This document provides an analysis of the relationship between intellectual property rights (IPRs) and competition law. It summarizes the U.S. Supreme Court's 2006 decision in Illinois Tool Works v. Independent Ink, which rejected the presumption that patents confer market power. The decision established that plaintiffs in tying cases must prove the defendant has market power in the relevant market, rather than relying on this presumption. It analyzes how the presumption originally arose and reasons for its failure, noting a lack of economic evidence supporting an equivalence between legal and economic monopolies. The ruling shifts analysis of patent tying cases to a rule of reason approach.

1. MIPLC, Summer Seminar
IP and Competition Law
Prof. Josef Drexl.
IPRs: Between Exclusivity
and Market Power
The US Supreme Court in Illinois
Tools Case.
By: Moses Muchiri
May 2, 2012.

2. Introduction
• Traditional view of IP and Competition Law being ever in conflict
quietly giving way to the modern view that IP and Competition
complement each other. Both aim to promote
innovation, competition and consumer welfare.
→ IPRs are legal monopolies. IPRs establish property rights over an
idea (patent), expression (©), product quality/origin (™), Design
…
→ IPRs are both +ve and –ve rights = right to exclude certain acts
while also providing right to owner to use the rights.
→ Competition law does NOT regulate the existence of IPRs but
only the exercise of IPRs in the marketplace which could
adversely affect competition.
→ Competition law only intervenes to correct anti-competitive
conduct.
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3. Introduction
• Distinguish between economic monopoly and
legal monopoly:
→ Legal monopoly (IPRs) created by legal
instruments or legal grants. Are + ve (use
rights) and – ve rights (exclusionary).
→Economic monopoly: allows monopolist to
arbitrarily determine prices or exclude
competition.
• Antitrust policy: aims at preventing Patent
holders from extending the legal monopoly
beyond the term and scope of the patent.
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4. The Issue & Scope
• Whether IPRs confer market power solely on
existence of a patent on tied product?
[Rephrased] Do legal monopolies
simultaneously create market
monopoly/dominance?
• Paper discusses this question mainly in patent
tying cases, highlighting the US Supreme
Court decision in Illinois Tool Works and also
highlights similar cases in the EU.
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5. Nature of the Presumption of Market
Power
• What is this presumption? A judicial doctrine stating
that in the absence of evidence to the contrary, IPRs
(particularly patents) confer market power on owners.
• “Market Power”- the power to control market prices or
exclude competition. The US Supreme Court in
Jefferson Parish v. Hyde 466 U.S. 2 (1984) defined it as
“an economic matter, market power exists whenever
prices can be raised above the levels that would be
charged in a competitive market. [it is the power] to
force a purchaser to do something that he would not
do in a competitive market.”
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6. Legal Origin of the Presumption of
Market Power in the US
• For most of the 20th Century US courts, competition regulators assumed IPRs conferred
monopoly power.
→1972 “Nine No-Nos” which the Department of Justice (DOJ) saw as per se illegal.
• But then (tides of change);
→1988- DOJ Antitrust Division accepted that IPRs do not necessarily confer a monopoly in
relevant antitrust markets
Adopted a rule of reason approach to balance the pro-competitive and anti-
competitive effects of licensing i.e. no practices presumptively (per se) unlawful.
A Rule of Reason analysis looks at price rises vs. outputs; enhancing consumer welfare;
efficiencies offsetting competition.
→1988- Congress amends Patent Act effectively removing the presumption of market
power in the context of patent misuse.
→1991 – DOJ scraps away “Nine No-Nos”.
→1995 DOJ/FTC Antitrust Guidelines said that they “will no longer presume that a
patent, copyright or trade secret necessarily confers market power on the owner”.
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7. Legal Origin of the Presumption of
Market Power in the US
1. Henry v. A.B Dick (1912) USC: Held, (Chief Justice White dissenting) that violation of a
tying agreement was patent infringement. However no mention of market power.
2. 1916- Congress enacts §3 Clayton Act → makes tying agreements illegal if they
substantially lessen competition or create a monopoly.
3. Motion Picture Patents v. Universal Film (1917) USC.-
4. Morton Salt v. Suppiger (1942).
5. Mercoid Co. v. Mid-Continent (1944).
6. International Salt Co. v. U.S. (1947) - Court held it was a violation of s.1, Sherman Act
to condition (tie-in) sale of patented Salt machine to purchase of salt from the patent
owner.
7. Times-Picayune Publishing Co. v. U.S. (1953).
8. U.S. v. Loew’s Inc. (1962).- formally adopted the presumption.
9. Fortner Enterprises Inc. v. U.S. Steel Corp. (1969) (Fortner I) overruled in U.S. Steel
Corp. v. Fortner Enterprises Inc. (1977)- (Fortner II) †
10. Jefferson Parrish v. Hyde (1984)- Supreme Court unanimously reversed Court of
Appeal judgement that tying agreements were per se violations of 1, Sherman Act.
