with J. O’Connor and J. Thomas dissented from that position, contesting that the informational asymmetry and the switching costs could ground the definition of a relevant market for spare parts and the monopoly power therein by Kodak. Interestingly, it also discusses the rationale for the per se rule in tying arrangement, when market power is present, as follows: “per se rule of antitrust illegality are reserved for those situations where logic and experience show that the risk to competition” is so likely and “pronounced” that an antitrust inquiry into the balance between pro-competitive benefits and anticompetitive costs “is needless and wasteful” so it is for the per se rule against tying “where the tying arrangement is backed up by the defendant’s market power in the tying product”. Notably, the general threshold for the antitrust safety zone is 20%, under section 4.3 of the DOJ-FTC Antitrust Guidelines for the Licensing of Intellectual Property.
  39. Eastman Kodak Co. v. Image Technical Services, Inc., 112 S. Ct. 2072 (1992) (“Kodak I”), at 2079. The four-parts test is clearly stated in Data General Corp. v. Grumman Systems Support Corp., 32 F.3d 1147 (1st Cir. 1994), even tough the requirements were not met in the specific case.
  40. L.A. Sullivan and W. S. Grimes, The law of antitrust: an integrated handbook, supra at XX, at 392 ff., underlines the lack of agreement among courts on tests to use and the ambiguity of the “effects” test.
  41. For a comment on the Guidelines see Port K. L. and others, Licensing Intellectual Property in the Information Age, Carolina Academic Press, Durham, 2005, at 495 ff.
  42. In this sense, the FTC-DOJ Antitrust Guidelines for the Licensing of Intellectual Property (April 6, 1995) and the European Guidelines on the Technology Transfer Block Exemption Regulation (April 27, 2004) are consistent (see below). As for the case law, the European Commission has considered the ownership of patents among structural factors to rely upon for a dominant position being established, namely as barriers to entry. See, for example, the Commission’s Decision on AstraZeneca (Decision 2005/175/EC of June 15, 2005, in COMP/A.37.507/F3 Re AstraZeneca Plc [2006] 5 CMLR 6). On the other hand, IP rights different from patents have also been deemed as sufficient -- per se -- to trigger a de facto monopoly position and the essential facility doctrine, such as in the ECJ leading precedent Magill (C-241 and 242/91 Radio Telefis Eireann (RTE) & Independent Television Publications Ltd (ITP) v. Commission [1995] ECR I-743) and in the subsequent IMS Health case (C-418/01 IMS Health GmbH & Co. OHG v. NDC Health GmbH & Co. KG [2004] ECR I-5039).
  43. It is worth mentioning that so far the enforcement of European competition law to IP rights has focused mostly on the Community exhaustion of IPR doctrine at the origin (e.g. in C-56 and 58/64 Établissements Consten S.à.r.l. and Grundig-Verkaufs-GmbH v. Commission [1966] ECR 299, and C-15/74 Centrafarm BV et Adriaan de Peijper v. Sterling Drug Inc. [1974] ECR 1147), and most recently on the refusal to license doctrine (cases Magill and IMS Health above).
  44. The double number it due to the 1992 Treaty of Amsterdam, which modified and renumbered the articles within the EC Treaty.
  45. Both articles list tying agreements among possible anticompetitive conduct.
  46. The “appreciable restriction” requirement is not statutory, under Article 81.1, yet it is well settled under case law, as well as currently formalized within the Commission Notice on agreements of minor importance (OJ C 368, 22.12.2001, p. 13). This Notice sets 10% for competing firms and 15% for non-competing firms as minimum market share thresholds, unless per se violations are concerned, such us price fixing and market sharing.
