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Wheel Games Are Not Shown to Be an Economically Distinct Relevant Market

December 17, 2012

Decision icon Decision

Judges: Bryson (dissenting), Linn, Reyna (author)

[Appealed from: D. Nev., Judge Jones]

In IGT v. Alliance Gaming Corp., No. 11-1166 (Fed. Cir. Dec. 17, 2012), the Federal Circuit affirmed the district court’s entry of SJ denying antitrust counterclaims because the undisputed facts were insufficient to establish the existence of a relevant antitrust market in wheel games.

IGT owns several patents directed to wheel-based casino games. IGT sued Alliance Gaming Corp., Bally Gaming International, Inc., and Bally Gaming, Inc. (collectively “Bally”) for infringement of those patents. Bally responded that the patents were invalid and not infringed. Bally also counterclaimed, alleging that the infringement lawsuit was an attempt to monopolize the wheel game market by asserting patents that IGT knew to be invalid, unenforceable, and not infringed. The district court denied IGT’s motion for SJ on the antitrust issues, noting that the definition of the relevant market was a question of fact and concluding that there were genuine issues of material fact about whether wheel games were a relevant market and/or submarket. The district court granted Bally’s motions that the patents were invalid and not infringed, and certified the patent issues for interlocutory appeal. The Federal Circuit affirmed.

On remand, IGT moved for reconsideration of the district court’s denial of SJ on the antitrust counterclaims. Changing course from its previous ruling, the district court ruled that wheel games were not an economically distinct relevant market and granted SJ against Bally. Bally appealed.

On appeal, the Federal Circuit applied Ninth Circuit law in reviewing the district court’s conclusions as to the relevant market under antitrust law. The Court noted that, as a threshold issue in any monopolization claim, the court must identify the relevant market.

The district court determined that, because wheel games compete with all gaming machines, wheel games are not a relevant market because a market limited to wheel games would not encompass all economic substitutes. Bally argued that the district court (1) improperly resolved disputed facts when it determined that wheel games were not a relevant market; (2) erred in concluding that the existence of some substitution between wheel and nonwheel games foreclosed the existence of a wheel game market; and (3) improperly focused on functional, rather than economic, substitution.

To decide whether the district court improperly resolved disputed facts, the Federal Circuit examined the district court’s conclusion that wheel games compete with all gaming machines. The Court found that both Bally and IGT provided extensive evidence that wheel games compete in the broader gaming machine market and that Bally did not rebut this evidence. Thus, the Court held that Bally failed to produce evidence to show that there is a genuine issue of material fact that wheel games compete with all gaming machines, and the district court did not resolve a disputed factual issue.

The Federal Circuit next considered whether it was error for the district court to conclude that, because wheel games compete with all gaming machines, wheel games are not a relevant market. The Court noted that the relevant market inquiry focuses on economic substitution. Bally argued that it has shown a lack of economic substitution under a test set forth in the Department of Justice’s Horizontal Merger Guidelines, known as the “small but significant and non-transitory increase in price” (“SSNIP”) test, which asks “whether the degree of substitutability between the two products is sufficiently great that it would restrain a hypothetical monopolist from profitably imposing a substantial price increase.” Slip op. at 11 (citation omitted). Bally argued that, because the introduction of wheel games forced IGT to lower its prices, this meant that IGT’s prior prices were supracompetitive and those supracompetitive prices represented an SSNIP. The Court disagreed. In the Court’s view, even assuming SSNIP is a proper test and that IGT did have to lower its prices, Bally did not explain what the baseline price for wheel games was from which IGT allegedly imposed an SSNIP. Moreover, even considering IGT’s supracompetitive prices as the baseline, the Court concluded that Bally showed that the prices had decreased, not increased.

The Federal Circuit also rejected Bally’s argument that the district court improperly focused on technological substitutions. The Court held that the district court based its ultimate conclusion on competition, not on functionality, and that its recognition of meaningful competition was not in error.

The Court next considered Bally’s argument that the factors from Brown Shoe Co. v. United States, 370 U.S. 294 (1962), establish wheel games as a submarket. The Court concluded, however, that the undisputed facts are insufficient to establish the existence of a submarket under the Brown Shoe factors. The Court found that there are no unique production facilities or specialized vendors for wheel games, and there are no distinct customers; all games are purchased by casinos. Further, although the Court noted that some players prefer wheel games to other games, “player preference for wheel games says nothing about whether there is a public or industry perception that wheel games constitute a separate market; to the contrary, it is in harmony with the rest of the evidence that gaming machines are a differentiated market and that wheel games compete with all gaming machines to accommodate the spectrum of player preferences.” Slip op. at 14-15.

Finally, Bally argued that statements IGT and its experts made in support of its lost profits patent damages theory supported a conclusion that nonwheel games are not substitutes for wheel games. Specifically, IGT argued that there were no noninfringing substitutes for wheel games, and that every infringing game sold represented a loss of profits. Bally argued that this was a concession by IGT that there are no substitutes for wheel games and that nonwheel games are not in the same market as wheel games. But the Court found that IGT’s expert’s opinion regarding technological substitutes cannot be read to mean that there were no economic substitutes and did not support a reasonable inference that no economic substitution existed. Therefore, the Court held that the district court’s order did not resolve disputed issues of material fact.

For these reasons, the Court found that the undisputed facts show that meaningful competition exists between wheel games and all gaming machines, and that wheel games are not a separate submarket. Accordingly, the Court affirmed the district court’s grant of SJ that a wheel game market did not exist.

Judge Bryson dissented. In Judge Bryson’s view, Bally presented sufficient evidence for a reasonable finder of fact to find that the relevant product market is limited to wheel games. Judge Bryson explained that the relevant market inquiry seeks to determine the scope of the market in which a monopolist can exert market power over buyers, and Bally alleged, and had introduced evidence, that IGT had market power over buyers in supplying wheel games. Specifically, Judge Bryson found that Bally showed that IGT was forced to lower its prices because of Bally’s introduction of wheel games into the market, that margin and profit per unit for wheel games is higher than for nonwheel games, and that demand for wheel games is higher than for any nonwheel games. Further, Judge Bryson stated that evidence put forth by IGT showed that there were no alternatives to which consumers could shift their demand other than Bally’s products, which in turn established that the relevant market was limited to wheel games.

Summary authored by Robert A. Hall, Esq.