Distribution, Competition, and Antitrust / Intellectual Property (IP) Law

Potential Patent Licensing “No-No” #1: Patent/Product Tying

Yes or No?

(This is the second post in a series on the nine potential “no-nos” of patent licensing.  Click here for the prior post.)

Patent / product tying is no longer an automatic “no-no.” It is subject to an analysis that takes into account market power, as well as, at least in some cases, pro-competitive benefits and anti-competitive effects.

A “tying” or “tie-in” or “tied sale” arrangement has been defined as “an agreement by a party to sell one product . . . on the condition that the buyer also purchases a different (or tied) product, or at least agrees that he will not purchase that [tied] product from any other supplier.” Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451, 461 (1992). As the DOJ and FTC Antitrust Guidelines for the Licensing of Intellectual Property state, “[c]onditioning the ability of a licensee to license one or more items of intellectual property on the licensee’s purchase of another item of intellectual property or a good or a service has been held in some cases to constitute illegal tying.” However, although tying arrangements may result in anticompetitive effects, such arrangements can also result in significant efficiencies and procompetitive benefits.

For many decades the courts have considered tying arrangements involving patents – in particular, ties where a patented product is offered only on the condition that the buyer also purchase an unpatented product. Courts have been concerned that the tie could expand the patentee’s rights or powers beyond the statutory patent monopoly grant into related products or adjacent markets and interfere with competition in those markets.

Ties are potentially problematic when the firm imposing the tie has market power in the tying product market, and can use that power to “force” the consumption of tied products. For a number of decades, patents were presumed to confer market power. This presumption meant that patent / unpatented product ties were particularly troublesome. However, on the patent / patent misuse side of the law, the patent laws were reformed in the 1980s, and under 35 U.S.C. § 271(d)(5):

No patent owner otherwise entitled to relief for infringement or contributory infringement of a patent shall be denied relief or deemed guilty of misuse or illegal extension of the patent right by reason of his having done one or more of the following: … (5) conditioned the license of any rights to the patent or the sale of the patented product on the acquisition of a license to rights in another patent or purchase of a separate product, unless, in view of the circumstances, the patent owner has market power in the relevant market for the patent or patented product on which the license or sale is conditioned.” 35 U. S. C. § 271(d)(5) (emphasis added).

On the antitrust side of the law, a patent also no longer creates a presumption of market power – market power must be proven as in any other antitrust case. See Illinois Tool Works v. Independent Ink, Inc., 547 U.S. 28 (2006). Thus, ties imposed by licensors without market power are unlikely to pose significant concerns.

There remains the question of whether, if the patentee indeed has substantial market power, a tie is “per se” unlawful or whether it is evaluated under the rule of reason (which balances pro-competitive benefits and anti-competitive effects). I suggest that this is often a somewhat academic question. Once courts start examining market power issues, they are necessarily inquiring into effects or potential effects issues, whether they say so or not. Compare NCAA v. Board of Regents, 468 U.S. 85 (1984) at 104 n.26 (“there is often no bright line separating per se from Rule of Reason analysis. Per se rules may require considerable inquiry into market conditions before the evidence justifies a presumption of anticompetitive conduct. For example, while the Court has spoken of a ‘per se’ rule against tying arrangements, it has also recognized that tying may have procompetitive justifications that make it inappropriate to condemn without considerable market analysis.”). Even those courts that still treat market power ties as per se unlawful sometimes accept business justifications for the ties.

So the bottom line?  Tying a patent to an unpatented product can still be unlawful.  It’s just not always so.

The above discussion assumes that we are talking about the tie of a patent or patented product to an unpatented, staple product. I’ll discuss tying of non-staple products in an upcoming post.

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Trackbacks

  1. […] Ullman of Orrick, Herrington & Sutcliffe comments on patent and product tying in patent licences. Howard Ullman suggests that the decision to tie […]

  2. […] This post continues the series about potential patent licensing “no-nos.” The last installment may be viewed here. […]

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