Independent Ink at the Crossroads of Antitrust and Intellectual Property Law: the Court's Holding Regarding Market Power in Cases Involving Patents and Implications in Cases Involving Copyrights

• Publication year: 2006
• Citation: Vol. 30 No. 02

SEATTLE UNIVERSITY LAW REVIEWVolume 30, No. 2WINTER 2007

Independent Ink at the Crossroads of Antitrust and Intellectual Property Law: The Court's Holding Regarding Market Power in Cases Involving Patents and Implications in Cases Involving Copyrights

Leonard J. Feldman, RimaJ. Alaily, and Chad D. Farre(fn*)

I. Introduction

For almost ninety years, the Supreme Court regarded tying arrangements-contracts to sell a product only on the condition that the buyer also take a second product-with deep suspicion under the antitrust laws.(fn1) The Court's distrust of such arrangements arose from the danger that a seller holding monopoly power in the market for the first product (the "tying" product) could extend that power into the second ("tied") product's market by forcing buyers to take an additional product that they either did not want or would have preferred to buy from another seller.(fn2) The Court's antitrust jurisprudence was dominated by the fear that a company would unlawfully leverage its monopoly power to acquire market share from competitors or to create high barriers to entry for new market participants.(fn3) This fear dominated even though many companies develop tying arrangements for legitimate purposes and not to suppress competition.

For example, a software company might legitimately refuse to sell its word processor application (a copyrighted work) unless the buyer also purchases the company's operating system. Or a software company might legitimately refuse to sell its computer operating system software (also a copyrighted work) unless the buyer also purchases the company's computer hardware because each product works best only when properly supported by the other. Similarly, a company might tie the sale of copyrighted instructions for manufacturing widgets to the purchase of one of the key ingredients for the procedure-thus facilitating competition by allowing low volume users to purchase the instructions at a lower cost while high volume users pay more based on their intensity of use. As these examples show, a copyright owner may wish to tie sales of different products for a variety of economically efficient reasons, including quality control, consumer satisfaction, reducing overall costs through economies of scale, and price discrimination.

Since patents and copyrights have the potential to create legally sanctioned monopolies in particular markets, the Supreme Court has viewed tying arrangements involving patented or copyrighted products with particular mistrust.(fn4) For over a half-century, the Court maintained two presumptions that together prevented any patent or copyright holder from tying sales of their product to any other item.(fn5) We will refer to the two presumptions as the "tying arrangement presumption" and the "market power presumption." According to the tying arrangement presumption, tying arrangements were per se violations of the antitrust laws if the company initiating the tying arrangement also enjoyed "market power" in the tying product market.(fn6) According to the market power presumption, the legal monopolies granted by a patent or copyright were presumed to confer market power sufficient to bring a tying arrangement within the per se presumption of illegality.(fn7) No evidence of healthy competition in the tying product market, or even of a particular tying arrangement's pro-competitive effects, would exempt a patent or copyright holder from per se liability under the antitrust laws.(fn8)

Over the past thirty years, however, courts gradually began to exhibit a more tolerant attitude toward tying arrangements, acknowledging that tying arrangements are not always anticompetitive. In Jefferson Parish Hospital District No. 2 v. Hyde, decided in 1984, a majority of the Supreme Court continued to hold that "certain tying arrangements pose an unacceptable risk of stifling competition and therefore are unreasonable 'per se;"'(fn9) however, four justices argued that the per se rule should be abandoned.(fn10) The same four justices repudiated the long-held notion that "tying arrangements serve hardly any purpose beyond the suppression of competition."(fn11) At the same time, lower courts began to question both the validity of the market power presumption and the rationale behind it, noting correctly that patents and copyrights frequently confer little, if any, market power.(fn12) After extensive criticism of the market power presumption by academics,(fn13) lower courts,(fn14) and even the Antitrust Division of the Justice Department,(fn15) the Supreme Court finally eliminated the presumption for patents in Illinois Tool Works v. Independent Ink(fn16) As a result, for the first time since the 1940s, a plaintiff in an antitrust lawsuit involving a patented product must establish that the patent holder has monopoly power in the relevant market.(fn17)

By eliminating the market power presumption for patent holders, Independent Ink calls into question the presumption's continued validity for tying arrangements involving copyrights. While the Court's holding directly applies only to patents, we present three reasons why, after Independent Ink, the presumption can no longer be viable in antitrust lawsuits challenging a tying arrangement involving a copyrighted product. First, the Court's rationale for eliminating the presumption- including citations to extensive academic writings, agency guidelines, and legislative amendments-precludes the presumption's continued application in any other context. Second, copyrights are significantly less likely than patents to confer market power because the scope of the limited monopoly granted by the copyright laws is narrower than that conferred by the patent laws. Therefore, once the Court has found the presumption to be invalid in the patent context, there is no reasonable basis for its continued application to tying arrangements involving copyrights. Third, as the Court's tolerance toward tying arrangements has increased over the past thirty years, the Court has become increasingly reluctant to find the market power required to make tying arrangements per se illegal. Given Independent Ink's holding that "many tying arrangements, even those involving patents and requirements ties, are fully consistent with a free, competitive market,"(fn18) it would be anomalous to preserve a presumption that condemns all copyright tying arrangements without requiring any showing of market power or anticompetitive effect.

In Part II of this article we review the history of the Court's tying cases, chronicling the steady construction of the market power presumption as well as the Court's increasing distrust of tying arrangements in general. We also note the Court's particular antipathy toward tying arrangements involving intellectual property. We then describe the partial deconstruction of those presumptions, culminating in the recent abolition of the presumption of market power for patent holders in Independent Ink. In Part III, we argue that, consistent with the Court's reasoning in the patent context, Independent Ink should signal the end of the market power presumption for copyright holders in antitrust cases. Accordingly, just as tying arrangements involving patented products are not condemned per se, tying arrangements involving copyrighted products should not be condemned per se under the antitrust laws unless the plaintiff is able to prove market power.

II. History of the Market Power Presumption

A. The Court's Construction of the Market Power Presumption

The Supreme Court's concern regarding tying arrangements emerged out of patent infringement cases and was only later imported into the Court's antitrust jurisprudence. The Court's concern was first expressed in Chief Justice White's 1912 dissent in Henry v. A.B. Dick Co}(fn19) Plaintiff patentee licensed its patented mimeograph machine on the condition that the licensee use only its unpatented ink in the machine.(fn20) The Supreme Court held that the use of a competitor's ink, in violation of the license agreement, constituted infringement.(fn21) In response, Chief Justice White wrote a lengthy dissent, warning that such license agreements granted the patentee "the power, by contract, to extend his patent rights so as to bring within the claims of his patent things which are not embraced therein" and "to multiply monopolies at. .. will."(fn22) Two years later, Congress took heed of that warning and enacted § 3 of the Clayton Act, thereby prohibiting tying the sale of one good to another.(fn23) In doing so, Congress "expressed great concern about the anticompetitive character of tying arrangements."(fn24)

Three years after the passage of the Clayton Act, when confronted again with a contract tying a patented product to an unpatented product-a patented movie projector tied to unpatented movie films-the Court condemned the arrangement.(fn25) Movie films, reasoned the Court in Motion Picture Patents Co. v. Universal Film Manufacturing Co., are not part of the patented projector, and, therefore, the purchase of the supplies elsewhere could not infringe the patent.(fn26) Throughout its opinion, the Court referred to a patent "monopoly," meaning that the patentee was granted the exclusive right to make and sell the patented article.(fn27) Although the fact that an article is patented does not mean that it would be in demand, the Court recognized that the...