The United States Supreme Court has decided to review the decision of the Court of Appeals for the Federal Circuit (CAFC) in the case of Independent Ink Inc. v. Illinois Tool Works Inc. (ITW) and Trident Inc. How the Supreme Court rules in this case will determine if aftermarket industries will be eliminated from fair competition.
Essentially, Independent Ink’s case is based upon the doctrine of patent tying. This policy prohibits a seller from conditioning the sale of his patented product on his non-patented products. This case is not a matter of warranties; rather, it is a matter of contracts which last the life of the printing equipment.
Independent Ink is an aftermarket manufacturer of specialty inks for use in many industrial and wide-format inkjet printing applications. Independent Ink developed an ink specifically designed for use in Trident-ITW’s patented piezoelectric inkjet print-head systems.
As a condition of sale, Trident-ITW’s contract requires all OEMs, distributors and end users of its print heads to purchase all of the non-patented ink exclusively from ITW. In other words, ITW ties the sale of its patented inkjet printers to its non-patented inks.
The CAFC ruled in favor of Independent Ink, concluding the existence of Trident-ITW’s patented print heads created a presumption of market power. Market power in the patented print heads makes tying the non-patented ink purchase requirement a violation of Section 1 of the Sherman Act. The implications of changing the CAFC ruling of this case are far-reaching and could have an extremely detrimental impact on the American economy.
The purpose of the Sherman Act antitrust law is to protect the consumer and promote fair competition in the marketplace. Competition benefits consumers by keeping prices low and the quality of goods and services high. Independent Ink wants to ensure consumers have a choice in their ongoing consumable purchases in a fair, competitive marketplace.
The patent-tying doctrine has been under assault for years from large special interest groups who desire to impose tying contracts. Changing the patent-tying doctrine has been brought before Congress five times and has never passed. Altering this statute will open up Pandora’s Box. Therefore, one must ask the questions: By changing this statute will there be more pro-competitive or anti-competitive behavior? What effect will changing this doctrine have on the economy and the consumer?
The Supreme Court first decided that these contracts were anti-competitive and could not be used to bring patent infringement suits against purchasers of patented products in the 1917 case of Motion Picture Patents Co. v. Universal Film Mfg. Co. Then, in 1947, the Supreme Court found patent tying to be a violation of the antitrust laws in the case of International Salt v. United States.
The opponents of the patent-tying doctrine make the frivolous argument that the mere existence of a patent does not confer market power if there are close substitutes available for the patented product. The fundamental flaw in that reasoning is that close available substitutes usually infringe on the patent because a patent extends to all products that include the principles of the invention. The second problem is in actually defining close available substitutes. A substitute that works for one buyer may not work for another buyer; however, the patented product covers the needs of multiple buyers.
By definition, a patent defines a unique technology. The requirement for obtaining a patent is the patent covers technology that is both new and useful. Accordingly, it makes perfect sense to use the patent to define a market in terms of a product’s unique technological features. For example, in the Independent Ink case, at the time the tying contracts were entered into, Trident-ITW was the only source for piezoelectric print-head technology for printing inkjet bar codes directly on shipping cartons.
Another problem in repealing the patented market-power presumption is due to the nature of our economy, which is made up of a series of oligopolies. Basically, a small number of companies control and dominate major business sectors. As a group, those companies effectively exclude smaller companies from entering into competition. However, independently these companies will never have monopoly power over their competitors.
For example, Hewlett-Packard has only about 35 percent of the printer market. Collectively, however, approximately five different companies make up 99 percent of the desktop printer market. Therefore, it would be virtually impossible to establish Hewlett- Packard’s market power vis-à-vis its competitors.
It is almost a guarantee that if the doctrine is reversed and patentees are able to legally tie their patented products to their non-patented products multiple industries will be affected and go out of business overnight. And there will be absolutely nothing that anyone can do to prevent this because it is impossible to prove monopoly power from an independent company that is part of an oligopoly. Listed below are examples of how oligopolies will hide behind market power claims:
n Inkjet and laser printer manufacturers such as HP, Lexmark, Canon, Epson and Dell (all of which claim that individually they do not have market power in the desktop printer market) will now be able to condition the sale of their printers and force consumers to only purchase their branded inks/toners. This would all but eliminate the recycling, recharging and remanufacturing inkjet/toner aftermarket industry. Additionally, without the recharging industry we can expect an exponential increase in landfill waste usage.
n Automobile manufacturers such as Toyota, GM and Ford (all of which claim that individually they do not have market power in the automobile market) will condition the sale of their automobiles by prohibiting purchasers from buying automotive aftermarket parts, oil changes or independent servicing from non-dealer service centers.
n Pharmaceutical giants such as Pfizer, Merck, Smith Kline, Glaxo, Aventis and Bristol Meyer-Squibb (all of which claim that individually they do not have market power in the prescription drug market) will immediately attempt to force drug stores, which currently purchase their patented prescription drugs, to stop carrying generic drugs altogether. The pharmaceutical companies have been waging war against the manufacturers of generic drugs for years and this will give them the license to enact those restrictions.
If Independent Ink loses this case, one can expect an explosion of tying contracts and a consequential devastating impact on companies throughout the refurbishing, refilling, and replacement industries. Overnight, many of the companies that provide aftermarket services, replacement parts, and consumables will be sued for contract interference and put out of business, causing a negative impact on the economy as well as the environment.
Edward O’Connor is a partner in the firm O’Connor Christensen & McLaughlin LLP, the attorneys for Independent Ink Inc. Contact him at eoconnor@ocmiplaw.com.
