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No Presumption of Market Power When a Tying Product Is Patented

March 01, 2006

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Last Month at the Federal Circuit - April 2006

Judges: Justice Stevens delivered the unanimous opinion of the Court. Justice Alito took no part in the decision.

In Illinois Tool Works Inc. v. Independent Ink, Inc., No. 04-1329 (U.S. Mar. 1, 2006), the Supreme Court ruled that the mere fact that a tying product is patented does not support a presumption of market power. The Court vacated the judgment of the Federal Circuit and remanded for further proceedings.

Trident, Inc. and its parent, Illinois Tool Works Inc. (collectively “Trident”), manufacture and market printing systems that include a patented printhead, a patented ink container, and a specially designed but unpatented ink. Trident sells its systems to original equipment manufacturers (“OEMs”), who agree that they will purchase their ink exclusively from Trident, and that neither they nor their customers will refill the patented containers with ink of any kind.

Independent Ink, Inc. (“Independent”) developed an ink with the same chemical composition as the ink sold by petitioners. Independent filed suit against Trident seeking a judgment of noninfringement and invalidity of Trident’s patents, and alleging that petitioners were engaged in illegal tying and monopolization under §§ 1 and 2 of the Sherman Act. 15 U.S.C. §§ 1, 2.

After discovery, the district court granted Trident’s motion for SJ on the Sherman Actclaims. It rejected Independent’s submission that Trident necessarily had 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. Finding that Independent had submitted no affirmative evidence defining the relevant market or establishing Trident’s power within it, the district court concluded that Independent could not prevail on either antitrust claim. On appeal, the Federal Circuit reversed the district court’s decision as to Independent’s § 1 claim, finding that it ran contrary to a long chain of Supreme Court decisions.

The Supreme Court vacated the judgment of the Federal Circuit, concluding that the mere fact that a tying product is patented does not support a presumption of market power. The Court noted that “[o]ver the years . . . this Court’s strong disapproval of tying arrangements has substantially diminished. Rather than relying on assumptions, in its more recent opinions the Court has required a showing of market power in the tying product.” Slip op. at 5. The Court further explained that the view that tying arrangements may have legitimate business purposes and be procompetitive ultimately prevailed in its jurisprudence. It thereby described the presumption of market power as “a vestige of the Court’s historical distrust of tying arrangements.” Id. at 8.

As the Court explained, the presumption that a patent confers market power arose outside the antitrust context as part of the patent misuse doctrine, which provides a defense to patent infringement when a patentee ties the purchase of unpatented goods to the sale of a patented good. The presumption that a patent confers market power then migrated from patent law to antitrust law in International Salt Co. v. United States, 332 U.S. 392 (1947).

In 1988, Congress amended the Patent Code to eliminate the patent-equals-market-power presumption in the patent misuse context. See 35 U.S.C. § 271(d)(5). The Court noted that although the 1988 amendment only expressly refers to the patent misuse context, and not to the antitrust laws, the amendment “certainly invites a reappraisal of the per se rule announced in International Salt.” Slip op. at 12.

The Court reasoned that if Congress intended to eliminate the presumption in the patent misuse context, it would be absurd to maintain the presumption under the antitrust laws, which can make the conduct at issue a federal crime punishable by up to ten years in prison. The Court further stated that “given the fact that the patent misuse doctrine provided the basis for the market power presumption, it would be anomalous to preserve the presumption in antitrust after Congress has eliminated its foundation.” Id. at 13. Thus, the Court concluded that while some tying arrangements involving patented products “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.” Id.

Independent further argued (i) that the Court should endorse a rebuttable presumption that patentees possess market power when they condition the purchase of a patented product on an agreement to buy unpatented goodsexclusively from the patentee, or (ii) that the Court should recognize a presumption of market power when a tying arrangement involves the purchase of unpatented goods over a period of time, a so-called “requirements tie.” The Court rejected both of these proposed alternatives, concluding that “the lesson to be learned from International Salt and the academic commentary is the same: Many tying arrangements, even those involving patents and requirements ties, are fully consistent with a free, competitive market.” Id. at 16. The Court elaborated that “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.” Id. The Court therefore held that in all cases involving a tying arrangement, the plaintiff must prove that the defendant has market power in the tying product. It then remanded the case to allow Independent an opportunity to develop and introduce evidence defining the relevant market and proving that Trident possesses power within it.