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MARKET POWER AND

INTELLECTUAL PROPERTY LITIGATION

HEARING

BEFORE THE

SUBCOMMITTEE ON COURTS, THE INTERNET,

AND INTELLECTUAL PROPERTY

OF THE

COMMITTEE ON THE JUDICIARY

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

NOVEMBER 8, 2001

Serial No. 42

Printed for the use of the Committee on the Judiciary

(

Available via the World Wide Web: http://www.house.gov/judiciary

(II)

COMMITTEE ON THE JUDICIARY

F. JAMES SENSENBRENNER, JR., WISCONSIN, Chairman

HENRY J. HYDE, Illinois

GEORGE W. GEKAS, Pennsylvania

HOWARD COBLE, North Carolina

LAMAR SMITH, Texas

ELTON GALLEGLY, California

BOB GOODLATTE, Virginia

ED BRYANT, Tennessee

STEVE CHABOT, Ohio

BOB BARR, Georgia

WILLIAM L. JENKINS, Tennessee

CHRIS CANNON, Utah

LINDSEY O. GRAHAM, South Carolina

SPENCER BACHUS, Alabama

JOHN N. HOSTETTLER, Indiana

MARK GREEN, Wisconsin

RIC KELLER, Florida

DARRELL E. ISSA, California

MELISSA A. HART, Pennsylvania

JEFF FLAKE, Arizona

MIKE PENCE, Indiana

JOHN CONYERS, JR., Michigan

BARNEY FRANK, Massachusetts

HOWARD L. BERMAN, California

RICK BOUCHER, Virginia

JERROLD NADLER, New York

ROBERT C. SCOTT, Virginia

MELVIN L. WATT, North Carolina

ZOE LOFGREN, California

SHEILA JACKSON LEE, Texas

MAXINE WATERS, California

MARTIN T. MEEHAN, Massachusetts

WILLIAM D. DELAHUNT, Massachusetts

ROBERT WEXLER, Florida

TAMMY BALDWIN, Wisconsin

ANTHONY D. WEINER, New York

ADAM B. SCHIFF, California

PHILIP G. KIKO, Chief of Staff-General Counsel

PERRY H. APELBAUM, Minority Chief Counsel

SUBCOMMITTEE ON COURTS, THE INTERNET, AND INTELLECTUAL PROPERTY

HOWARD COBLE, North Carolina, Chairman

HENRY J. HYDE, Illinois

ELTON GALLEGLY, California

BOB GOODLATTE, Virginia, Vice Chair

WILLIAM L. JENKINS, Tennessee

CHRIS CANNON, Utah

LINDSEY O. GRAHAM, South Carolina

SPENCER BACHUS, Alabama

JOHN N. HOSTETTLER, Indiana

RIC KELLER, Florida

[VACANCY]

[VACANCY]

HOWARD L. BERMAN, California

JOHN CONYERS, JR., Michigan

RICK BOUCHER, Virginia

ZOE LOFGREN, California

WILLIAM D. DELAHUNT, Massachusetts

ROBERT WEXLER, Florida

MAXINE WATERS, California

MARTIN T. MEEHAN, Massachusetts

TAMMY BALDWIN, Wisconsin

ANTHONY D. WEINER, New York

BLAINE MERRITT, Chief Counsel

DEBRA ROSE, Counsel

CHRIS J. KATOPIS, Counsel

ALEC FRENCH, Minority Counsel

(III)

C O N T E N T S

NOVEMBER 8, 2001

OPENING STATEMENT

The Honorable Howard Coble, a Representative in Congress From the State

of North Carolina, and Chairman, Subcommittee on Courts, the Internet,

and Intellectual Property .................................................................................... 1

The Honorable Howard L. Berman, a Representative in Congress From the

State of California, and Ranking Member, Subcommittee on Courts, the

Internet, and Intellectual Property .................................................................... 2

