United States: Federal Circuit Reaffirms Rule that Patent Raises Rebuttable Presumption of Market Power

The Federal Circuit recently reaffirmed the unique – most would say antiquated – rule that possession of a patent raises a rebuttable presumption of market power in a tying case under Sherman Act § 1. Independent Ink, Inc. v. Illinois Tool Works, Inc., No. 04-1196, 2005 U.S. App. LEXIS 1205 (Fed. Cir. 1/25/2005). To read the full decision in PDF format, please click the following link: http://fedcir.gov/opinions/04-1196.pdf.

The rule that possession of a patent creates a rebuttable presumption of market power was endorsed more than two decades ago by a plurality of the Supreme Court in Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2 (1984). The Federal Circuit declined to follow more recent precedent from the lower courts rejecting this presumption and significant academic criticism of the rule.

• The Federal Circuit recognized that Congress abrogated a similar rebuttable presumption of market power in patent misuse defenses based on patent tying, but the court determined that Congress expressly considered and declined to abrogate the presumption for affirmative antitrust tying claims.

• Nonetheless, the Federal Circuit implicitly acknowledged that the precedent establishing the rebuttable presumption "contains many infirmities" and concluded that "the time may have come to abandon the doctrine, but it is up to the Congress or Supreme Court to make this judgment."

The Federal Circuit’s decision has potentially significant implications for patent holders. Federal Circuit law applies nationwide, and the Independent Ink decision increases the risk of antitrust claims against patent holders who bundle or otherwise link sales of patented products and nonpatented products. While the Federal Circuit’s decision does not directly address tying claims involving copyrights, the court in dicta expressly extended the rationale behind its decision to products protected by copyright and "intellectual property" generally.

Independent Ink, Inc. ("Independent Ink") is an independent distributor and supplier of printer ink products. Illinois Tool Works, Inc. ("Illinois Tool") manufactures patented inkjet printheads, patented ink containers and non-patented ink for use in connection with its printheads and ink containers. Illinois Tool licenses its patented products to original equipment manufacturers ("OEMs") as a package, and the patent license agreements require OEMs using Illinois Tool’s printheads and ink containers to purchase their ink exclusively from Illinois Tool.

Notwithstanding Illinois Tool’s OEM license agreements, various third-party ink manufacturers offer ink for use in Illinois Tool’s printhead systems. Moreover, Illinois Tool’s OEM license agreements apply only to the OEMs themselves; the license agreements do not prevent the OEMs’ customers or the ultimate end users from purchasing refill ink and ink containers from third-party ink manufacturers. In addition, Illinois Tool faces competition from at least two companies in the sale of its patented printhead systems.

Independent Ink brought an antitrust action against Illinois Tool, alleging that Illinois Tool engaged in unlawful tying by conditioning the sale of its patented printhead systems on the purchase of Illinois Tool’s ink. Although tying law typically requires the plaintiff to establish that the defendant possesses market power in the market for the conditioned product, Independent Ink argued that it should be relieved of that burden in this case because Illinois Tool’s patents should establish a presumption of market power. The District Court granted summary judgment to Illinois Tool on the tying claim, holding that tying claims involving a patented good are no different from tying claims in other contexts, and therefore that a plaintiff alleging tying involving a patented good must affirmatively prove market power. The District Court squarely rejected Independent Ink’s argument that Illinois Tool should, by virtue of its patents, be presumed to possess market power in printheads and ink containers.

The Federal Circuit reversed, holding that the District Court erred in concluding that possession of a patent does not raise a rebuttable presumption of market power in a tying case. The Federal Circuit declined to depart from the language in the Supreme Court’s 1984 Jefferson Parish decision, that "if the 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." 466 U.S. at 11.

In support of the District Court decision, Illinois Tool had pointed to language in various Supreme Court decisions to argue that a majority of current Justices have criticized the notion that a patent or copyright could be presumed to confer market power. The Federal Circuit found the argument "unpersuasive" and further refused to engage in "nose counting" of Supreme Court Justices. Independent Ink, Inc., 2005 U.S. App. LEXIS 1205, at *20.

The Federal Circuit also disregarded numerous lower court cases that have rejected a presumption of market power, and significant academic criticism of Supreme Court decisions relying on a presumption of market power in patent cases. Moreover, the Federal Circuit found unpersuasive the fact that the Federal Trade Commission and the U.S. Department of Justice have determined that a patent or copyright should not be presumed to confer market power. In declining to follow these other authorities, the court explained that "the fundamental error in all of defendants’ arguments is that they ignore the fact that it is the duty of a court of appeals to follow the precedents of the Supreme Court until the Court itself chooses expressly to overrule them." Independent Ink, Inc., 2005 U.S. App. LEXIS 1205, at *23. This is true, the Federal Circuit noted, even where a Supreme Court precedent "contains many ‘infirmities’ and rests upon ‘wobbly moth-eaten foundations’." Id. Nonetheless, the court acknowledged that "[t]he time may have come to abandon the doctrine, but it is up to the Congress or Supreme Court to make this judgment." Id. at *24.

The Federal Circuit’s decision has potentially significant implications for patent holders (as well as owners of other intellectual property):

• Federal Circuit law applies nationwide to issues involving patent tying, although it is too early to predict how the district courts will treat the divergence between the Federal Circuit’s Independent Ink decision and the decisions of the regional Courts of Appeals rejecting the rebuttable presumption.

• Although the Federal Circuit did not expressly consider whether copyright holders are subject to a similar presumption of market power, it clearly indicated in dicta that Supreme Court precedent provides such a presumption "when the tying product is patented or copyrighted." Accordingly, copyright holders – and potentially owners of other intellectual property – are not safe from the implications of Independent Ink.

• Without question, Independent Ink will embolden antitrust plaintiffs and increase the risk of antitrust claims against patent holders who bundle or otherwise link sales of patented products and nonpatented products. It remains to be seen whether plaintiffs will successfully extend the Federal Circuit’s reasoning to tying claims involving two patented products or "patent bundles."

• The risk of affirmative antitrust tying claims is especially heightened in light of the divergence in the treatment of affirmative antitrust tying claims – where possession of a patent will raise a rebuttable presumption of market power – and patent misuse defenses based on patent tying – where possession of a patent will not raise any presumption of market power.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved