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On Tuesday, the Supreme Court will be asked to abolish the nearly 60-year-old common-sense presumption that patents confer market power on their owner. The key word here is “presumption.” Everyone agrees that patents can confer market power in at least some circumstances. But the petitioner in Illinois Tool Works Inc. v. Independent Ink Inc. will argue that they usually do not. Thus, the issue before the justices is whether antitrust law’s presumption that they do continues to make sense today. The short answer is yes. The Supreme Court case arises out of a dispute over patent tying. Manufacturer Illinois Tool Works required purchasers of its patented printheads also to buy its unpatented ink for use with the printheads. Competitor Independent Ink accused Illinois Tool Works of illegal tying under antitrust law. The U.S. Court of Appeals for the Federal Circuit held that the presumption of patent market power remains good law. THE EXCLUSION ZONE A patent gives its owner the exclusive right to manufacture, use, and sell a particular invention � and thus to bar others from manufacturing, using, or selling that invention � for 20 years. As the 11th Circuit put it in Schering-Plough Corp. v. Federal Trade Commission this past March: “By their nature, patents create an environment of exclusion, and consequently, cripple competition.”
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Although this power to exclude is not exactly the same as market power, it can confer market power. Under antitrust law, market power is the ability of a single seller to successfully raise prices or restrict output within a relevant market. Relevant markets are determined by examining the reasonable interchangeability of products (or services). To the extent, then, that a new invention has no acceptable substitute, the owner of the patent on that invention can raise prices or reduce output, and thus exercise market power. Over time, the power of patents has actually increased. The recent legislative trend in Congress has been to strengthen intellectual property rights, and the courts � including specifically the Federal Circuit, the exclusive appeals court for all patent cases � have done much the same. (For instance, the presumption that patents are valid has been so heightened that it now strongly favors the holder of even an invalid patent.) Since the exclusionary power conferred by a patent has thus become more substantial since the presumption of market power was first promulgated by the Supreme Court in the 1940s, the presumption makes more sense today than it ever has. Ruling in Independent Ink this past January, the Federal Circuit held that in tying cases, “a patent presumptively defines the relevant market as the nationwide market for the patented product itself, and creates a presumption of power within this market.” Now it is unarguable that a patent will always give its holder market power in cases where the patent itself defines the relevant market, since the holder can completely exclude competition from that patent-defined market. This gives the patent holder an unfettered ability to raise prices or restrict output in that market during the term of the patent. While it is, of course, not always correct to define a market as one patented product, product-specific markets are commonplace. For example, a product may constitute its own market when it is so highly differentiated that for some consumers nothing else will do. Even one brand of a particular product can sometimes define a separate market. Generally, market definition must take into account the commercial realities faced by consumers. And the commercial reality in many situations involving patented goods is that the patent defines the market and, as such, gives the patent holder power within that market. WONDER DRUGS Most people are probably not familiar with the business of selling printheads and inks. A better example of the direct relationship between a patent and market power � one that cuts closer to home for most Americans � is the pharmaceutical industry. Product development in the pharmaceutical industry predominantly focuses on creating entirely new molecules, not improving old ones. Thus, when a company receives a patent on a new drug, that drug is often so innovative that it creates its own market. (Indeed, drug makers spend a lot of money to suggest to doctors and patients that their products have no adequate substitute.) The exclusive right to sell the new drug gives the company considerable market power � a fact that is widely recognized, including by patent holders themselves, who routinely tell investors about the impact that patents have on their bottom line. For instance, in filings with the Securities and Exchange Commission, Pfizer Inc. cautioned its investors that “[t]he loss of patent protection with respect to any of our major products could have a material adverse effect on revenue and net income.” When discussing various legal proceedings in which it was involved, Pfizer went on to say that the loss of patent protection for any of the drugs at issue “could lead to a significant loss of sales of that drug and could materially affect future results of operations.” Pfizer has also emphasized that the expiration of a product patent or the loss of patent protection resulting from a legal challenge tends to encourage significant competition from generic drugs and “can result in a significant reduction in sales of that product in a very short period.” Other companies make similar statements to investors about the direct relationship between patents and market power. It seems schizophrenic that companies like these then turn around and tell courts reviewing antitrust law that no relationship between patents and market power should be presumed. But that is exactly what Pfizer did in an amicus brief to the Supreme Court in the Independent Ink case. WHEN TYING HURTS Basically, the argument against the presumption that patents confer market power on their owners is that although they do so in certain situations, those situations are “rare.” But it is precisely those “rare” situations that are the problem. It is in those cases where a patent effectively creates its own market that a tying arrangement between the highly desired patented product and the less desired unpatented product can work � because consumers will agree to buy the tied product to get the patented product. The market power in the tying product, provided by the patent that effectively bars reasonable alternatives from reaching the market, is what forces consumers to purchase the tied product, which would otherwise be subject to full competition. That forced purchasing of the tied product creates an anti-competitive injury, which thereby justifies a rival company’s challenge to the tying arrangement under antitrust law. Truth be told, tying arrangements involving patents occur all the time. But contrary to what the petitioner in the Supreme Court case and other commentators � including the authors of a previous opinion piece in this newspaper (“Independent Ink Stain,” April 4, 2005) � argue, only a very few tying arrangements are ever challenged in court. With respect to those few cases � the few cases in which another party was sufficiently injured so as to justify litigation � the presumption of market power resulting from the patent makes sense and should be maintained. Even if the frequency with which all patents confer market power on their owners is “rare” (a conclusion that is not at all certain), it is reasonable to assume that the small number of patents involved in tying arrangements that have proved harmful enough to drive a party into court do confer market power. For that defined subset of patents, the presumption has always made sense and still does today. Confronted with the vast body of precedent against them, those who argue for abandonment of the presumption often state that there is no significant authority on intellectual property law who defends it. However, they willingly ignore the cases that have reviewed and upheld the presumption over the years. They also ignore conflicting commentaries supporting the presumption. Even the economic scholarship is not nearly as one-sided as the anti-presumption voices would have us believe. Regardless, law is to be governed by precedent and the constitutionally established courts, not academic opinion. Ultimately, what those who argue against the current presumption really want is a dramatic shift in the law of tying cases that, they hope, will make it harder for plaintiffs to prevail and will thus discourage potential plaintiffs from bringing patent tying claims at all. To be sure, we could reduce the amount of antitrust litigation by stating that nothing a company does can violate any antitrust law, but such would obviously be disastrous policy. Therefore, without reservation, the Supreme Court should deny the request that will be made tomorrow to reverse its long-standing presumption that patents confer market power. To abandon the presumption would be economic and legal error.

Daniel B. Ravicher is a registered patent attorney and executive director of the Public Patent Foundation, a not-for-profit legal services organization based in New York City that represents the public’s interests in the patent system. Along with the AARP and Consumers Union, PubPat filed an amicus brief with the Supreme Court in the Independent Ink case supporting the market power presumption.

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