Beyond the obvious hilarity of a case featuring a party with “Ink, Inc.” in its name, this decision turned out to be interesting on a number of levels, both for what it said and what it didn’t say. Having read the oral argument transcript and some of the amicus briefs, I was surprised both at the unanimity of the decision and its doctrinalist tone — economics seemed to take a back seat to an explanation of the orgin of the presumption of market power in early Supreme Court decisions. I would have taken it as an article of faith that no one cares any more about why pre-Chicago antitrust decisions arrived at the conclusions they did, the question being whether there is any warrant in Chicago or post-Chicago economic theory for a particular rule or standard. Illinois Tool serves up a reminder that the Supreme Court is still first and foremost a legal institution that operates juridically and not as an open-ended purveyor of economic policy.

Having said this, I thought that the decision was correct, even if not as obvious as might appear from the unanimity of the court and the relative brevity of Justice Stevens’s opinion. The assumptions that seemed to ungird much of Independent Ink’s argument was faulty, circular, and proved too much. I took Kathleen Sullivan’s oral argument to attempt to hoist Chicago on its own petard in the following manner: Chicago has taught us that tying exists in order to facilitate price discrimination; price discrimination requires market power; therefore where tying exists there must be market power. Of course, this would prove that all instances of tying prove the existence of market power, whether or not a patent was involved. Justice Stevens aptly noted another fault with the argument: the assumption that price discrimination requires market power, which is not generally true.

I was disappointed that the opinion did not rigorously engage what I thought were the strongest arguments for Independent Ink. The obvious problem for Independent Ink (which probably doomed them from the start) is that no sane person believes that patents generally confer market power. So the challenge was to articulate the basis for a rule that patents used to tie presumptively confer market power. The line taken by Independent Ink and the Nalebuff, Ayres, Sullivan amicus brief was that patents used in requirements contract tie-ins (as opposed to all patents as a class) should be assumed to confer market power. Justice Stevens’s response on that point was weak — a doctrinalist rejoinder that this argument construes the International Salt decision. I still think the argument is wrong, but I would have liked to have seen in rebutted on its economics, not on its law.

F.M. Scherer’s amicus brief presents what I thought was the most interesting argument, and it received not a word in the opinion. Scherer argues not for a general rule that patents confer market power (his own prior work saying that most patents have no economic value was cited in the Solicitor General’s brief–which apparently is why he jumped in to correct the alleged misuse of his scholarship) but that patents that have been the subject of litigation presumptively confer market power. There is something intuitive about this argument. If Illinois Tool sued Independent Ink for infringing its patent, Illinois Tool obviously doesn’t think its patent lacks any value. Still, I’m not sure the point is correct. If a firm sues a competitor for physical trespass to its plant, that doesn’t mean that the real estate confers market power. Scherer does better than this, relying on statistics (from Germany — where IP rights are different from the U.S., and query whether this makes a difference) showing that patents that have been involved in litigation have signficantly higher market value than other patents. In any event, I would like to have seen a bit of a discussion of whether there should be a rebuttable presumption of market power with respect to a patent when the patentee has previously sued for patent infringement as to that patent, as was true in Illinois Tool.

So where do we go from here? One immediate question is what happens to the per se rule in tying cases. Is it gone? On one level, the answer may not matter much because it was effectively gone with Jefferson Parish, whether or not the majority was willing to recognize this. At a doctrinal level, however, the per se rule persisted — foolishly, in my opinion since it did not resemble the per se rule anywhere else in antitrust and only caused confusion. Illinois Tool does not explicitly say that the per se rule is dead, but it does explicitly repudiate the “tying arrangements serve hardly any purpose beyond the suppression of competition” language of Standard Oil, which provides the only meaningful justification for a per se rule. My guess is that this is the end of the road for the per se rule for tying (if Jefferson Parish and Kodak weren’t functionally that end already).

If you’re keeping score on “Chicago vs. post-Chicago,” this was arguably another win for Chicago after losing in Kodak. The Nalebuff, et al, brief (and, to some extent, the Scherer brief) was a full frontal attack on the Chicago view of tying and the welfare effects of price discrimination. This opinion nominally says nothing on the welfare effects of price discrimination, but that issue is lurking in the background for future tying and bundling decisions.

So stay tuned for more fun ahead.

Technorati Tags: Independent Ink, Chicago School, market power, patents, Supreme Court, antitrust, intellectual property

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