Supreme Court Weighs in on Patents, Antitrust and Market Power

by Lee Gesmer on March 20, 2006

Patents, Antitrust. Suppose that you live in a small farming community, Village 1, that relies entirely on its own members for food supplies. I have the only farm that grows corn. Whenever you come to me to purchase corn I tell you that I will only sell you my corn if you also buy a pound of cauliflower for every pound of corn you purchase. Cauliflower is plentiful, and you don’t want to buy my cauliflower (in fact you don’t even like this vegetable), but since you (and your fellow citizens) need corn you have no choice.

Assume that you move to a new community, Village 2. You still need corn, but you discover that there are several purveyors of corn in your new town. You go to the closest of these, and you discover, to your dismay, that this farmer also insists that if you buy his corn, you must also buy his cauliflower. Before purchasing you check around, and learn that the other corn vendors do not require that you purchase cauliflower as a condition to purchasing corn, and you happily proceed to do business only with them in the future. You later learn, to your satisfaction, that the corn farmer that you first encountered in Village 2 has gone out of business.

Thie simple example illustrates one of the more complex and vexing doctrines of U.S. antitrust law, the doctrine of tying arrangements. At its most simple, this intimidating term means that if you want to buy one product from me, you have to buy another that you may not want at all.

In antitrust parlance, corn is the “tying product,” and cauliflower the “tied product.” The product you don’t want (cauliflower) is “tied” to the product you do want (corn).

In Village 1 the corn farmer had what antitrust types call “market power” – in fact, he had a monopoly. If you wanted corn, you had to get it from him, and because he had a monopoly in corn he had the power to force you to buy his cauliflower as well. U.S antitrust law has long held this practice to be illegal per se, meaning there is no legal justification that would excuse it.

In Village 2, the first corn farmer had no market power at all. Because he foolishly insisted that a purchase of corn be accompanied by a purchase of cauliflower, he was soon out of business. In cases where the seller has no market power in the tying product, anitrust law has almost always found that a tying arrangement is permitted. After all, since the purchaser has the option to go to other sellers, how can the seller who lacks market power harm competition?

All of this seems intuitive and makes perfect sense, but lawyers being what they are nothing is ever this simple. What is the market? In the market, what is market power, and how do you measure it? How much is too much? Are there situations where there is a justification for requiring people who want product A to also buy product B (such as safety or cost efficiencies)? Are products A and B so closely related that they aren’t really separate products at all, but actually one product? These questions, to name just a few, have occupied the minds of judges, lawyers and economists for over one hundred years, and have resulted in enough pages of briefs, decisions and legal and economic treatises to reach from here to Pluto (well, not quite, but you get my point).

The most recent twist on the law of tying arrangements is the Supreme Court’s March 1, 2006 decision in Illinois Tool Works v. Independent Ink, Inc.

In this case the Supreme Court considered the question of whether one who holds a patent in Product A (remember, this is the “tying product” – the one you want) should be presumed to have market power simply by virtue of holding that patent. After all, once you obtain a patent you have a government-granted monopoly in products that incorporate the patent, don’t you? How could there be any doubt that the patent holder has market power?

This argument was accepted for over 40 years [link]. However, the prevailing winds at the all-powerful academic institutions and federal agencies (the antitrust division of the U.S. DOJ and Federal Trade Commission) that influence antitrust policy have shifted, and the Supreme Court decided to catch up with current economic thinking and put an end to the “patent-equals-market-power” presumption. In Illinois Tools the Court reversed this 40 year line of precedents, holding that one challenging a tying arrangement must show power in the relevant market, rather than relying on a mere presumption of power based on patent ownership.

Does this decision make good economic sense? In today’s environment, it probably does. Not only are most patents of little or no value, but in a 21st century economy there often are non infringing alternatives to the patented product that serve as substitutes, robbing the patent holder of market power. The Supreme Court has joined the Justice Department and the Federal Trade Commission [link] in concluding that it is implausible to presume that the owner of a patent possesses market power merely by virtue of the patent. However, because patents have become such an important part of the economy, the case is highly significant, and can be expected to have broad application.

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