April 1, 2005 (Vol. 25, No. 7)

Biotech and Pharma Firms Should Use Caution When Designing Licensing and Marketing Policies

Antitrust laws prohibit so-called tying arrangements whereby a first product, service, or technology is bundled and sold together with a second, generally one which is less desirable or which is also available from competitors.

According to the U.S. Supreme Court, such arrangements can have an anticompetitive effect and can be illegal if the seller has market power for the first product. A recent holding by a U.S. appeals court makes it easier to prove that market power exists for a product covered by a patent.

Here are some hypothetical examples of situations where the issue of possibly illegal tying may be raised for products or services offered by a biotechnology or pharmaceutical company:

A company sells an analytical instrument covered by a patent and requires buyers of the instrument to use its own reagents or kits with the instrument, or requires buyers to license a method that can be carried out with the instrument.

For example, a thermocycler instrument is sold only with a license to a particular PCR method that can be performed using the thermocycler.

A company licenses patented technology A only bundled together with a license to technology B, or only with the requirement to purchase a given product.

For example, a patent covering a DNA sequence is licensed only together with a license to a cell line containing the patented DNA sequence. Or, a company licenses antibody X only bundled with a license to its method of using antibody X to treat cancer.

Of course, the above are merely hypothetical examples, and only a court examining the specific facts of each case can determine whether an illegal tying arrangement actually exists.

Market Power

A line of cases from the U.S. Supreme Court has long held that ownership of a patent is presumed to convey market power, which is one of the factors needed to prove that an illegal tying arrangement exists in contravention of Section 1 of the Sherman Act.

Market power indicative of illegal tying is appreciable economic power in the market for the tying product affecting a substantial volume of commerce in the tied market [Eastman Kodak Co. v. Image Technical Services, 504 U.S. 451, 462 (1992)].

For tying to be illegal the seller must be able to appreciably restrain free competition in the market for the tied product [United States v. Loews, Inc., 371 U.S. 38, 45 (1962)].

If no patent is involved, then market power is proved by showing that the seller is able to raise prices or require purchasers to accept burdensome terms that could not be exacted in a completely competitive market [United States Steel Corp. v. Fortner Enterprises, Inc., 429 U.S. 610, 620 (1977)].

However, if a patent covers the tying product, then market power is presumed [International Salt Co. v. United States, 332 U.S. 392 (1947)].

The doctrine linking patent ownership with market power has been subject to frequent criticism. While a patent provides a monopoly over the claimed invention for the term of the patent, there are several arguments suggesting that the patent monopoly does not automatically result in market power.

For example, there may be alternative technologies on the market, and the patented invention might exclude competition from only a limited market share. Or, it might be fairly easy to design around the patent to develop alternatives. After all, theres more than one way to build a mousetrap.

The presumption of market power based on a patent has fallen into disfavor in recent years, and some courts have declined to follow it. As a matter of policy, the Department of Justice, which enforces the antitrust laws, does not presume that market power exists based merely on patent ownership, and states so in its Antitrust Guidelines for the Licensing of Intellectual Property.

Rebuttable Presumption

Thats why a recent decision by the U.S. Court of Appeals for the Federal Circuit is somewhat surprising. In Independent Ink, Inc. v. Illinois Tool Works, Inc., the court reaffirmed the U.S. Supreme Court doctrine that ownership of a patent covering a tying product, i.e., the desired product used to force sales of another product, creates what is called a rebuttable presumption of market power over that product.

In this case, the standard license offered by Illinois Tool Works required users of its ink jet printhead to purchase their ink exclusively from Illinois Tool Works. In fact, Illinois Tool Works faces competition from at least two other companies in the market for its printhead.

However, because of the Supreme Courts presumption, Independent Ink was able to support an accusation of illegal tying without presenting any evidence of market power other than the patent. Without the presumption, Independent Ink would have to provide extensive and complex expert testimony analyzing the national market for the Illinois Tool Works printhead.

The court explained that its hands were tied so to speak, because it is obligated to follow the Supreme Court doctrine, which can only be changed by the Supreme Court itself or by Congress. Since Congress recently declined an opportunity to end the presumption of market power from patent ownership, the Independent Ink case presents an opportunity for the Supreme Court to reconsider its doctrine.

Nevertheless, until and unless the case is heard on appeal by the Supreme Court, biotechnology and pharmaceutical companies should heed the lesson from Independent Ink in designing their licensing and marketing policies.

Be keenly aware of what forms of competition your companys patents exclude. Is all competition excluded?

If so, then with the presumption of market power in place, a company can more easily be accused of violating Section 1 of the Sherman Act if it owns a patent and bundles it with other products or patents in license agreements, or if it sells a product covered by the patent and conditions its purchase on the purchase of another product.

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