Competitor Foreclosure Arrangements
1. Tying Cases – To get this, you must buy that.
1. Exclusive dealing – Me and no one else.
2. Requirements Cases – To get this, you must do that.
3. Reciprocity – I will buy from you if you buy from me.
Law 552 - Antitrust - Instructor:
Dwight Drake
Very Early Tying
Heaton-Peninsular Button-Fastener Co. v. Eureka Specialty Co. (1896)
Patent right includes right to condition sale of patent machine on condition
that buyer use non-patented goods of patent holder. Sherman Act never
mentioned.
Henry v. A.B. Dick Co. (1912)
Manufacturer sold patented stencil-duplicating machine on condition it
be used only with paper, ink and supplies sold by manufacturer. Restriction
upheld in 4-3 decision. Sherman mentioned, but not main focus.
Congress’ reaction to A.B. Dick – Section 3 of Clayton Act (1914)
Prohibited tying, whether product patented or unpatented, if
“substantially lessen competition or tend to create a monopoly
in any line of commerce.”
Law 552 - Antitrust - Instructor:
Dwight Drake
Motion Pictures Patents Co. v. Universal Film (Sup. Ct. 1917)
Basic Facts: Patent on motion picture exhibiting machine. Restriction
was that machine could be only used with films covered by patents of
Motion Pictures Patents Company.
What was basis for Court holding restriction invalid?
What was role of Clayton 3 to the Court’s decision?
What was left of A.B. Dick holding?
What was the alleged business justification for the restriction?
How did Court say public interest would be injured?
Law 552 - Antitrust - Instructor:
Dwight Drake
United Shoe Machinery Corp. v. U.S. (1922): Round Two
Basic Facts: United Shoe leased shoe machines, controlled 95% of market,
imposed conditions on lease of machine:
1.
2.
3.
4.
5.
6.
7.
Can’t use with shoes not serviced by other United Shoe machines.
If not exclusively use United Shoe machines, license can be cancelled.
Licensee must purchase supplies from United Shoe.
Patent insole clause – must use other machines of United Shoe.
Additional machines clause
Must pay royalty on any shoes serviced by competitor products.
Lower royalties if don’t use any competitor products.
Was there any prohibition on using competitive equipment?
What did Court say about Sherman Act?
Court: Clayton Act provides different test of liability. Injunction affirmed.
Law 552 - Antitrust - Instructor:
Dwight Drake
Government Tying Victories
IBM v. U.S. (Sup. Ct. 1936): Illegal tying where IBM conditioned lease of patented
tabulating machines with purchase of patented machine cards. Others
offered cards of comparable quality. Card tie highly profitable to IBM.
IBM could condition use of machine on use of cards of stated quality. IBM
had created card market.
International Salt Company v. U.S. (Sup. Ct. 1947): International Salt leased
patented salt machines on condition lessees purchased salt from
International. Exception if there was competition for salt and International
failed to meet price. Ct. held tie illegal, saying it per se illegal to
foreclose competitors from market, that volume effected was not
“insignificant or insubstantial” and that “tendency of arrangement” to
create monopoly was “obvious”.
Law 552 - Antitrust - Instructor:
Dwight Drake
Northern Pacific Railroad Co. v. U.S. (Sup. Ct. 1958)
Basic Facts: Northern Pacific, granted by Congress 40 million acres to build
railroad, required those contracting and leasing to ship all goods produced
on land on Northern Pacific railroad. Dist. Ct., on summary judgment,
held preferential routing clause an illegal restrain. Supreme Ct. affirmed.
- Sherman Act “charter of economic liberty.”
- “Unrestrained economic forces will yield best allocation of resources.”
- Per se rationale: pernicious effect on competition; no redeeming virtue.
- Tying serve hardly any purpose except injury to competition.
- Tying denies competitors access and hurts consumer choice.
- Tying unreasonable when effects “not insubstantial” amount of commerce.
Law 552 - Antitrust - Instructor:
Dwight Drake
Defining “market power” and the prohibition of “conditioning”
U.S. v. Loew’s Inc. (Sup. Ct. 1962): Motion picture producers “block
booking” – requiring TV stations to purchase a block of movies (some
good, some bad) per se illegal. No required showing of market
dominance. Crucial economic power may be inferred from uniqueness
and is “presumed” when the tying product is patented or copyrighted.
Hazeltine Research Inc. v. Zenith Radio (7th Cir. 1967). Hazeltine enjoined
from forcing acceptance of package licenses. They used pricing to coerce
bulk buying. Nine license cost 275k a year, but all licenses available for
200k one time.
Fortner Enterprises, Inc. v. United States Steel Corp (Sup. Ct. 1969): U.S.
