Supreme Court hears patent tying case

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The U.S. Supreme Court recently heard oral arguments in a printer toner case that has broad ramifications for both antitrust and intellectual property law.

Illinois Tool Works, a producer of inkjet printheads and inks, holds several patents covering printhead technology. It conditioned the licensing of this technology on an agreement that equipment manufacturers and end-user customers use only its ink in systems using its technology.

Independent Ink, also a manufacturer of specialty inks — including a product that competes with an Illinois Tool Works ink — brought suit, alleging that Illinois Tool Works’ “tying” agreement violated the Sherman Act.

The intersection between antitrust and intellectual property, particularly patents, poses a tough question for the courts, because patents, by their very definition, give the holder exclusive rights.

And the impact of the case isn’t limited to printers — amicus briefs were filed by a number of intellectual property groups and industries ranging from pharmaceuticals to the motion picture association.

Because patent tying is so common, “it’s hard to think of an industry that won’t be impacted by the decision,” Andrew J. Pincus, who argued on behalf of Illinois Tool Works, said.

For approximately 60 years, courts have held by virtue of the patent, there is a presumption that the holder has “market power,” which is a major component of proving a Sherman Act violation.

But Illinois Tool Works, with the support of the federal government as an amicus, argued that this presumption is outdated and irrelevant.

“If the Court were confronted with this question today, for the first time, it is inconceivable [it] would adopt this rule” of a market power presumption, Pincus told the justices.

Not surprisingly, Independent Ink emphasized stare decisis, and in the alternative, argued that the presumption was economically logical.

“The presumption is a sensible rule of thumb. It makes sense in theory and in practice,” Redwood Shores, Calif., lawyer Kathleen M. Sullivan, who practices at Quinn Emanuel Urquhart Oliver & Hedges, said in her oral argument.

Patent Law Meets Antitrust

Trident, Inc., a wholly-owned subsidiary of Illinois Tool Works, holds a patent over printhead technology used in barcode printers and manufactures ink for use with this technology.

The licensing agreement requires the user of the printhead technology to purchase Illinois Tool Works ink.

The company brought suit for patent infringement against Independent Ink (and other competitors) who sold their ink at significantly lower prices than Illinois Tool Works.

When that action was dismissed, Independent Ink filed suit in the current case.

It alleged that Illinois Tool Works’ tying patent violated the Sherman Act, relying on the presumption that the existence of a patent tying arrangement creates illegal market power.

A U.S. District Court granted summary judgment for the defendant, holding that a plaintiff must affirmatively prove market power in order for patent tying to constitute an antitrust violation.

On appeal to the Federal Circuit, the court reversed.

It relied on primarily on two Supreme Court cases, International Salt Co. v. U.S., 68 S.Ct.12 (1947) and U.S. v. Loews, 83 S.Ct. 97 (1962).

International Salt was the first case in which the U.S. Supreme Court held that patent tying violated the Sherman Act, and Loews established an express rule that a presumption of market power exists when the original (or “tying”) product is patented.

While the Federal Circuit acknowledged that “the time may have come to abandon the doctrine” because both cases have “been subject to heavy criticism,” it upheld the market power presumption absent its express repudiation by the Supreme Court.

The decision created a split among the circuits, with the 7th and 9th Circuits having determined that the presumption was no longer viable.
Invites Litigation?

Before a packed courtroom, Pincus, a partner at Washington, D.C.’s Mayer, Brown, Rowe & Maw, said the “evil” of the presumption causes consumers to lose out when inventors are restricted in their use of tying arrangements that can create a positive risk-sharing business arrangement. Because the value of a patent isn’t known from the start, patentees should be able to use whatever revenue streams they can to encourage innovation, he argued.

He then sparred with Justices Anthony Kennedy and Stephen Breyer, trying to make the point that market power shouldn’t be presumed from the mere existence of a patent, in part because a large number of patents are valueless.

“At the time something is patented, you don’t know its monetary value,” Pincus argued.

When questioned by Justice David Souter about whether the presumption “invites more lawsuits,” Pincus answered in the affirmative.

“I think it’s a fair assumption that if the presumption says you can file a lawsuit and allege tying, then that is a low-cost thing that competitors can do to make you spend money to defend a lawsuit,” he said.

For the government, Thomas G. Hungar said the presumption was unnecessarily harmful to IP rights.

“It essential
ly imposes a litigation tax on patent owners,” he told the Court.

Justice John Paul Stevens wondered what should be done in the alternative if the Court did away with the presumption.

“Where is our destination?” he asked.

Hungar replied that the Court could keep market power as a factor in a Sherman Act case, but force the plaintiff to affirmatively prove its existence.

‘Economically Sensible’

Sullivan urged the justices to respect stare decisis.

But Chief Justice John Roberts expressed concern that the presumption creates “heavy lifting” for defendants who bear the cost of defending themselves in litigation.

Sullivan noted that when Justice Souter had asked Pincus for examples of frivolous litigation, he couldn’t give any.

Because the intent of patent ownership is to make money, “the presumption makes economic sense,” she said.

But Justice Antonin Scalia said that sometimes, “frivolous litigation only becomes evident when it proceeds,” noting that many cases settle before trial.

Justice Breyer expressed significant concerns about the case.

“If we decide the case against you,” he said to Sullivan, “I’m concerned that a lot of big companies in the technology arena will be able to extend their power through tying patents and insulate themselves, creating a war of experts [if a case went to trial]. But if we decide in your favor, new uncertain technology might not be able to get off the ground because tying is an easy way to make money. I’m not certain what to do here.”

With no hesitation, Sullivan replied, “Justice Breyer, you should affirm.”

She also noted that in the 60 years since the presumption was created, Congress has never attempted to alter or remove it.

“But the courts created this rule,” Justice Ruth Bader Ginsburg objected. “Shouldn’t the Court correct its own erroneous ways?”

Sullivan again emphasized that the presumption made “economic sense” because requiring plaintiffs to prove market power would create inefficiencies in the market.

Patent owners know more about their own products and market share than a competitor, so it makes more sense to have them bear the burden of rebutting the presumption, she argued.

“It’s a sensible burden,” she told the justices.

The Impact

Patrick J. Coyne, an IP and antitrust attorney at Henderson, Farabow, Garrett & Dunner in Washington, D.C, attended the oral argument and was surprised by some of the justices’ questions.

“They seemed favorable to retaining some form of the presumption,” he opined. “They weren’t openly hostile to it and seemed to be exploring options to limit it.”

Coyne, who filed an amicus brief on behalf of the American Intellectual Property Law Association, said his group sought to do away with the presumption.

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“It’s unwarranted, unfair and creates an incentive for plaintiffs’ lawyers to file lawsuits,” he said.

Because the majority of patents aren’t profitable, Coyne and his group argued that the presumption limits patentees’ ability to utilize a potential revenue stream by tying multiple products together.

But Jonathan Rubin, a sole practitioner in Washington, D.C., disagreed that stronger IP rights necessarily yield greater innovation.

“What that ignores is that a lot of innovation comes from competition,” he said.

Rubin, who is also an adjunct professor of law and economics at George Washington University law school, filed an amicus brief for the American Antitrust Institute suggesting that doing away with the presumption will strengthen the control of those with large patent portfolios, such as pharmaceutical companies like Pfizer.

A decision in the case, Illinois Tool Works v. Independent Ink, is expected later this term.