Product tying is a practice where the sale of one good (the tying good) is conditional upon the purchase of another good (the tied good). Technology companies engage in this practice to leverage their dominance in one market (of the tying goods) as a way to extend into another market (of the tied goods). This method has gottengot Microsoft in trouble with the U.S. government twice, for tying MS-DOS with Windows 3.0 in 1994, and more recently for tying Internet Explorer with Windows 95.
When the seller has sufficient "market power" in a product, tying arrangements involving that product could be a violation of §1 of the Sherman Act, which prohibits any contract that creates an unreasonable "restraint in trade or commerce.". However, in most cases, the "market power" possessed by the companies using tying arrangements are not as clear as Microsoft’s. Defining the market and proving the "market power" possessed by a company utilizing a tying arrangement could be difficult.
The Supreme Court explained the requirement of proving the market power in its Jefferson Parish decision, which involved an agreement requiring patients of a hospital to use a particular anesthesiology firm.. In Jefferson Parish, the court held that the requirement of proving the "market power" necessitates both a definition of the market in which such power is alleged to exist and a showing of an "actual adverse effect on competition."
However, the Jefferson Parrish requirement applies to tying arrangements not involving intellectual property. In cases involving intellectual property as the tying product, the burden to prove market power is typically less. In 1947, the court held in International Salt that the defendant violated §1 of the Sherman Act by tying the leasing of patented salt machines on the condition that the lessees also purchase salt from the defendant. The Court made no inquiry into the defendant’s market power, finding that "[t]he tendency of the [tying] arrangement to accomplishment of monopoly seems obvious." In 1962, the Supreme Court reaffirmed this decision in U.S. v. Loew’s,, where defendant Loew’s tied less popular films to more popular copyrighted films in licenses to television stations. The Court held that "the requisite economic power is presumed when the tying product is patented or copyrighted."
In subsequent cases, the Supreme Court has somewhat retreated from its position on the presumption of market power for intellectual property. In a patent antitrust case involving §2 of the Sherman Act, the Supreme Court stated that it was "reluctant to extend [per se illegality] on the bare pleading and absent examination of market effect and economic consequences." However, this case was about monopolization under §2 of the Sherman Act, hence the holding is not directly applicable to product tying contracts under §1 of the Sherman Act. Also, a concurrence to the Jefferson Parrish decision written by Justice O’Connor and joined by Chief Justice Burger, Justice Powell, and Justice Rehnquist, stated that it is a "common misconception … that a patent or copyright … suffices to demonstrate market power." However, this also did not expressly overrule Loew’s and International Salt since Jefferson Parrish did not involve the tying of intellectual property and this statement was made in a concurrence.
Based on these indications from the Supreme Court and ongoing academic criticism, the Sixth Circuit has been persuaded to not follow LoweLoew’s in holding that "we reject any absolute presumption of market power for copyright or patented product[s]." Two Seventh Circuit decisions also suggested in dictum that proof for market power is not required in patent and copyright tying cases.
Most recently, in January 2005, the Federal Circuit examined the issue of market power presumption in a product tying case involving a patented product tied to a non-patented product.. In Independent Ink v. Illinois Tool Works, defendant Illinois Tool Works’ subsidiary Trident Inc. held a patent over its printhead technology.. Trident’s licensing agreements to OEMs required "OEMs to purchase their ink for Trident-based systems exclusively from Trident." Plaintiff Independent Ink is a competing manufacturer of ink, and sued Illinois Tools for violations under §1 of the Sherman Act, alleging that the tying of a patented product (printheads) with the unpatented product (ink) violates antitrust laws. The U.S. District Court granted summary judgment in favor of the defendant based on the failure of the plaintiff to affirmatively prove defendant’s market power. The plaintiffs appealed to the Federal Circuit, which held that the existence of a patent on the tying product creates a rebuttable presumption that the patent holder has the required "market power" to violate §1 of the Sherman Act. The Federal Circuit largely relied on International Salt and Loew’s, holding those decisions to be good law since the Supreme Court has not expressly overruled them.
Independent Ink has been appealed to the U.S. Supreme Court, and the Court granted certiorari on June 20, 2005. Whichever way the Court decides on the doctrine of presumed market power for patented and copyrighted products, there will be significant consequences on the technology industry.
If the Supreme Court upholds the Federal Circuit and concludes that market power is presumed from patents and copyrights, the barrier to bringing lawsuits against technology companies is greatly lowered. In the technology industry, most products incorporate some patents. For example, the licensing agreement to Adobe Acrobat version 6.0 lists 40 issued patents. Hence, manufacturers who bundle a patented product with non-patented products could be sued under §1 of the Sherman Act under the presumed market power of the patent, no matter how much actual market power the company has. Competitors bringing the suits need not prove market power or its restraining effect on commerce, and the burden is on the patent-holder to present evidences to rebut the market power presumption. This will have the obvious effect of discouraging the practice of product tying. However, in many cases for electronic products, it is difficult to distinguish what is a "product bundle" and what are independent products. For example, many electronic hardware devices contain embedded software codes, which are entitled to copyright protection.. It’s conceivable that competitors could argue that such devices tie copyrighted products (software) to un-patented and un-copyrighted hardware. This line of reasoning could potentially expose virtually all electronics makers to antitrust litigation.
On the other hand, if the Supreme Court reverses the Federal Circuit and holds that there is no presumption of market power from the tying of intellectual property, then technology companies will be more inclined to use their intellectual property as leverages to enter or dominate in other markets. The market for electronics products is ever-shifting and difficult to define. A competitor bringing an antitrust lawsuit against tying arrangements bears the burden to both define the market and show market power which could adversely affect competition. With the typical litigation time getting longer and the life-cycle of electronic products getting shorter, competitors seeking to use antitrust litigation to breakup illegal product tying contracts may go out of business before succeeding. This barrier to litigation could encourage companies to use their dominance in one market to extend into in a new or related market, and this trend could have a stifling effect on innovation.
