By: Frank Xu
Introduction:
Patent rights grant a single firm the right to exclude others from producing, selling, offering to sell, or importing the patented invention or any other invention covered by the patent’s claim. For decades, the Supreme Court has consistently ruled that, in antitrust lawsuits, patent rights necessarily give the patent holder significant power in that market. Market power is the ability of a firm to raise and maintain prices above competitive, free-market levels. For example, suppose that Dean Guzman owns an automobile company, USC Auto, which is a monopoly that controls all of the car manufacturing plants and car dealerships globally. In that case, USC Auto could charge USC students $100,000, on average, for a car, even though the average price of a new car in the US is only around $40,000. USC Auto can successfully raise and maintain prices at such an inflated level because USC Auto has market power; if students do not buy a car from USC Auto, then they cannot buy a car at all. Because market power is detrimental to consumers (and USC students), the Supreme Court has taken a vigilant stance on antitrust law to prevent firms from abusing their market power.
Legislative History:
The Supreme Court has a remarkable history of deciding cases against firms who hold patents in antitrust lawsuits: International Salt Co. v. United States, Morton Salt Co. v. G.S. Suppiger Co., and United States v. Loew’s Inc. were all decided against the defendant. In each, the Supreme Court held that firms that have a patent in a market necessarily possess significant power in that market. The reasoning is fairly straightforward: since a patent grants exclusive commercial control over a patented product or innovation, the holder can freely exclude others and prevent free-market competition. If no other firm can sell the same product or use the same innovation, then the patent holder can use its market position to raise prices and exclude others from competing against them with the threat of patent infringement litigation. If Dean Guzman, for example, held a patent for an engine design that would make cars twice as fuel-efficient, then USC Auto could prevent other would-be manufacturers from entering the auto industry; other car manufacturers would not be able to compete against USC Auto because, to avoid patent infringement, they would have to design and sell cars that are half as efficient.
One of the most common ways in which patent holders abuse their market power is through product tying. Product tying is when a consumer must purchase a product in one market as a condition to buy a different product in a different market. One example of product tying is if Dean Guzman wanted to buy a USC t-shirt, but to buy the shirt, he also had to buy a pair of USC socks that came with it. Here, the t-shirt and the socks are two separate and distinct products, but the two products are “tied” together because the purchase of one (socks) is required for the purchase of the other (t-shirt). If a firm owns a patent, then that firm could tie the sale of the patented good to a separate, unpatented product; this way, the firm could exercise market power over both goods. As another example, if Professor Jody Armour, owner of USC Clothing, owned a patent on a breathable fabric t-shirt technology, then Prof. Armour could tie the sale of his patented t-shirt with the sale of his unpatented socks. By forcing customers to buy the shirt and socks together, Prof. Armour could control the sale of both shirts and socks, despite only owning a patent for the shirt.
The Supreme Court also has a consistent history in ruling against defendants who engage in product tying; the Supreme Court has traditionally held that product tying is per se illegal under the Sherman Antitrust Act of 1890, as well as a violation of the 1914 Clayton Act. In Int’l Salt Co. v United States, Standard Oil Co. v. United States, and Northern Pacific Railway Co. v. United States, the Supreme Court held that product tying was anticompetitive behavior that violated the Sherman Act. In Standard Oil, the Court commented that “tying agreements serve hardly any purpose beyond the suppression of competition.” In Northern Pacific Railway, the Court further held that “by conditioning [the] sale of one commodity on the purchase of another, a seller coerces the . . . buyers’ independent judgment as to the “tied” product’s merits and insulates it from the competitive stresses of the open market.”
Yet given the Supreme Court’s consistent and well-documented attitude against firms with patent rights and even stronger attitudes against product tying, it may come as a surprise that in Illinois Tool Works Inc. (Trident) v. Independent Ink, Inc., the Supreme Court went against six decades worth of precedent and ruled that a firm engaging in product tying of a patented product does not necessarily commit anticompetitive behavior in violation of the Sherman Act.
Trident v. Independent Ink:
Trident, Inc., a subsidiary of Illinois Tool Works Inc., produced printheads for their industrial piezoelectric impulse inkjet printers. Trident held a patent on both their printheads and their bottle and valved cap ink containers, but no patent on the actual ink they used for their products. Trident required that their customers enter exclusive buyers’ agreements to ensure that buyers who purchased Trident’s printheads would buy their ink cartridges and ink refills as well. This allowed Trident to tie the sale of their printheads to the sale of their ink. As a result, Trident was able to sell their cartridges at a significantly marked-up price.