WITNESSES

Mr. Ronald E. Myrick, Chief Intellectual Property Counsel, G.E., General

Electric on Behalf of Intellectual Property Owners Association

Oral Testimony ..................................................................................................... 4

Prepared Statement ............................................................................................. 5

Mr. Charles P. Baker, Attorney, Fitzpatrick, Cella, Harper & Scinto, on

Behalf of the American Bar Association

Oral Testimony ..................................................................................................... 9

Prepared Statement ............................................................................................. 11

APPENDIX

MATERIAL SUBMITTED FOR THE RECORD

Letter from Mr. Mike K. Kirk, Executive Director, American Intellectual

Property Law Association .................................................................................... 31

Letter from Mr. Robert H. Lande, Venable Professor of Law, University

of Baltimore, School of Law ................................................................................. 34

(1)

MARKET POWER AND INTELLECTUAL

PROPERTY LITIGATION

THURSDAY, NOVEMBER 8, 2001

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON COURTS, THE INTERNET, AND INTELLECTUAL PROPERTY, COMMITTEE ON THE JUDICIARY, Washington, DC.

The Subcommittee met, pursuant to call, at 2 p.m., in Room

2141, Rayburn House Office Building, Hon. Howard Coble [Chairman of the Subcommittee] presiding.

Mr. COBLE. Good afternoon, ladies and gentlemen. The Subcommittee will come to order.

This is the first hearing that our Subcommittee has convened in

some time, for obvious reasons known to all of you. Good to see you

all. I am pleased to be with you all and welcome you here.

It is appropriate for the Subcommittee to examine the subject we

visit today. It is alleged or has been alleged that the Federal Court

litigation has resulted in a series of cases and judge-made law on

the subject of market power that prejudices copyright, patent and

trade secret holders. I repeat, it has been alleged. I am not necessarily alleging that, nor am I refuting it.

Market power is defined as the power to control prices or to exclude competition. The issue is whether the courts have promulgated an overly-harsh standard regarding the presumption of market power. Some legal observers argue that the situation in courts

has worsened since Congress first examined this area more than a

decade ago and a legislative remedy is needed. Other scholars conversely counterargue that the frustration over the handful of cases

on this subject is exaggerated.

My colleagues and I are interested in examining the current

state of the law on this subject and its consequences for intellectual

property holders. In the view of many, the policies embodied by the

judge-made law undermine the incentives for innovation in many

areas. As we all know, there is an interest in keeping our economy

strong at this point in time, yet the cases that we will discuss appear to cast a cloud of uncertainty over the ability to license, sell

and distribute innovative products to the public and result in

wasteful litigation.

In the Supreme Court’s Jefferson Parrish case, it was noted: A

common misconception has been that a patent or copyright suffices

to demonstrate market power. While a patent or copyright holder

might help to give market power to a seller, it is also possible that

a seller in that situation will have no market power. For example,

2

a patent holder has no market power in any relevant sense if there

are close substitutes for the patented product. The question before

us, what is the appropriate standard in this area.

Today, we are interested in our goal of examining to what degree

the current legal landscape poses a hardship for intellectual property owners, investors and the public. Many assert that a legislative remedy is needed. As you all know, several distinguished

Members of this Committee, including the late Hamilton Fish, the

distinguished gentleman from New York, as well as Chairman

Henry Hyde and I believe Senator Leahy as well, have pursued

bills to address the issue we explore today. Ultimately, we will be

required to work with our colleagues on the full Committee to advance any necessary legislation to fully address these problems.

I am now pleased to recognize the distinguished gentleman from

California, Mr. Howard Berman, who is the Ranking Member.

Mr. BERMAN. Thank you very much, Mr. Chairman. Thank you

for rescheduling the hearing today.

I look forward to hearing from the witnesses, who as I understand it will discuss the judicially created presumption that patented or copyrighted products convey market power in the context

of tying arrangements. I can see reasonable policy arguments both

for and against the continued existence of this presumption. Thus,

I remain open to being convinced by our witnesses that legislation

is necessary to overturn the presumption.

