Wednesday, November 16, 2005

The Supreme Court Case You’re Not Paying Attention To, But Should

Last June 20th, the Supreme Court agreed to hear the appeal of Illinois Tool Works v. Independent Ink. Trident, Inc., a subsidiary of Illinois Tool Works, holds a patent for a printhead that prints barcodes on boxes. Its standard form licensing agreement requires customers to purchase their ink for the Trident printhead exclusively from Trident. Trident’s website states, “Trident's inks meet all the requirements for performance with Trident printheads and support full printhead warranty coverage. Use of incompatible inks could damage the printhead and void the printhead warranty.” The ink, however is not patented.

It’s a practice called “tying”. Tying is requiring a customer to buy a non-patented product you manufacture in order to purchase your patented product. Tying was the basis for the anti-trust suit against Microsoft. And this case has the potential to change the way you buy things forever.

The Sherman Anti-Trust Act does not specifically outlaw tying per se. It’s more general than that. “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.” So take that to mean what you will.

The notion that tying is a violation of the Sherman Anti-Trust act comes from case law. In 1917 the Supreme Court in Motion Picture Patents Co. v. Universal Film Mfg. Co. ruled that a motion picture projector company could not restrict their customer’s use of their projectors to movies made on their film. And in 1947, the Supreme Court found in International Salt v. United States that International Salt could not require its customers to buy its salt for use in its Lixator and Saltomat salt processing machines provided they used salt of similar or better quality. And again in 1962 in United States v. Loew's Inc., the Supreme Court ruled that motion picture distributors could not condition the sale of one movie on another.

In the case at had, another company which manufactures the ink, Independent Ink, found themselves unable to penetrate the market for the ink for Trident printheads and sued, alleging that Trident was engaged in illegal tying and monopolization in violation of sections 1 and 2 of the Sherman Act. The US District Court in Central California ruled against them. They appealed. And the US Court of Appeals for the Federal Circuit ruled in Independent Ink’s favor. They found that, “a rebuttable presumption of market power arises from the possession of a patent over a tying product.” Illinois Tool Works appealed and the US Supreme Court has agreed to hear the case. (Astute DKos readers will remember Illinois Tool Works from this post about corporations giving contributions almost exclusively to Republicans.)

Now that we’re all up to speed on the particulars, and before I move on to why you should care, I must confess, by way of disclaimer, case references notwithstanding, I am not an attorney. So with apologies to any actual attorneys, I’ll proceed to discuss this based on what makes sense rather than what the law might say, knowing full well that these often diverge.

To get a sense of the importance of the case. Here’s a list of parties (that I’ve found) who have filed Amicus Curiae briefs in favor of Illinois Tool Works: Intellectual Property Owners Association, Motion Picture Association of America, NY Intellectual Property Law Association, Intellectual Property Law Association of Chicago, American Bar Association and, most telling, the US Department of Justice. I expect there will more.

Clearly, lots of big businesses, and their lawyers, would very much like to see the precedent in International Salt overturned and the practice of tying become part of everyday business. Want to buy that GM car? You will be using only GM brand parts, oil and gasoline purchased at GM dealerships, won’t you? Enjoying your new Dell computer? You will be running only Dell licensed software, right? Looking forward to enjoying your new Sony CD player? You do agree to only play Sony CDs, right? Pharmaceutical companies could attempt to require drug stores to stop carrying generics if they want to purchase patented medications.

I think you get the picture. Clearly, in some instance tying will be bad business. In others not. And in some instances, it might be bad business except if every supplier did it, then it’s not like you’d have a choice. The one thing I can say with some certainty about you, the reader, is that you are using a computer. So chances are high that you are already familiar with the screwy terms in software EULA’s. Expect them to get screwier. It wouldn't be hard to imagine an anti-virus software company requiring you to use only their pop-up blocker or firewall, or else void the license and kill the program. And expect more of this sort of requirement, for more things. It just takes a little imagination.

What makes this case so potentially far-reaching is the core issue being argued. Does a patent confer a rebuttable presumption of market power? Proving that the seller has market power is a key element of pressing an anti-trust suit. The central element is choice. If HP required you to only use HP ink in any newly purchased printer, you’d probably just buy another printer (assuming you knew this before purchase and assuming that it is not the case that all printer manufacturers decide to do the same). But if there a particular type of printer you need that you can only get from one source due to a patent, it’s another story.

So where does the burden of proof lie? Is it with the patent holder – to refute the presumption of market power; or the customer – to establish it? The first problem should be obvious. Establishing market power is a potentially monumental task for the individual. You have to essentially map out the entire market for the patented product and demonstrate that the patent holder has considerable economic power in the market. And don’t expect the patent holder’s cooperation. And in the case of the printer market, for example, approximately five different companies make up 99 percent of the desktop printer market. So establishing that any one of them had market power might be hard, since no single firm has more than 35% market share. Yet, collectively, they are in a position to say, “Buy my expensive ink – or just don’t print.”

To my mind, of course a patent confers market power. Why else hold a patent? Patents are designed to prevent copycats from competing in the market for a period of time to reward the innovator. Patents are supposed to be issued only for something unique. So, by definition, there are not other competing products on the market. If there were, if they were similar enough to be a real alternative, they’d be infringing on the patent. Patents are by their very nature anti-competitive. We allow that because we judge that the good that comes from encouraging innovation outweighs the bad from stifling competition. Furthermore, if the patent did not confer market power, there really would be no point to tying. The whole idea behind tying is to extend the anti-competitive shield of a patent to other, non-patented, products.

The tentacles of a ruling in favor of the appellant in this case are potentially far-reaching. A sizable number of companies make products in aftermarket industries. As a note of full disclosure, and as I’ve discussed before in a post long ago, I work in such an industry. The struggling automotive parts industry, mostly small to medium businesses, has already largely fallen away in part due to the overwhelming tendency of people to bring their warranteed vehicles to dealers for service, coupled with the tendency to keep cars for shorter periods of time. So I've had a first hand view of the effects of a manufacturer having a defacto monopoly on aftermarket parts and service. Nevertheless, a ruling here in the favor of the appellant has the potential to finally do in an already crippled industry. It was through the industry trade association, the Automotive Parts Remanufacturers Association, that this case came to my attention. And the APRA has joined with the American Antitrust Institute and nine other trade associations to file an Amicus Curiae brief in support of Independent Ink.

Or consider that tying is the underlying issue in the Monsanto case in which Monsanto is trying to require that its customers only use its patented seeds for growing food and not harvest any of them for replanting the next season. Here the question is not can a company require you to buy only their non patented products as a condition of purchasing their patented product, but can they dictate to you how you will use that patented product. I cannot see how Monsanto would not prevail if Illinois Tool Works does.

Think of it, much of what you buy and used – even food stuffs – with EULA’s and conditions and agreements. Conservatives would argue that the Market would never let that happen. But corporations are in business to make money, and sometimes there is more money to be had by offering less choice, not more.

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