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In a significant shift from its jurisprudence of the past forty years, the United States Supreme Court has rejected the presumption that a patent confers market power on the holder of that patent. In Illinois Tool Works Inc. v Independent Ink, Inc. (No. 04-1329, decided 1 March 2006), the Supreme Court concluded that since a patent does not necessarily confer market power, defendants in cases involving a tying arrangement must prove the existence of market power to bring an antitrust claim.

A possible implication of this case is that companies might be able to require customers to use the spare parts and supplies (car parts, toner cartridges etc.), designed and sold for use with their proprietary equipment, and prohibit the manufacture and sale of spare parts and supplies by third parties.

Tying, simply put, occurs when the supplier of a product (or service) agrees to supply that product only on the condition that the prospective purchaser will also acquire another product (the “tied” product) from the same supplier. (In the patent context, this situation commonly arises where the product being sold is the license to use a patent.) In tying, the products are typically not offered for sale individually.

Tying is distinct from bundling, which involves the sale of products (or services) in a group, often at a discount. The same products are, however, also available for sale individually (although probably without the discount).

From an antitrust law perspective, tying has been seen to potentially prevent competition in the market for the tied product, ie, by preventing third parties from supplying compatible spare parts and supplies, possibly at a savings for consumers.

In this case, the antitrust claim was brought in response to a patent infringement claim filed by Illinois Tool Works (“ITW”), which manufacturers patented inkjet printers that print barcodes on cartons. The license agreements for these printers required customers to buy replacement ink only from ITW. A division of ITW sued Independent Ink–which sells replacement ink at a lower price than the ink sold by ITW–claiming patent infringement. After the infringement claim was dismissed, Independent Ink sued ITW, seeking to render ITW’s patents invalid on the ground that ITW was engaged in illegal tying and monopolization in violation of the US anitrust laws (sections 1 and 2 of the Sherman Act).

The Supreme Court rejected Independent Ink’s argument that ITW had market power by virtue of its patent on the printing system, and thus that the tying arrangements were per se violations of antitrust law.

In rejecting the presumption of market power, the Court noted that in recent years its jurisprudence not only showed a movement away from assuming the existence of market power arising from a patent, but that its disapproval of tying arrangements had also diminished. This presumption, the Court observed, originally arose in the patent misuse context, and was later imported to antitrust law (citing International Salt Co. v United States (1947)). As a result of changes to patent law and views on tying arrangements generally, the Supreme Court decided that tying arrangements involving patented products should be evaluated on a rule of reason approach (in which the effect of a practice on competition is considered to determine if the antitrust laws are violated), rather than on the per se approach (in which instances of tying are assumed to be violations of antitrust law without any consideration of its effect on competition).

The rejection of the per se rule will make it easier for patent (and copyright) holders to tie sales of their products to sale of other products to which they hold the intellectual property.

On the other hand, it has long been the position of economists and certain policymakers that treating tying as per se illegal stiffled innovation and led to unnecessary litigation. In terms of litigation, the barrier is higher for the potential antitrust plaintiff, who must prove that the patent in fact confers market (ie, monopoly) power on the patent holder. However, in terms of innovation and competition, the decision may cut both ways. Although the holder of intellectual property in the primary product (the printer, the car, etc) may be given more scope to innovate, this same scope may be limited for third parties, particularly if they are smaller businesses.

The Supreme Court is not the only United States court reconsidering the relationship between patent misuse and antitrust concepts. In U.S. Philips Corporation v U.S. International Trade Commission (04-1361, 21 Sept. 2005), the Federal Circuit Court of Appeals held that the sale of patent licences as a package was not an illegal tying arrangement (and as such did not give rise to a defence to patent misuse). In this case, Philips licensed a group of patents relevant to the manufacture of compact discs (CD-Rs and CD-RWs) together, although some of those patents were not “essential” to the manufacture of those CDs. The court held that this packaging of patents was not tying, as no additional charge was levied for the use of the non-essential patents, and thus competition was not reduced as a result of the arrangement. (The patent holders charged CD manufacturers a fee for each CD made using the patents, but only charged for the use of “essential” patents as defined by the industry standard.) The court noted that “tying” was not an appropriate analogy in this situation, as Philips did not force manufacturers to use any of the non-essential patents.

Philips makes it more likely that patent holders attempting to establish technical or industry standards will licence patents as a portfolio, rather than individually. Whether this practice will have an effect on the market power held by such patent holders is unclear. Illinois Tool Works, however, clearly strengthens the position of patent holders, and makes it easier for them to tie the sale of related products to one another.

It will be interesting to see what the next developments will be in the relationship between patent and antitrust laws.