• U.S. Supreme Court Holds that Tying Arrangements Involving Patented Products Are Not Per Se Violations of Antitrust Law
  • March 31, 2006
  • Law Firm: Manatt, Phelps & Phillips, LLP - Los Angeles Office
  • The U.S. Supreme Court recently decided unanimously that it is not a per se violation of antitrust law for the owner of a patented product to tie it to the sale of a non-patented product. A party opposing the tying arrangement must establish that the owner of the patent has market power in the market for the patented product, to prove an antitrust violation. Illinois Tool Works Inc. v. Independent Ink, Inc.

    Illinois Tool Works ("ITW") and a related company are manufacturers and marketers of a printing system that includes a patented printhead and ink container and specially designed but unpatented ink. ITW sells its printing system to original equipment manufacturers which are licensed to incorporate the printheads and containers into printers that are in turn sold to other companies for use in printing barcodes on packaging materials. Such companies agree that they will purchase the printer ink exclusively from ITW, and that neither the companies nor their customers will refill the containers with any other kind of ink. Meanwhile, Independent Ink ("Independent") manufactures unpatented ink that is usable in ITW's patented devices, but Independent was not able to sell its ink to users of ITW's devices, because of the tying arrangement.

    Independent filed a declaratory judgment lawsuit against ITW in federal trial court in Santa Ana, CA, alleging that ITW's tying arrangement violated federal antitrust law. The trial court decided the case in ITW's favor without a trial, because Independent had presented no evidence that ITW had market power in the pertinent printer market.

    Independent appealed the decision to the U.S. Court of Appeals for the Federal Circuit and obtained a reversal. That court found that possession of a patent does give its owner presumed market power over the product incorporating the patent. The Federal Circuit also admonished the trial court for not following U.S. Supreme Court decisions, which the trial court had called "vintage."

    The U.S. Supreme Court then took the case. Looking back at more than 100 years of antitrust law and public policy, the high court observed that it and the U.S. Congress initially disapproved of tying arrangements, but over the years the judicial disapproval has substantially diminished. The Supreme Court had come to require a showing of market power in the tying product before concluding that an antitrust violation had occurred.

    In the context of alleged misuse of patents, the presumption of market power had remained in the case law. However, in 1988, Congress amended the federal patent law to eliminate that presumption. Justice John Paul Stevens, writing for the high court majority, consequently observed 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. 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."

    The Illinois Tool decision creates opportunity for companies in a wide variety of businesses and industries to re-evaluate their product sales, marketing and distribution policies. Whereas patent owners have to be careful and creative about the manner in which they bundle their patented products with other products, for fear of being accused of antitrust violations, the Illinois Tool decision significantly raises the hurdle for the accusers to overcome to prove such violations. Moreover, this decision suggests that the courts might someday be willing to reconsider the presumption of market power attached to copyrights, as well, which presumption for decades has shaped many content-distribution practices in the entertainment industry.