The debate over this judicial presumption is part of a larger

issue concerning the interplay between antitrust and intellectual

property law. Some describe this interplay as containing an inherent tension between the goals of antitrust law and the exercise of

intellectual property rights. I disagree. Rather, I align myself with

those commentators who have written that antitrust and intellectual property laws serve the same goals, namely, promoting competition and benefiting consumers.

That is not to say that IP owners may not commit antitrust violations in the course of exploiting their intellectual property rights.

An ample body of case law indicates that such violations do occur.

However, I know of no reason to believe that antitrust violations

by IP owners occur with any greater frequency than similar violations in other industries.

In fact, IP owners may just as often may be the victims of antitrust violations. Creators of copyrighted works like films, software,

music and books must often rely on third parties to distribute, perform and otherwise find a market for their works. Those distribution channels have a history of consolidation and vertical integration and may even be owned by competitors. Thus, owners of distribution channels can potentially commit antitrust violations

against copyright owners.

Similarly, copyright owners may often find themselves reliant on

third parties, such as device manufacturers, for protection of their

copyrighted works. To the extent that antitrust law is interpreted

to prevent such third parties from cooperating to protect copyrighted works, it may be straying from the pro-consumer and procompetitive goals of both antitrust and intellectual property law.

I understand the Subcommittee and the full Committee may be

considering further hearings on other antitrust intellectual propVerDate 11-MAY-2000 12:37 Dec 10, 2001 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 G:\WORK\COURTS\110801\75981.000 HJUD2 PsN: HJUD2
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erty issues, and I look forward to exploring these and related issues

at those hearings.

Mr. Chairman, I am once again in the predicament that I have

been in several times and that being both on the International Relations Committee and this Subcommittee present a conflict. So I

am going to stay as long as I can, but I do have—there is a closed

briefing on an important subject in the IR Committee that I have

to go to at some point. I hope you will forgive me for leaving early.

To the witnesses, I am going to read and try to absorb all your

testimony, even that part that I am not able to hear.

Mr. COBLE. You will not be punished for early departure.

We have been joined by our distinguished gentleman from Utah,

Mr. Cannon. Do you have a statement to make?

Mr. CANNON. No.

Mr. COBLE. The Subcommittee is pleased to have two distinguished members of the bar with us this afternoon. In point of fact,

these gentlemen share similar views on the subject we intend to

explore. We contacted several other parties in hopes of rounding

out the panel, but our invitation was declined. However, it is well

known that we have an open process, and the record will remain

open for those who wish to send or to submit written testimony.

Today we are indeed fortunate to have as our first witness, Mr.

Ronald E. Myrick, who is the President of the Intellectual Property

Owners Association, properly known as IPO, and serves as Chief

Intellectual Property Counsel for the General Electric Company. I

think I am correct, Mr. Myrick, when I say that GE is one of the

largest companies in America and can trace its origins to Thomas

Edison and his many patents, such as the light bulb.

Mr. Myrick holds a JD degree cum laude from Loyola University

School of Law in Chicago. Prior to assuming his present position

he was an attorney in private practice. He has been nominated by

the United States to the World Trade Organization dispute settlement roster and has served as a delegate for IPO at meetings on

the Committees of Experts for the Berne Protocol and the Patent

Harmonization Treaty. He is a member of USPTO’s Patent Public

Advisory Committee.

Mr. Myrick has also published a multi-volume treatise and several papers relating to the subject of international litigation. He

has lectured at meetings and seminars organized by such organizations as the World Intellectual Property Organization, WIPO, the

ABA and the State Bar of Texas.

Our second witness is equally qualified and well known, Mr.

Charles P. Baker, a partner in the law firm of Fitzpatrick, Cella,

Harper & Scinto. In addition, he currently serves as Chair of the

American Bar Association Intellectual Property Law Section.