Steel condition for making loan to developer that developer build only U.S.
home on land not illegal tie because no proof that U.S. Steel had
economic power over credit. Credit was just strategy to compete in
housing market.
Law 552 - Antitrust - Instructor:
Dwight Drake
Jefferson Parish Hospital Dist. No. 2 v. Hyde (Sup. Ct. 1984)
Basic Facts: Exclusive contract between hospital and anesthesiologist group.
Third party anesthesiologist, seeking declaratory judgment that contract was
illegal tying of anesthesiologist services to hospital surgery. Dist. Ct.
dismissed. Ct. of Appeals reversed.
What was basis of Dist. Cts. Dismissal?
What was basis of Ct. of Appeals reversal?
What percent of market share did hospital have?
Did hospital have market power?
What was majority’s position regarding a per se for tying?
Note two prong majority analysis: (1) Are there two separate products that are
being tied? (2) Is there market power to force patients to accept tying?
Law 552 - Antitrust - Instructor:
Dwight Drake
Jefferson Parish Hospital Dist. No. 2 v. Hyde (Sup. Ct. 1984)
Did majority find there were two separate products that had been tied?
Why did majority conclude hospital lacked market power?
Even without per se and market power, majority said there may be Section 1
liability if unreasonable restrain. Why insufficient evidence here?
O’Connor and three others concurred. What would they have done with per
se rule for tying?
What was O’Connor’s three threshold criteria for tying?
If three threshold criteria met, what then according to O’Connor?
How did facts of this case stack up against O’Connor’s threshold criteria?
Law 552 - Antitrust - Instructor:
Dwight Drake
Eastman Kodak Co. v. Image Technical Services Inc. (Sup. Ct. 1992)
Basic Facts: Kodak, after encouraging ISOs to service customers, reversed
course, refused to sell parts to ISOs and offered to sell parts to customers
only if they bought services from Kodak or serviced themselves. ISO’s sued
for monopolizations and illegal tying. Dist. Ct. granted Kodak summary
judgment; Appellate court reversed.
What was the alleged tying and tied product?
What was required to defeat summary judgment per Court?
What was Court’s test for whether there is two separate products?
What did the Court say was necessary in addition to tying arrangement for
plaintiff to prevail?
Did Kodak have market power in its parts market? How about the equipment
market?
Law 552 - Antitrust - Instructor:
Dwight Drake
Eastman Kodak Co. v. Image Technical Services Inc. (1992)
What substantive rule did Kodak urge Court to adopt for aftermarket
products?
What was Kodak’s and Court’s view of cross-elasticity between primary and
aftermarket?
Can competition in an equipment market co-exist with market power in an
aftermarket? What did evidence show about pricing impacts?
How did Court view the impact of the cost and value of consumer total
information and the cost of switching.
Did Majority leave in tack per se rule?
Why did Scalia, O’Connor and Thomas say per se tying and monopolization
doctrine should not apply to single-brand aftermarket, when seller does not
have market power at interbrand level?
How did dissent view the information and lock-in challenges?
Law 552 - Antitrust - Instructor:
Dwight Drake
United States v. Microsoft Corporation (D.C. Cir. 2001) (Tying)
What was alleged tying and tied products?
What did court say about separate-product test of Jefferson Parish?
Why did Microsoft claim Jefferson Parish’s test would chill innovation?
Why did court say this case different than all tying cases of Supreme Court?
Why did Court hold bundling of products in software platform market should
not be subject to per se?
What did court say about per se and software market generally?
Why do you think the tying claim was abandoned on remand and no attempt
was made to prevail under a “rule of reason” tying claim?
Law 552 - Antitrust - Instructor:
Dwight Drake
Illinois Tool Works Inc v. Independent Ink, Inc. (Sup. Ct. 2006)
What was factual basis of Independent’s Sherman 1 tying claim?
What was factual basis of Independent’s Sherman 2 claim?
What market power standard did Plaintiff argue should by used in patent tying
cases?
What market power standard did Dist. Ct use in granting summary judgment
on Sherman 1 claim?
What authority did the Dist. Ct. use in support of its position?
What market power did the Fed. Circuit use in reversing the Dist Ct.?
Law 552 - Antitrust - Instructor:
Dwight Drake
Illinois Tool Works Inc v. Independent Ink, Inc. (Sup. Ct. 2006)
Was there any question that there were two products or that a “not
insubstantial” amount of commerce was affected? Were these issues?
Why did Dist. Ct. grant summary judgment on Sherman 2 claim for
defendant? Was Fed Cir. correct in affirming on this issue?
Should patented and copyright products be held to a tougher standard than
non-legal protected products?
How did Supreme Court decide the issue? Do you agree?
What is the practical impact of the decision?
Law 552 - Antitrust - Instructor:
Dwight Drake