Independent Ink, on the other hand, was a small company that manufactured ink cartridges using the same chemicals as Trident. Independent’s cartridges were far cheaper than Trident’s ($125 vs. $325), and, as a result, many of Trident’s customers started violating their buyers’ agreements to purchase ink from Independent instead. In response, Trident sued Independent Ink in 1997 for violating their patent rights. California’s Federal District Court dismissed the original case because Trident’s patent only covered their printheads and ink cartridges, not the actual ink they were selling. In 1998, Independent filed a countersuit under Section 2 of the Sherman Antitrust Act and Section 3 of the Clayton Antitrust Act for illegal monopolization and product tying. Independent argued that Trident’s product tying demonstrated explicit anticompetitive behavior in violation of both the Sherman and Clayton Act. Trident’s patent ownership meant that they necessarily possessed significant market power in the jet printer industry. Trident defended their actions by claiming that the company had legitimate, pro-consumer reasons for tying the sale of their ink to their printheads, such as ensuring the quality of the ink their customers received and reducing their customers’ risk of purchasing inferior ink from a different provider. Ultimately, the Supreme Court went against precedent and ruled in favor of Trident.
Supreme Court’s Reasoning:
The Supreme Court held that contrary to International Salt Co. v. United States and other prior cases, patent ownership does not necessarily prove or imply that the firm has any market power in that industry. The actual market power patents grant is dependent on several factors, such as the usefulness of the patent, the broadness of the claim, and the competitive advantage the patent gives the holder over other competing firms. If Prof. Armour’s breathable fabric t-shirt patent is very narrow and easily designed around, or the design neither valuable nor competitive because the breathable fabric is far too expensive and commercially impractical, then Prof. Armour’s patent would not give USC Clothing any additional market power in the clothing industry. If, by contrast, Dean Guzman’s auto engine patent is very broad and challenging to design around, and the design is so useful that it makes cars twice as fuel-efficient, then the patent would give Dean Guzman and USC Auto significant market power in the auto industry. Simply having a patent does not prove that a firm has any market power in that industry.
Furthermore, the Court held that if a firm does not have significant market power, product tying is not a per se violation of the Sherman Act. The Supreme Court had already ruled on this issue in a precedent case involving a non-patent holding firm, Jefferson Parish Hospital District No. 2 v. Hyde, but in Trident, the Supreme Court applied the same reasoning in Jefferson, but to a patent-holding firm. One simplified illustration of the holding is if the Intellectual Property and Technology Law Society decided to up a small lemonade stand outside of Gould; the stand sells lemonade of one dollar a glass, and with the purchase of a glass of lemonade, the IPTLS decided to also give each customer a free sticker with their purchase. Here, the IPTLS is tying the sale of their lemonade with their slicker; customers must purchase both products together. It would be absurd, in this situation, to file an antitrust lawsuit against the IPTLS for anticompetitive behavior. Since the IPTLS lemonade stand is a small business with no market power, antitrust laws such as the Sherman Act and Clayton Act do not apply. Since many small businesses offer bundled services together, such as a taco truck providing a free drink with the purchase of their tacos, it is why the Supreme Court ruled this way in Trident.
Policy Implications of Trident:
The holding in Trident has positive policy implications for patent holders but negative ones for consumers. For patent holders, the decisions in both Jefferson and Trident indicate that the Supreme Court has switched from adopting a per se rule on product tying to a rule of reason approach. A per se rule is a black letter law where any company that holds a patent would be found guilty of anti-competitive behavior in violation of the Sherman Act and Clayton Act as a matter of law. A per se rule is enforced rigidly and without discretion. A rule of reason approach, by contrast, functions more like a standard than a rule. Rule of reason allows the court to exercise discretion and consider the market power of the patent holder, the reasons for implementing product tying, and the effect the behavior has on the market. Under the rule of reason, there are a few reasons why a patent-holding firm might adopt product tying. Product tying allows for lower search costs and more convenience for customers, as products that consumers would otherwise purchase separately can now be purchased together. Furthermore, some products, such as a tennis ball and tennis racket, are natural complements and usually purchased together without tying. The new rule of reason approach is much more favorable to patent holders because it allows them to exercise their patent rights with less fear of being sued for engaging in anti-competitive behavior.
On the other hand, for consumers, especially consumers of patented products, the decision in Trident is very detrimental. Product tying is an easy way for companies to price discriminate and thus reduce consumer welfare. A firm can make a customer pay significantly more for a product by tying it to a mandatory purchase of a separate product, forcing the customer to purchase both products together rather than only the product they wanted. In the case of Dean Guzman and Professor Armour, if Dean Guzman only wished to buy a t-shirt from Prof. Armour but is forced to buy both the shirt and the socks together, then Prof. Armour could charge Dean Guzman the combined value of both goods. If Dean Guzman values t-shirts at ten dollars each and socks at five dollars a pair, then Prof. Armour could charge Dean Guzman up to $15 for the shirt-sock combo. If Dean Guzman already has a closet full of socks and only wishes to purchase the shirt, then requiring Dean Guzman to purchase the socks as a condition to purchasing the shirt would force Dean Guzman to pay $15 when he could have only purchased the shirt alone for ten dollars. Product tying forces consumers to spend more money on unnecessary and/or undesired products because the products they wish to buy are tied to those they do not want to buy. Thus, product tying is an easy way for firms to artificially inflate purchase volume and maximize profits at the buyers’ expense.
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