Mr. Baker earned his BS in engineering physics from Cornell

University and his JD from the University of Virginia. In his law

practice he has served as lead trial counsel in all aspects of patent

litigation, across a variety of fields ranging from computers to

pharmaceuticals to textural fibers. He also has substantial experience advising clients in anticipation of litigation. Mr. Baker is a

member of the New York and the D.C. Bar and is active in a variety of professional and civic associations.

Gentlemen, we are pleased to have each of you with us.

4

If you all will—as you know is our custom, we ask the witnesses

to confine their oral testimony to about 5 minutes. When you see

the red light illuminate in your eye, that is the signal that 5 minutes is approaching.

Mr. COBLE. Mr. Myrick, if you will start us off.

STATEMENT OF RONALD E. MYRICK, CHIEF INTELLECTUAL

PROPERTY COUNSEL, G.E., GENERAL ELECTRIC ON BEHALF

OF INTELLECTUAL PROPERTY OWNERS ASSOCIATION

Mr. MYRICK. Thank you, Mr. Chairman, Mr. Berman and all the

other Members of the Subcommittee. I find myself in the delightful

position of having to agree with both the Chairman and Mr. Berman in much of what they had to say already today.

I appreciate the opportunity to testify on behalf of Intellectual

Property Owners Association. I am its current President, as you

heard, so the views that I express today are those of IPO and not

necessarily those of any other organization, certainly including the

P-PAC as well. That is the Patent Public Advisory Committee.

In recent years, IPO has observed that we believe there is a first

stage of a dilution of intellectual property rights occurring. We are

not going to overblow this. It is just the first stage. It is an incipient dilution. The Supreme Court long ago recognized that the

right to exclude is the very essence of the property right that a patent confers. Unfortunately, several courts recently have begun to

cast some doubt on the continued vitality of the right to exclude.

In 1997, for example, the Ninth Circuit Court of Appeals in the

Eastman Kodak case broke away from the rule that there is no

antitrust liability for a unilateral refusal to license a patent or

copyright. Also, courts in this country and abroad have begun to

extend the essential facility doctrine to some degree to intellectual

property. In the latest development on this issue in the IMS Health

case, a court in the European Union decided in favor of intellectual

property on October 26, but the European Commission is expected

to appeal the case to the EU’s highest court.

The incipient erosion of intellectual property’s exclusionary

rights is occurring notwithstanding congressional efforts to protect

and strengthen the right to exclude over the past 2 decades. Despite new legislation, some courts have continued to misunderstand

the nature of intellectual property rights. In the recent Microsoft

case, for example, the United States Court of Appeals for the District of Columbia compared an intellectual property owner’s exercise of the right to exclude to a tortious misuse of a baseball bat.

The judicial presumption that intellectual property establishes

market power is a manifestation of this erosion of intellectual property exclusionary rights. For example, presuming market power

based on the mere possession of a patent is irrational and perverse.

The inventor has been given a reward by the government which

now is used against him by creating an adverse presumption he

must overcome.

The Federal patent system recognizes that inventors and investors must be able to recoup their costs in order to earn a profit.

Without the reward of a patent and the right of exclusive use that

it confers, incentives for innovation will be weakened.

5

The possibility that a presumption of market power will deter innovation has become more likely in light of the Ninth Circuit decision in the Eastman Kodak case. The Ninth Circuit held that,

when a seller has market power, the seller’s mere refusal to license

a product to a competitor can violate section 2 of the Sherman Act.

Under this reasoning, if it were the case that mere possession of

a patent confers market power or at least a presumption of such

power, the patent owner is precluded from using the very exclusionary right that the patent specifically confers.

The Ninth Circuit based its liability finding on the patent owner’s subjective intent. Were courts to presume that all patent owners have market power, then the effect of the Eastman Kodak case

would be that all patent owners would have to think twice before

refusing to license their patents to competitors.