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8. Observations
→ The presumption of market power arose from patent misuse contexts.
→ Tying of patented device with a non-patented item was deemed per se
patent misuse as it was deemed an unlawful extension of patent
monopoly or patent term. (Heaton v. Eureka , 6th Cir. 1896).
→ The per se rule migrated from Patent law to Antitrust law in the Int’l Salt
v. U.S. case. This was the 1st Supreme Court decision to apply and read
Antitrust law into patent tying [tying = patent misuse = antitrust
violation]. Cases before Int’l Salt dealt with tying as per se patent misuse.†
→ Presumption formally adopted in Loew’s. Court said “if the government
has granted … a patent or similar monopoly… it is fair to assume that
inability to buy the product elsewhere gives … market power”
→ The 1988 amendment to the US Patent Act removed the presumption of
market power from patent law under the misuse context. (It still remained
in Antitrust law). (*An act of legislative oversight or deliberate omission?
Probably deliberate omission → Presumption was a judicial creature) ††
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9. Illinois Tool Works Inc. v. Independent
Ink Inc. 547 U.S. 28 (2006)
Facts:
• Illinois Tool Works (ITW) and its
subsidiary Trident, made patented
print-heads, patented ink
containers and unpatented
special ink. Sold the print-heads
& containers to original
equipment manufacturers (OEMs)
under license to incorporate them
into (industrial) printers for use in
printing bar codes on cartons.
• The licenses were subject to the
condition that OEMs would only
purchase the ink from Trident.
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10. Illinois Tool Works Inc. v. Independent
Ink Inc. 547 U.S. 28 (2006)
• Independent Ink Inc. (IIC) made ink with same chemical
composition as ITW’s ink. ITW sued for patent infringement but
failed. IIC then filed suit for non-infringement and invalidity of
ITW’s patents and amended its claim to include claim for illegal
tying and monopolization under 1 & 2, Sherman Act.
• District Court: Rejected IIC argument that ITW had market power
rendering the tying arrangements per se unlawful under
Sherman Act. Held IIC must submit affirmative proof of market
power. IIC appealed.
• Federal Circuit (Appeal): Reversed as to 1, tying claim holding
they were bound to previous Supreme Court patent tying
decisions which rendered patent ties per se illegal. In Obiter
stated that though it was time to abandon the presumption only
Supreme Court or congress could overrule its own precedents.
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11. Illinois Tool Works Inc. v. Independent
Ink Inc. 547 U.S. 28 (2006)
• Held in Fed. Circuit: “Once the plaintiff establishes a
patent tying agreement, it is the defendant’s burden to
rebut the presumption of market power and
consequent illegality that arises from patent tying.”
• Supreme Court: Noted that Fortner II (1977) &
Jefferson (1984) rejected the assumption that tying
agreements served no other purpose other than
suppression of competition. Held:
→ Rejected per se rule. Evaluate patent tying cases
under rule of reason ( i.e. Jefferson & Fortner II).
→Must prove market power in the relevant market.
→A patent does not necessarily confer market power.
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12. Illinois Tool Works Inc. v. Independent
Ink Inc. 547 U.S. 28 (2006)
“We are not persuaded that the combination of these two
factors [price discrimination & tying agreement] should give
rise to a presumption of market power when neither is
sufficient to do so standing alone. Rather, the lesson to be
learned from International Salt and the academic commentary is
the same: many tying arrangements, … are fully consistent
with a free, competitive market. … Congress, the antitrust
enforcement agencies, and most economists have all reached the
conclusion that a patent does not necessarily confer market
power upon the patentee. Today, we reach the same
conclusion, and therefore hold that, in all cases involving a
tying arrangement, the plaintiff must prove that the defendant
has market power in the tying product.”
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13. Analysis
Some questions:
• How did the presumption of market power come to exist in the first place?
• What is it about tying arrangements that led to creation of the presumption in tying cases?
And why specifically patents & ©?
• Was the court concerned about possible wrong application of the presumption beyond
patent tying cases? Was it a mistake?
• Now that the presumption no longer applies, what does this mean for Competition law?
→ There can be no absolute freedom of property rights or contract.
→ Free competition in the market must be secured.
→ How do we balance? While IP and Competition law both seek same goals i.e. promote
competition, technological progress and consumer welfare, they both go at it in different
ways: Competition law adopts static competition methods while IP law adopts Dynamic
(Schumpeterian) competition methods. †
• But even still, was there any legitimacy for the presumption? No!
→ No economic evidence supporting the presumption.
→ Presumption assumes single patent products. Ignores that today most
technological products would have multiple patented components eg.
Computers, cell phones. How would the presumption work in such a case. To
which patent would the tying be attached to? Just a single patent component
would make the presumption applicable (theoretically). Where’s the market
for the single component? (vis a vis the total product)
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14. Analysis
• Loew’s observed the presumption arose as a “hostility to use of the
statutorily granted patent monopoly to extend the patentee’s economic
control to unpatented products.” courts were overtly concerned about
tying. Why?