  47. A “dominant position” is defined as the ability of a firm to act independently from consumers, suppliers, and competitors. Many factors may concur in assessing the dominant position held by a firm, both structural (e.g., market share, access to labor or raw material, degree of vertical integration, commercial image, ownership of IPRs) and behavioral (e.g., the ability to charge monopolistic or predatory prices). According to the case law, different presumptions apply regarding the dominant position, depending on the market share. For example, in the case law a market share of 40-45% supported by other factors has been considered sufficient to this purpose, a market share above 50% has grounded a rebuttable presumption of dominant position, while a market share around 70-80% has grounded an unrebattable presumption of dominant position.
  48. When many undertakings are collectively dominant, they are nonetheless considered as but one party.
  49. Vertical agreements are agreements for the sale and purchase of goods or services which are entered into between companies operating at different levels of the production or distribution chain, like distribution agreements, agreements for industrial supply between a manufacturer of a component and a producer of a product using that component.
  50. See below §§ XX.
  51. Indeed, prior to the current Block Exemption Regulation on Technology Transfer no. 772/04, the Technology Transfer Regulation (CE) no. 240/96 provided under Article 4(2)(a) that the opposition procedure applied to tie-in clauses. This means that the Commission could evaluate on a case-by-case basis, within a certain period of time (four months), whether such clauses fell not within the scope of the exemption. Also, more clearly, the prior Patent Licensing Regulation and the Know-how Licensing Regulation, later replaced by Regulation n. 240/96, blacklisted tie-ins which were not necessary for a technically satisfactory exploitation of the licensed technology or for ensuring quality standards.
  52. C-193/83 Windsurfing International Inc. v. Commission ECR [1986] 611.
  53. Commission Decision of 11 July 1983, OJ 1983, L229, p. 1.
  54. In this assessment, the Commission had to determine the scope of the German patent. According to the ECJ, although the Commission is not competent to do so, “it may not refrain from all action” when the scope of the patent is relevant in order to enforce competition law. The Court yet specified that such assessment by the Commission does not pre-empt any determinations made later by the national courts in an action brought before them.
  55. The Court also specified that “the clauses contained in the licensing agreements, in so far as they relate to parts of the sailboard not covered by the German patent or include the complete sailboard within their terms of reference, can therefore find no justification on grounds of the protection of an industrial property right.”
  56. Commission Decision 79/86/EEC of 10 January 1979 (IV/c-29.290 Vaessen/Moris, OJ L 19, 26/01/1979 p. 32).
  57. The Decision contains only an injunction, while no fine was imposed upon the infringer (which stands for the lack of appeal). In this case, the patentee Moris and its undertaking ALMO held patents on a process and a machine to manufacture synthetic casings, but the casings themselves were not patented. ALMO entered into licensing agreements for the use of the patented process and machine, on condition that the manufacturers undertake to obtain all their supplies of casings from the same patentee. A rival producer of casings filed a complaint to the Commission. The Commission deemed the licensing agreements entered into by ALMO a breach of Article 85.1, based on the finding, among others, that the exclusive purchase obligation was “likewise not a requirement imposed by the industrial property right, for its deletion would in no way jeopardize the patent holder’s exclusive right to work his invention himself or through others” and, since the product supplied by ALMO was not covered by the patent, such obligation constituted “an unlawful extension by contractual means of the monopoly given by the patent.” Remarkably, the patent at issue was contested among the parties, but the Commission “presumed” it to be valid for the purpose of the proceeding, while it left the matter to be settled by the national courts. No relevance was given to the fact that sausage makers were not deprived of freedom of choice, since they could buy the package “machine plus casings” from the patentee or other casings which could be used without the patented machine.
  58. OJ 1978 L 70, p. 69. Here the licensee was required to obtain secret ingredients from the licensor. Those ingredients were deemed as needed in order to maintain the consistency of the franchised beverage.
  59. Commission Decision 88/138/EEC of 22 December 1987 (IV/30.787 and 31.488 – Eurofix-Bauco v. Hilti), OJ 1988 L65, p. 19.
