Ink and IP
When it comes before the U.S. Supreme Court this month, Independent Ink Inc. of Gardena, Calif., near Los Angeles, will make a simple request. The small, 35-person firm will ask for the right to compete against a Fortune 200 multinational that earned more than $12 billion last year.
The huge multinational, on the other hand, will be asking the court for protection against this competition. And to get that protection, Illinois Tool Works Inc. of Glenview, outside Chicago, will be requesting that the court overrule a 40-year-old precedent.
At stake in Illinois Tool Works Inc. v. Independent Ink Inc., No. 04-1329, is not just hundreds of millions of dollars that Independent Ink might win in litigation. The ruling could change significantly the way many patent and copyright infringement suits are conducted–making such suits faster, cheaper and easier for intellectual property rights owners to win.
The ruling could also strengthen IP rights owners’ business prospects by allowing them to tie the sale of their patented or copyrighted products to the sale of other goods, thus fencing out competition for those goods.
That, Independent Ink says, runs head-on into the Sherman Antitrust Act, placing this case at the intersection of intellectual property and antitrust law. Arguments are scheduled for Nov. 29.
A unit of Illinois Tool Works makes patented ink-jet printheads that are used to place bar codes on boxes. The company sells these printheads to manufacturers of industrial printing equipment.
However, ITW’s license agreement with the equipment manufacturers requires them to buy the ink used in the patented printheads only from ITW. The license allows the manufacturers’ customers to buy more ink from ITW, but the customers are forbidden to refill the ITW ink cartridges with ink from third-party ink makers.
That’s where Independent Ink comes in. The company has been making specialty inks since 1939 but has garnered few sales to users of ITW’s printheads–even though Independent’s ink costs much less than ITW’s.
“When Independent tried to sell in this market, it ran right into a stone wall,” says Edward O’Connor, the Irvine, Calif., attorney who represents the company. Independent blames its poor sales on ITW’s license agreement, which ties the sale of ITW’s patented printheads to the sale of ink. Independent will argue that this illegal tying arrangement violates section 1 of the Sherman Act.
There’s just one problem with Independent’s case. It has failed to present evidence that ITW has market power over the tying product (the printheads). Such evidence is ordinarily required for a plaintiff to prove an illegal tying claim under the Sherman Act.
Independent, however, will argue that it didn’t have to. The usual antitrust litigation rules don’t apply here, the company says, because this tying product is covered by a patent.
In 1962, the Supreme Court seemed to lay down a special antitrust rule for products that are protected by patents or copyrights. The court stated that for alleged tying violations, “the requisite economic power is presumed when the tying product is patented or copyrighted.” United States v. Loew’s Inc., 371 U.S. 38. The main issue in this case is whether the court should repudiate Loew’s.
The Loew’s decision has certainly been repudiated by economists and legal scholars, who have been almost unanimous during the past few decades. They say the court is wrong to presume that every patent or copyright provides its owner with significant economic power.
“Most patents confer too little monopoly power to be a proper object of antitrust concern,” according to Judge Richard Posner in his treatise Antitrust Law. “Some patents confer no monopoly power at all.”
Some lower federal courts also have expressed reservations about Loew’s. While the presumption of market power has been upheld by the U.S. Court of Appeals for the 2nd, 9th and 11th circuits, the 6th Circuit has rejected it, and the 7th Circuit has twice questioned the presumption in dicta.
In this case, the Federal Circuit reluctantly upheld the presumption, stating that “the time may have come to abandon the [Loew’s] doctrine, but it is up to the Congress or the Supreme Court to make this judgment.” 396 F.3d 1342 (2005).
O’Connor objects to the criticisms of Loew’s, claiming they completely miss the rationale for the presumption. “The fundamental basis for the doctrine was a prohibition on expanding the limited patent monopoly outside what is claimed in the patent,” he says. The presumption was a means to prevent a patent holder from effectively swelling its government-granted patent monopoly to include other nonpatented products, he says.
If the court overturns Loew’s, it will be a disaster for small and medium-size companies, O’Connor warns. “It would make the economic burden of proving antitrust violations expensive beyond belief,” he says. “Small companies couldn’t do it.”
Attorneys for Illinois Tool Works declined to comment when contacted.
Staving Off Counterclaims
Others, however, say that overturning Loew’s would protect patent owners and encourage innovation by allowing IP rights owners to sue infringers without fear of being hit with baseless antitrust counterclaims.
“Counterclaims [seeking treble damages] are asserted with great frequency in patent and copyright litigation,” says Kevin McDonald, a Washington, D.C., antitrust lawyer.
It is difficult and expensive for patent owners to fight these counterclaims because of Loew’s. “This leads to lots of unnecessary antitrust litigation, where the litigation goes much farther than it otherwise would, because of a presumption of market power that is generally not true,” says McDonald, who helped write the ABA’s amicus brief in this case, which advised the court to get rid of the presumption. “If the [alleged infringers] had to prove market power, these antitrust cases would fail at the outset.” That means infringement litigation would become substantially faster and cheaper.
Most observers expect the court to overturn Loew’s and its presumption of market power. “It is not in line with the realities of the marketplace,” notes Scott Burow, a Chicago patent litigator.
O’Connor, however, sounds optimistic. “I think the Supreme Court took this case to reaffirm the doctrine of patent-tying being illegal,” he says. “Some district court judges are saying they don’t think the doctrine exists anymore, and the court wants to straighten them out.”