Legislation is the only way to clarify that courts should not presume market power. The Supreme Court has suggested that the

presumption should exist but has repeatedly chosen not to revisit

the issue in recent years. The courts of appeals remain divided in

their holdings. The Department of Justice and the Federal Trade

Commission, to be sure, have published antitrust guidelines for the

licensing of intellectual property, stating that the agencies will not

presume that a patent, copyright or trade secret confers market

power upon its owners. The guidelines, however, are only guidelines. They do not bind any court, nor do they preclude private parties from filing lawsuits for treble damages.

Eliminating the presumption of market power will not create an

antitrust exemption of any kind. It will not legalize any conduct

that is currently illegal. Eliminating the presumption simply requires a plaintiff suing a patent owner, like plaintiffs suing the

owners of other property, to prove that market power does in fact

exist. Courts in turn will resolve that issue by implementing the

same factual analysis that they use in other antitrust cases.

Intellectual property can pave the way for overwhelming gains in

productivity and consumer welfare. It has been demonstrated year

after year. The fact that economic prospects may have dimmed in

recent months only lends support to the argument for protecting intellectual property and encouraging entrepreneurs to create and develop competitive new products. Because legislation to abolish market power would provide such protection and encouragement, IPO

supports it.

Thank you for the opportunity to testify in favor of the right of

IP owners to exclude other parties consistent with the right that

they have been granted.

Mr. COBLE. Thank you, Mr. Myrick.

[The prepared statement of Mr. Myrick follows:]

PREPARED STATEMENT OF RONALD E. MYRICK

Mr. Chairman and Members of the Subcommittee:

I appreciate the opportunity to testify on behalf of Intellectual Property Owners

Association (IPO). I am the current President of IPO. I am also Chief Intellectual

Property Counsel for General Electric Co. in Fairfield, Connecticut, and I have the

privilege of serving on the U.S. Patent and Trademark Office’s Patent Public Advisory Committee ‘‘P-PAC,’’ as First Vice President of the American Intellectual Property Law Association, and on the Council of the IP Law Section of the American

Bar Association. The views I am presenting today are those of IPO, and not necVerDate 11-MAY-2000 12:37 Dec 10, 2001 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6621 G:\WORK\COURTS\110801\75981.000 HJUD2 PsN: HJUD2
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essarily those of my company, the P-PAC or any bar association. Speaking for IPO,

I am speaking for owners of intellectual property rights.

IPO is an association of U.S.-based owners of patents, trade secrets, trademarks,

and copyrights. Our members include about 100 American corporations that are

among the largest patent filers in the United States and worldwide from all major

industries. Our members file about 30 percent of the patent applications that are

filed in the U.S. Patent and Trademark Office (PTO) by U.S. nationals, and pay

nearly $200 million a year in fees to support operations of the PTO.

I am testifying here today largely because, in recent years, IPO has observed the

incipient stages of a distressing dilution of intellectual property rights. The Supreme

Court long ago recognized that the right to exclude is the ‘‘very essence’’ of the property right a patent confers. Continental Paper Bag Co. v. Eastern Paper Bag Co.,

210 U.S. 405, 429 (1908). Yet several courts have recently cast doubt on the continued vitality of this right. Although there previously had been ‘‘no reported case in

which a court . . . imposed antitrust liability for a unilateral refusal to sell or license a patent or copyright,’’ Image Technical Services, Inc. v. Eastman Kodak Co.,

125 F.3d 1195, 1217 (9th Cir. 1997), the Court of Appeals for the Ninth Circuit has

broken away from this consistent line of precedent. See id. And despite the previously limited application of the ‘‘essential facilities’’ doctrine, courts in this country

and abroad have begun to extend the doctrine to intellectual property. See, e.g., Bell

South Adver. & Publishing Corp. v. Donnelley Info. Publ’g, 719 F. Supp. 1551, 1566

