March 2, 2006
In a landmark decision handed down by the U.S. Supreme Court on March 1, 2006, the Court unanimously abrogated its decades-old presumption, articulated most prominently in United States v. Loew’s, Inc., 371 U.S. 38 (1962), that market power arises from the mere ownership of intellectual property rights. See also International Salt Co. v. United States, 332 U.S. 392 (1947). In an opinion authored by Justice Stevens, a unanimous Court broadly held that “in all [antitrust] cases involving a tying arrangement, the plaintiff must prove that the defendant has market power in the tying product,” Illinois Tool Works Inc. v. Independent Ink, Inc., 547 U.S. __ (Mar. 1, 2006), No. 04-1329, slip op. at 16.
The Court reasoned that the market power presumption announced in Loew’s and International Salt finds no support in modern economic theory or antitrust enforcement policy, does not accord with the Court’s modern tying jurisprudence, and lacks support in the Court’s earlier patent cases. Beginning by noting that “this Court’s strong disapproval of tying arrangements has substantially diminished” “[o]ver the years,” the Court specifically noted that “[t]he assumption that ‘[t]ying arrangements serve hardly any purpose beyond the suppression of competition,’” “has not been endorsed in any opinion” of the Court since it was “rejected in” United States Steel Corp. v. Fortner Enterprises, Inc., 429 U.S. 610 (1977) (Fortner II). Slip op. at 5-6. The Court then quoted approvingly from Justice O’Connor’s concurrence in the judgment in Jefferson Parish Hospital Dist. No. 2 v. Hyde, 466 U.S. 2 (1984), in which Justice O’Connor and three other Justices questioned the continued viability, as a matter of antitrust law, of the Loew’s presumption, which had originated in the Court’s early patent-misuse cases.
After analyzing the historical underpinnings of the Loew’s/International Salt presumption in the Court’s earlier precedents, the Court cited Congress’s 1988 amendment of the Patent Code, which eliminated “the patent-equals-market-power presumption” “in the patent misuse context,” as a reason to reexamine the continued viability of the Loew’s/International Salt presumption as a matter of antitrust law. Slip op. at 12. Relying on its more recent, post-Fortner II tying cases, “the vast majority of academic literature on the subject,” and modern economic theory and antitrust enforcement policy, the Court abrogated the Loew’s/International Salt presumption, and “conclude[d] that tying arrangements involving patented products should be evaluated under the standards applied in cases like Fortner II and Jefferson Parish rather than under the per se rule applied in Morton Salt [Co. v. G.S. Suppiger Co., 314 U.S. 488 (1942)] and Loew’s.” Slip op. at 13-16 (citing, inter alia, William J. Baumol & Daniel G. Swanson, The New Economy and Ubiquitous Competitive Price Discrimination: Identifying Defensible Criteria of Market Power, 70 Antitrust L.J. 661, 666 (2003)). Under such standards, any conclusion that a tying arrangement is unlawful “must be supported by proof of power in the relevant market rather than by a mere presumption thereof.” Slip op. at 13.
The Court’s holding should be read to extend to copyrights as well – an extension that Gibson Dunn had urged in an amicus brief it filed on behalf of the Motion Picture Association of America, the Association of American Publishers, the Business Software Alliance, the Entertainment Software Association, the Independent Film & Television Alliance, the National Football League, and the Recording Industry Association of America. Although Illinois Tool Works on its facts dealt only with patents, the Court broadly “h[e]ld that, in all cases involving a tying arrangement, the plaintiff must prove that the defendant has market power in the tying product.” Slip op. at 16 (emphasis added). This holding flows directly from the fact that the validity of the presumption in copyright tying cases rests on the validity of the presumption in patent tying cases. See United States v. Loew’s, Inc., 371 U.S. 38, 46 (1962) (noting in copyright tying case that the presumption of market power “grew out of a long line of patent cases”). As counsel for the United States acknowledged during oral argument in Illinois Tool Works, “a holding that there is no [market power] presumption in the patent context would eviscerate the underlying rationale for Loew’s,” “which was a copyright case.” Oral Argt Tr. at 22.
Aside from its broad holding that the plaintiff must prove that the defendant has market power in “all cases,” the Court cited with approval the statement by the Department of Justice and the Federal Trade Commission in their antitrust enforcement guidelines that the agencies “’will not presume that a patent, copyright, or trade secret necessarily confers market power upon its owner.’” Slip op. at 16 (emphasis added) (quoting U.S. Dept. of Justice and FTC, Antitrust Guidelines for the Licensing of Intellectual Property § 2.2 (Apr. 6, 1995)). Further, in stating that the “conclusion” that a tying arrangement is unlawful “must be supported by proof of power in the relevant market rather than by a mere presumption thereof,” the Court placed great reliance on the “vast majority of academic literature on the subject,” including literature recognizing the absence of any economic basis for inferring market power from mere copyright ownership. Slip op. at 13-14, n.4.
The Court’s unanimous decision in Illinois Tool Works has enormous significance for successful individual and corporate holders of copyrights, patents, and other intellectual property rights, who are now less likely to be confronted with antitrust suits as a result of their use of package marketing arrangements that make economic sense and are procompetitive.
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