CHEAPER REFILLS VS. PATENT PROFITS (READ)

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Cheaper refills vs. patent profits
The high court will decide if patent holders can protect products from cheaper suppliers.
NEW YORK – At first blush, you may think it’s a little spat about printer ink. But don’t be fooled … it’s a Supreme Court battle that could change how you buy everything from car parts to razor blades to generic drugs.
The case, which will be argued Tuesday, is Illinois Tool Works v. Independent Ink. The court will determine whether Illinois Tool Works violated antitrust laws under the Sherman Act by forcing consumers of its patented ink jet printer to buy a certain type of printer ink for use with its printer – a practice known as tying.
For consumers the case boils down to a central question: If you buy a company’s patented printer, should you also have to buy that company’s ink … even if there is a compatible and cheaper ink available from a small aftermarket supplier? And if you have to do it for printer ink, do you also have to do it for other supplies tied to a bigger product?
Of course for major patent holders (and their investors), there is an equally straightforward counter-question: Shouldn’t a company that has invested time and money into developing a patented printer have the right to protect the quality of its technology – as well as its profits – by requiring a user to only buy its brand of ink?
“This is a big case because intellectual property is growing in importance for business,” said David Price, attorney with Washington Legal Foundation. “If the Supreme Court accepts the lower court’s decision, it will make it difficult for companies to enforce their patents and raise worries that they will be liable on antitrust grounds.”
The consumer side
The defendant, Independent Ink president Barry Brucker, said big business is essentially hoping to put small after-market players out of business by asking the Supreme Court to overturn decades-old law.
“If the Supreme Court rules against us, before the ink is even dry on the ruling, companies in virtually every industry from drug companies to automotive firms to service organizations will start to condition the sale of their patented equipment on non-patented service parts,” he said. “Car companies could say: ‘If you buy my car, you have to buy all spare parts and motor oil changes from us as well’.”
He said film distributors could condition the sale of blockbuster movies on theater owners by requiring them to also show poorly reviewed movies that are unlikely to drive much traffic. And pharmaceutical companies could attempt to prohibit drug stores from carrying generic drugs in exchange for their patented drugs.
Indeed, Pfizer and The Motion Picture Association of America were among the organizations that filed friends-of-the-court briefs in favor of Illinois Tool Works.
“A simple antitrust case between a Goliath and a David has turned into an opportunity for Fortune 100 companies to begin to tie the sales of their patented goods to non-patented consumables,” Brucker said. “We’re up against a trillion dollars worth of businesses.”
While tying itself isn’t illegal, the practice can run into trouble if a company is considered to have a monopoly, forcing consumers to buy the product at whatever price is set. Independent Ink, which sold compatible printer ink at a lower price, said the Illinois Tool Works’ patent implies market power and by requiring its consumers to sign a licensing agreement prohibiting the use of any other ink, Illinois Tool Works was guilty of antitrust violations.
Change the law
Kevin McDonald, an attorney at the law firm Jones Day who filed an amicus brief in favor of Illinois Tool on behalf of the American Bar Association, said previous interpretations of patent law and tying have since been discarded by most economists and the Supreme Court should, likewise, review its earlier ruling.
“There are good business reasons for some types of tying arrangements, including quality assurance and convenience,” he said. “As long as consumers have some choices in the printer head market, it’s not a monopoly.”
The U.S. Court of Appeals of the Federal Circuit, however, disagreed, citing Supreme Court precedent from a 1962 case, United States v. Loew’s, that said if a product has a patent or copyright, by definition, it has market power that makes it illegal to tie the sale of a patented product to another.
But now Illinois Tool Works is hoping to convince the high court to reconsider its decision.
Price of the Washington Legal Foundation said a ruling against Illinois Tool Works could open the door for other companies to challenge tying arrangements across industries. That could mean increased pressure on corporate profits if companies are unable to tie the sale of legitimate products to each other. And if patent-holders are considered guilty of antitrust violations, they could be liable for treble damages.
McDonald added that while the high court is usually hesitant about changing precedents, in antitrust cases it has recognized that older cases may be wrong based on new economic thinking and developments and overturned prior rulings.
“In this case, there is just no basis in economic theory for the presumption that a patent holder has market power in the sale of that product,” he said.
Bad for small business, bad for consumers
But Independent Ink’s Brucker is supported by a variety of service dealers associations, tire manufacturers and large consumer advocacy organizations.
Albert Foer, president of American Antitrust Institute, a non-profit think-tank which filed an amicus brief in favor of Independent Ink, said the case essentially would shift the burden of proof in determining whether a corporation has market power onto smaller players rather than on the patent holder.
“Shifting the burden could do tremendous damage to what competition is,” he said. “A lot of manufacturers held their punches because under traditional law, they knew they’d be facing antitrust issues. But now we have conservative economists and attorneys who want to strengthen IP law at the expense of competition.”
For smaller players, the financial burden alone of trying to prove market power in court could be devastating, Foer said. And if small business is forced to shutter its doors, consumers would be left with fewer options to choose from which could the pave the way for higher priced goods, he said.
But observers speculate that the Supreme Court may not take such a black and white view of the case.
James Day, an associate at Latham & Watkins who specializes in IP litigation said It’s more likely that the Supreme Court will modify the language of the earlier ruling to provide more clarity for future cases.
“Illinois Tool Works argues that upholding the earlier ruling will stifle innovation while the counter-argument is that it’s been the law for 50 years and the world hasn’t come to a standstill,” he said. “I think its more likely the Supreme Court’s opinion would indicate that there was some unfortunate language in the prior ruling and would see it as correcting the direction of the law” rather than overturning the law altogether.

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November 30, 2005 at 10:57 AM