(S.D. Fla. 1988) (concluding that there is ‘‘no reason’’ why the doctrine cannot apply

when the alleged essential facility is information), rev’d on other grounds, 999 F.2d

1436 (CA11 1993); Joined Cases C-241/91 P & C-242/91 P, Radio Telefis Eireann

v. Commission, 1995 E.C.R. I-743 (holding by European Court of Justice that information protected by a copyright that was essential to the ability to compete had to

be licensed on reasonable terms); Case COMP D3/38.044—NDC Health/IMS Health

(Commission of the European Communities, July 3, 2001) (compelling IMS Health

Inc. to grant a copyright license to its ‘‘1860 brick structure,’’ which is a system for

organizing pharmaceutical data, on the basis that the structure is an essential facility), order temporarily suspended, IMS Health Inc. v. Commission of the European

Communities, T-184/01 R (Court of First Instance of the European Communities,

Aug 10, 2001).

This erosion of intellectual property rights has occurred notwithstanding Congressional efforts to protect and strengthen the right to exclude over the past two decades. Since 1984, Congress has amended 35 U.S.C. § 271—the statute that provides

the basic definition of patent infringement—seven times. Each amendment made

the definition of infringement, and thus the patent holder’s exclusive rights, broader

than before. Without exception, these amendments have demonstrated Congress’s

commitment to preserving a patentee’s right to exclude. The courts, however, have

not heeded Congress’s message and have continued to misunderstand intellectual

property rights. In United States v. Microsoft, for example, the Court of Appeals for

the District of Columbia compared an intellectual property owner’s exercise of the

right to exclude with tortious misuse of a baseball bat. See 253 F.3d 34 (2001).

In IPO’s view, the judicial presumption that intellectual property establishes market power is simply another manifestation of this erosion of intellectual property

rights. As such, it should be eliminated. In lieu of the presumption, courts should

analyze allegations of market power the same way in all antitrust cases, whether

the property is intellectual or traditional: Courts should simply examine the facts

of the particular case. Because antitrust law should not treat intellectual property

more harshly than other types of property, IPO supports the proposed legislation.

Congress considered and decided not to enact similar legislation several years ago.

We believe, however, that the recent court decisions undercutting intellectual property confirm the need for such legislation today. It is our hope that, in addition to

eliminating the improper presumption of market power, this legislation will also remind the courts of Congress’s consistent and faithful protection of intellectual property rights, and thereby help stem the tide of further erosion.

PRESUMING MARKET POWER IS IRRATIONAL AND COULD DETER INNOVATION,

COMPETITION, AND ECONOMIC GROWTH

Commentators have widely agreed that mere possession of a patent or other intellectual property is insufficient to obtain market power. As Professors Areeda and

Hovenkamp put it, some intellectual property has no commercial value at all, let

alone sufficient value to bestow market power on its owner. See Phillip E. Areeda

& Herbert Hovenkamp, IIIA Antitrust Law: An Analysis of Antitrust Principles and

Their Application 131, ¶523 (1996). A product might possess sufficient inventiveness

to be patentable, but there might not be anyone who is willing to pay the cost of

7

production. And even when intellectual property has value, market power is highly

unlikely if the relevant market contains numerous competitors or if entry barriers

are surmountable. In the markets for toasters, cameras, and home computers, for

example, most products contain patented features but still face vigorous competition

from viable substitutes. These patented goods are socially useful, and their innovation has augmented consumer welfare, but no producer of the goods can be said to

possess market power. To use the blunt words of Professor Hovenkamp,

‘‘presum[ing] market power in a product simply because it is protected by intellectual property is nonsense.’’ Herbert Hovenkamp, Federal Antitrust Policy: The Law

of Competition and Its Practice 136 (1994).

Moreover, the federal patent system, and the constitutional grant of authority

from which it is derived, are based on the recognition that ‘‘[i]nvention is an uncertain business,’’ and that, ‘‘[t]o spur investment in it, inventors must be reasonably

assured that they will be able to recoup their costs and earn a profit.’’ Rochelle C.