  60. Case T-30/89 Hilti AG v. Commission [1991] ECR II-1439.
  61. Case C-53/92P Hilti AG v. Commission ECR [1994] I-667
  62. Par. 66 of the Commission Decision.
  63. Case C-22/78 Hugin v. Commission [1979] ECR 1869, which upheld the Commission Decision 8 December 1979, Hugin/Liptons (OJ 1978 L 22/23). In this case, a British manufacturer of cash registers was found guilty of abusing its dominance in the aftermarket of spare parts for his own products, even if it held not more than 13 % of the total market for cash registers at that time
  64. Namely, the Court held that the Hugin case “did not intend to lay down the criteria for determining whether a market for consumables is distinct from the market for the equipment for which they are intended. The court merely held that, in the particular case before it, concerning spare parts for cash registers manufactured by Hugin, the purchasers of spare parts, essentially independent undertakings maintaining and repairing cash registers, were different from the purchasers of cash registers, so that the market for spare parts constituted a specific market governed by its own rules of supply and demand” (par. 15).
  65. The ECJ reviews cases only on grounds relating to the infringement of rules of law, to the exclusion of any appraisal of the facts.
  66. The Court noted that the appraisal by the CFI of evidence put before it does not constitute, “save where the clear sense of that evidence has been distorted”, a point of law which is subject, as such, to review by the ECJ (par. 42).
  67. See C-333\94 Tetrapack v. Commission [1996] ECR I-5951. In this case, the ECJ upheld the CFI and Commission’s holding that the scrutiny of the conduct may be carried out in a distinct, but associated dominated market, providing there is a link between the dominant position and the abusive conduct. Moreover, the opinion ruled that “even when tied sales of two products are in accordance with commercial usage or there is a natural link between the two products in question, such sales may still constitute abuse within the meaning of Article 86 unless they are objectively justified.”
  68. Commission Decision of 24 March 2004 (COMP/C-3/37.792 Microsoft).
  69. See Commission “Discussion Paper on the application of article 82 of the Treaty to exclusionary abuses” (December 2005) at http://europa.eu.int/comm/competition/antitrust/others/article_82_review.html.
  70. See paragraphs 177 trough 206.
  71. This means, an obligation or incentive for the buyer to purchase in a particular market or from only one supplier, not necessarily that the buyer can only buy directly from the supplier, but that he will not buy and resell or incorporate competing goods or services.
  72. Commission Regulation (EC) No. 2790/1999 of 22 December 1999 on the application of Article 81(3) of the Treaty to categories of vertical agreements and concerted practices renders the prohibition of Article 81.1 inapplicable to vertical agreements entered into by companies with market shares not exceeding 30%, subject to the conditions set therein (e.g., hardcore restrictions are excluded) and establishes the conditions for the application of Article 81.3 to vertical agreements.
  73. Commission Notice - Guidelines on Vertical Restraints (OJEC C 291, 13.10.2000, p. 1), see especially paragraphs 215 through 224.
  74. Commission Regulation (EC) No. 772/2004 of 27 April 2004 on the application of Article 81(3) of the Treaty to categories of technology transfer agreements, OJ L 123 , 27/04/2004 p. 0011 – 0017.
  75. Commission Notice - Guidelines on the application of Article 81 of the EC Treaty to technology transfer agreements, OJ C 101, 27/04/2004 p. 0002 – 0042.
  76. Unlike the Discussion Paper on the application of Article 82, no distinction is made here between tying and bundling.
  77. Par. 191 TTBER Guidelines.
  78. See Article 3 of the TTBER.
  79. Par. 192 TTBER Guidelines.
  80. The relevant par. 193 reads as follows: “For tying to produce likely anti-competitive effects the licensor must have a significant degree of market power in the tying product so as to restrict competition in the tied product. In the absence of market power in the tying product the licensor cannot use his technology for the anti-competitive purpose of foreclosing suppliers of the tied product”. The market power is defined in the same Guidelines as “the ability to maintain prices above competitive levels or to maintain output in terms of product quantities, product quality and variety or innovation below competitive levels for a not insignificant period of time” (par. 15).
  81. See paragraphs 194 and 195.

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