June 1, 2001

Subject: Copyright & Antitrust

Since a Supreme Court decision in 1962, there has been much debate about whether granting a copyright or patent automatically gives its owner market power in the "tying" item product market. An Eleventh Circuit ruling adds new fuel to this debate.

The U.S. Court of Appeals for the Eleventh Circuit has affirmed a district court's ruling in favor of a television station operator, holding that a contract arrangement in the television industry known as "block booking"; contracts where the copyright holder licenses one copyrighted program or group of programs to a station if the station also licenses another program or group of programs -- was a per se illegal tying arrangement violating the Sherman Act.

The copyright owner had an agreement with the television station operator to license several shows if it licensed a program the station operator claimed it would not otherwise have licensed. Relying on the 1962 decision, the court presumed that the licensor had market power in the "tying" programs because of its copyrights in those programs.

Focusing on the district court's finding that the station operator found the tied program "unappealing," the court found the contract had the anticompetitive effect of allowing the undesired tied program to "best the competition" for the time slot it filled on the station's roster despite its merit. The court concluded that the licensor had leverage sufficient to induce the station operator to purchase the tied program along with the desired tying programs, making the contract with the station operator illegal per se under the Sherman Act.

"Per se" condemnation of conduct under the Sherman Act avoids a burdensome inquiry into actual market conditions where the likelihood of anticompetitive effect is so great that the cost of doing such an analysis is not justified.

The elements of an illegal tying arrangement are:

• a conspiracy, concerted effort or agreement between two or more parties,
• an actual tying arrangement for two or more distinct products or services,
• market power in the tying market, and
• an effect on a not insubstantial amount of interstate commerce.

Market power over a tying product must be enough to make a buyer buy another product, the so-called tied product. If there are close substitutes available in the market for the tying product, the defendant will not have market power sufficient to maintain prices of one or both products above competitive levels by bundling them.

In its decision, the Supreme Court said that proving the defendant had economic power did not require showing it had the power to control price and exclude competition. All that was necessary was a showing that the defendant had economic leverage sufficient to induce his customers to take the tied product along with the tying item. Economic power may be found by either uniqueness or consumer appeal. It should seldom be necessary in a tie-in sale case to embark upon a full-scale factual inquiry into the scope of the relevant market for the tying product and into the corollary problem of the seller's percentage share in that market.

The Supreme Court suggested that any existence of reasonably interchangeable substitutes for the desired copyrighted films was irrelevant to a finding that the defendant has market power in tying cases. Affirming the district court's finding that each copyrighted film bundled by the defendants was a unique product in which the defendant had by definition, a monopoly, the court also said that requisite economic power is presumed when the tying product is patented or copyrighted. Thus, due to the precedent set by the Supreme Court, an economic analysis to decide whether the defendant had market power was notably absent from the Eleventh Circuit's opinion in MCA Television. Market power simply rested in MCA's copyright.

Redefining Market Power

Much has happened in antitrust law on tying arrangements since 1962. Subsequent Supreme Court cases have created a definition of market power inconsistent with the belief that market power can come merely from product differentiation or uniqueness. Instead, courts have employed economic analysis to decide whether market power exists.

In the Jefferson Parish case for example, the Supreme Court adopted what seemed a more stringent definition of market power. There, the hospital required that all anesthesiological services for its patients be done by one company, tying those services to procedures done at the hospital (tying product). In holding for the defendant, the court accepted the district court's version of the relevant geographic market and held that the defendant's 30 percent market share of the relevant market was not sufficient to establish market power.

The Supreme Court also departed from its 1962 notion of market power in the Eastman Kodak case where the defendant tied the sale of copier repair service to the sale of its copier parts. There, the Supreme Court defined market power alternatively as the power to force a purchaser to do something that he would not do in a competitive market and the ability of a single seller to raise price and restrict output.

The trend in these two cases is that the Court used a method of market definition and market share analysis that is inconsistent with the presumption that a copyright or patent automatically confers market power on its holder or that uniqueness automatically makes the product a market in itself, without allowing for, in an economic sense, whether close substitutes actually exist.

Intellectual Property

The law remains unclear about whether intellectual property rights automatically confer market power on the owners of those rights for antitrust purposes. While the Supreme Court and some lower courts have maintained that such rights automatically confer market power, other courts have refused to apply the presumption. For example, the Sixth Circuit affirmed summary judgment in favor of the defendant in a tying case, because the defendant lacked market power in the tying product. There the defendant possessed a copyright in an operating software system and conditioned the sale of the operating system on the licensing of its application software. The court explicitly rejected an absolute presumption of market power based on the ownership of a patent or copyright, finding the pronouncement in the 1962 Supreme Court decision to be overbroad.

The court also noted that a patent or copyright provides little, if any, market power. This was evidenced in the case by the fact that the operating system, although copyrighted, had many close substitutes in the market.

The Ninth Circuit has taken a different approach, holding that a copyright is evidence of sufficient market power. Although the Ninth Circuit follows the market power presumption in the 1962 Supreme Court decision, it has said that this presumption may be rebutted by the defendant in a tying case with evidence proving that market power does not exist.

Some commentators critical of the market power presumption have argued that a patent or copyright would not necessarily allow the owner to exact supernormal profits from a tying arrangement. This may be especially true with respect to copyrights. Copyright law protects original forms of expression. However, the idea expressed is not protected. A person who does not possess a copyright may still use the same idea, if the idea is expressed differently. Thus, two films premised on the same idea may be interchangeable with each other and therefore, should be part of the same product market for purposes of deciding market power, despite whether one or both are copyrighted.

Of course, a film may be so unique that substitutes do not exist, but such a finding -- which has nothing to do with whether the film is copyrighted -- should be made on a case-by-case basis using a market definition analysis.

Clarifying The Standard

Because of the uncertainty in the law governing ties of intellectual property, efforts have been made by the antitrust agencies and representatives of Congress to clarify the law in this respect. The Federal Trade Commission and Department of Justice (the agencies) have recognized that there will often be close substitutes for products, processes or works protected by intellectual property law sufficient to prevent the exercise of market power. In the Antitrust Guidelines for the Licensing of Intellectual Property, they explicitly say that in their investigations of anticompetitive practices involving the licensing of intellectual property rights, they will not presume that a patent, copyright, or trade secret necessarily confers market power upon its owner.

Efforts in Congress to provide greater certainty in this area of law have included the introduction of bills in Congress which have not been voted on.

Conclusion

Since the law remains unclear in this area, patent and copyright owners must be extremely careful about the terms and conditions they use for licensing since it is possible that the mere ownership of the copyright or patent is enough to trigger an antitrust violation.