Dreyfuss, Dethroning Lear: Licensee Estoppel and the Incentive to Innovate, 72 Va.

L. Rev. 677, 679 (1986). Without the reward of a patent, and the right of exclusive

use that it confers, ‘‘firms have weak incentives to absorb the costly expenditures

needed to develop intellectual property.’’ Alden F. Abbott, Developing a Framework

for Intellectual Property Protection to Advance Innovation, in Intellectual Property

Rights in Science, Technology and Economic Performance 311, 317 (Francis W.

Rushing & Carole G. Brown eds., 1990). They ‘‘run the risk that . . . their innovations w[ill] earn insufficient profits to offset the losses stemming from failed research efforts,’’ and that ‘‘capital markets w[ill] be far less willing to provide funds

for independent research efforts.’’ Id. at 321.

The patent system fosters innovation and investments in research and development through what the Supreme Court has described as ‘‘a carefully crafted bargain.’’ Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 151 (1989). In

exchange for ‘‘disclosure and the consequent benefit to the community,’’ the law

gives inventors exclusive rights to practice their inventions for a limited period of

time. Id. Thus, to foster innovation, the right to exclusive use must effectively compensate inventors, not only for sharing their inventions with the world, but also for

investments they make in both successful and unsuccessful research and development efforts, and for the risk, particularly acute in the high-tech industry, that their

patented innovations may rapidly become obsolete.

The benefit of this bargain, and thus the degree to which it fosters innovation,

is significantly reduced or undermined if the reward for innovation and disclosure

simultaneously saddles the innovator with a presumption of market power. As thenDeputy Assistant Attorney General Joel Klein explained to this Committee in 1995,

‘‘[t]ypically, one of the most important factors in determining whether a civil antitrust law violation has occurred is whether the firm engaging in particular conduct

has market power.’’ Prepared Statement of Joel I. Klein, Deputy Ass’t Attorney General, Antitrust Division, U.S. Department of Justice, in Hearing before the Committee on the Judiciary, House of Representatives, 104th Cong., 2nd Sess., on H.R.

2674 (May 14, 1996). Thus, a presumption that this important predicate to liability

exists greatly increases both the threat of litigation and the risk of a finding of liability. In light of the powerful antitrust litigation tools available in American

courts—class action procedures, parens patriae actions by the States, reliance on circumstantial evidence—and the powerful remedies available for antitrust violations—treble damages, joint and several liability, and injunctions—a presumption

that increases the risk of antitrust litigation and liability attaches a significant disability to the statutory right ‘‘to exclude others from making, using, offering for sale,

or selling the invention.’’ 35 U.S.C. § 154(a)(1). The inevitable result of altering and

reducing the benefit of the patent bargain is to reduce the reward for investment

in research and development that is so important to consumer welfare and to the

nation’s economy.

The possibility that a presumption of market power will deter innovation has become even more likely in light of the Ninth Circuit’s decision in Image Technical

Services, Inc. v. Eastman Kodak Co., 125 F.3d 1195 (1997), which held that, when

a seller has market power, his mere refusal to license a patented product to a competitor can violate section 2 of the Sherman Act. The Ninth Circuit based its liability finding on the patent owner’s subjective intent—introducing enormous uncertainty into whether an IP owner has the right to refuse to license its intellectual

property. Were courts to presume that all patentees have market power, then the

effect of Image Technical Services would be that all patentees (or at least all patentees in the Ninth Circuit) would have to think twice before refusing to license

their patents to competitors, lest the patentees be forced to defend against costly

lawsuits under the Sherman Act. The combination of a presumption of market

power and the Ninth Circuit’s holding limiting the freedom of those who possess

8

1See, e.g., Prepared Statement of Joel I. Klein, Deputy Ass’t Attorney General, Antirust Division, U.S. Department of Justice, in Hearing before the Committee on the Judiciary, House of

