New Antitrust Considerations for Tying Schemes

The Supreme Court has recently abolished the presumption that a patent confers “market power” on the patent owner, ending the presumption of antitrust liability arising from the conditioning of a patent license to the purchase of unpatented articles. See Illinois Tool Works v. Indep. Ink, Inc.,  126 S. Ct. 1281 (2006). As discussed below, this decision will have wide-ranging implications to the field of patent licensing, where fear of antitrust liability has tended to dampen the creativity of patent license schemes.

Consider that your client, the CEO of the hypothetical Tie-Co Int’l, excitably arrives at your office, eager to talk about his new product. “We’ve invented a new peach scent to go into children’s lip gloss,” he tells you, “it blows all other peach scents out of the water. I bet in a year or so, we have over 90% of the peach scent market for children’s lip gloss.”

As you share in his enthusiasm, you become edgy as he describes his scheme for leveraging his invention. He explains that he is going to require his customers (lip gloss manufacturers) to buy his entire line of scents if they want his new peach scent. He gloats that the rest of the scents currently in use are fungible commodities and that his potential customers wouldn’t object that much to buying the other scents from him, if it means having access to his new patented peach scent. He expects this new arrangement both to increase his already sizable market share substantially and to enable him to raise his prices 5% across the board.

Having heard about the Supreme Court’s March 1, 2006 decision in ITW, he tells you to stop worrying  about antitrust problems because he controls less than half the market on lip gloss scent additives. “Besides,” he tells you, “peach scented lip gloss represents only 10% of the scented lip gloss market and 40% of all lip gloss for kids is unscented, so where is the monopoly?”

Reluctant to dampen his enthusiasm, you explain that the analysis is not quite that simple. “If anything,” you tell him “although the decision in ITW made it harder to prove antitrust liability, it made the determination whether a patent tying arrangement violates the antitrust laws more complicated.”

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