• Possibly to protect markets? Judicial aid to promote competition at a time
when the market wasn’t technologically developed or advanced thus
narrow relevant market = few substitutes, concern that tying was a way to
extend patent monopoly.
• There are indications the court knew that the presumption might have
been a mistake. Consider: Justice O'Connor concurring in Jefferson Parish
described the presumption as a “common misconception”.
• Perhaps the Court was aware its precedents were outdated and premised
on false assumption that legal monopoly = economic monopoly.
• IIC argued retain presumption for efficient administration of antitrust law
because proving market power is “notoriously difficult”.
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15. Analysis
Why the presumption failed;
1. There was never empirical economic evidence to prove patents confer market
power or monetary profit. To uphold the presumption would mean construing the
relevant market so narrowly as to include only the Defendant’s product. ††
2. The Presumption never actually existed. Int’l Salt & Loew’s cases were never
about actual market power but patent leveraging.†
3. No factual support as to why the per se rule that “tying arrangements serve hardly
any purpose beyond the suppression of competition” (Std. Oil v. U.S, 1949) repeated
in every case until 1969 should exist in Antitrust law. Jefferson, 1984 recognized
that tying may be procompetitive & compliant with Sherman Act. Today, Antitrust
law will only intervene in patent tying if seller has significant actual market power
(Kodak Eastman v Image, Supr. Ct. 1992). This is real power i.e. power over price
(Fortner II case, 1977) and power over output (Kodak).
4. Wrongly assumed that legal monopoly synonymous with economic monopoly. †††
5. Jefferson Parish had already stripped away the Loew’s presumption by requiring
proof of actual market power.
6. 1988 Amendment to the US Patent Act removed the per se rule. It would have
been irrational for Congress to immunize tying from Patent Act liability only to
have it condemned under Sherman or Clayton Acts.
7. 1995 Antitrust Guidelines expressly eschewed the presumption that patents confer
market power. ††††
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16. IPRs & Market Dominance in EU
• Presumption? Not really. However EU Commission is aware that
standard essential patents do confer some form of market
power.
• Mr. Joaquin Almunia, (V-P, EU Commission) recently on
10.02.2012 says:
“Once a standard is adopted, it becomes the norm and the
underlying patents are indispensable. Owners of such standard
essential patents are conferred a power on the market that they
cannot be allowed to misuse ...”
• [Recall] EU Competition law doesn’t consider Monopolies as per
se unlawful under Art. 102, TFEU but only concerned with abuse
of dominance while US Antitrust Law may regulate the creation
of monopolies under Section 2, Sherman Act.
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17. IPRs & Market Dominance in EU
• EU Commission may regard (i) refusals to license (ii) discriminative
or exploitative licensing of Standard Essential Patents; as forms of
abuse of dominance. EU Commission has been active on licensing
of standard essential patents.
• Case Examples:
- Rambus (EU) case (COMP/38.636)
- Qualcomm case (Qualcomm/Texas Case No.39247)
- Volvo case (C.238/87)
- Renault case (C.53/87)
- Magill case (joint cases C.241/91 P & C.242/91 P)
- Microsoft Tying Case (COMP/39.530)
• EU Commission’s response has been to adopt FRAND Doctrine in
regard to Standard Essential Patents (similar to U.S. Essential
Facilities doctrine).
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18. Effect of Illinois Tools
• No more per se rule. Now rule of reason.
Plaintiff has initial burden of proving anti-
competitiveness of tying arrangements.
• To establish unlawful tying, Plaintiff must show:
(a)The sale of one product is conditioned
actually or effectively on purchase of another.
(b)Seller has sufficient market power in the tying
product market (relevant market) to coerce
purchasers to accept the tied product
(c)Substantial amount of interstate commerce in
the tied product is affected.
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19. Effect of Illinois Tools
• How do you prove market power?
(i) Market share/ market structure: Circumstantial evidence. Define
relevant market (i.e. product & geographic market);
interchangeable products; cross elasticity of demand.
(ii) Uniqueness of the product: totality of factors including design;
product ergonomics e.t.c.
(iii) ‘Lock-ins’- Technological tie ins (where device is designed in such
a way that it will only accept certain parts. Other manufacturer
parts may be technologically incompatible) → Eastman Kodak
case
(iv) Actual market evidence: eg. Price fluctuations, consumer
behaviour.
• Procedurally complex & burdensome. Experts + Difficult Disclosure
Procedures = Lengthy trials + Costs. But better to prove than
operate under presumption. Even in EU no
presumption, Commission will only intervene when there is abuse
of dominance eg refusals to license, which in case SEPs = FRAND
requirements. †
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20. Thank you!
Moses Muchiri.
LL.M Candidate, MIPLC
Munich, Germany.
moses.muchiri@miplc.de
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