Representatives, 104th Cong., 2nd Sess., on H.R. 2674 (May 14, 1996).

market power would open the door to vexatious litigation against those who own

intellectual property. This result would obtain, notwithstanding the fact that the

very essence of a patent has always been ‘‘the right to exclude others from making,

using, offering for sale, or selling the invention,’’ 35 U.S.C. § 154(a)(1). Fortunately,

the Court of Appeals for the Federal Circuit rejected the Ninth Circuit’s analysis

and holding. In re Independent Service Organizations Antitrust Litigation, 203 F.3d

1322 (Fed. Cir. 2000). But patent holders who may face litigation in the Ninth Circuit will have to be cautious before exercising their fundamental patent rights, especially if courts are permitted to apply the economically baseless presumption that

all intellectual property establishes market power.

LEGISLATION IS NECESSARY TO CLARIFY THAT COURTS SHOULD NOT PRESUME MARKET

POWER

Legislation would not be needed if federal courts had soundly settled the expectations of intellectual property owners by uniformly rejecting the presumption of market power. Unfortunately, however, in older decisions, the Supreme Court has twice

suggested that the presumption should exist, the courts of appeals are divided in

their holdings, and the Supreme Court has chosen not to revisit the issue in nearly

twenty years. Almost 40 years ago, in an overbroad statement unnecessary to the

holding of the case at hand, the Supreme Court stated that the ‘‘economic power’’

required for a tying violation is ‘‘presumed when the tying product is patented and

copyrighted.’’ United States v. Loew’s, Inc., 371 U.S. 38, 44 (1962). Citing to this language, the Supreme Court reiterated its position over two decades later, suggesting

in dictum in another tying case that, ‘‘if the government has granted the seller a

patent or similar monopoly over a product, it is fair to presume that the inability

to buy the product elsewhere gives the seller market power.’’ Jefferson Parish Hosp.

Dist. v. Hyde, 466 U.S. 2, 16. In a well-reasoned concurring opinion, Justice O’Connor flatly rejected this presumption and explained (as IPO has done today) that a

patent holder lacks market power when there are close substitutes to the patented

products. Id., at 38 n.7 (1984). But her position garnered only four votes, and the

lower courts were left to choose between the misguided dictum of the majority and

the concurring opinion of Justice O’Connor.

Taking the latter course, most courts of appeals have recognized that a presumption of market power is economically baseless. See, e.g., A.I. Root Company v. Computer/Dynamics, Inc., 806 F.2d 673 (6th Cir. 1986); Will v. Comprehensive Accounting Corp., 776 F.2d 665 (7th Cir. 1985). The Court of Appeals for the Ninth Circuit,

however, has maintained that the presumption applies with respect to patents and

copyrights in tying cases. Digidyne v. Data General Corp., 734 F.2d 1336 (9th Cir.

1984). Because the decisions of the Ninth Circuit affect the legal rights of over 50

million people living in nine western states—an area that includes much of our nation’s high-tech industries—as well as the rights of any national or global company

doing business in this large and populous area, that court’s presumption of market

power has tremendous consequences. Many onlookers have hoped that the Ninth

Circuit would overturn its decision or that the Supreme Court would resolve the

issue,1 but neither event has occurred. Indeed, on several occasions in recent years,

the Supreme Court has opted not to hear a case that squarely presented the question. See, e.g., id., cert. denied, 473 U.S. 908 (1985); American Hoist & Derrick Co.

v. Sowa & Sons, Inc., 725 F.2d 1350 (Fed. Cir.), cert. denied, 469 U.S. 821 (1984);

Will v. Comprehensive Accounting Corp., 776 F.2d 665 (7th Cir. 1985), cert. denied,

475 U.S. 1129 (1986). Thus, the federal courts have not settled the issue, and intellectual property owners have been confronted with uncertainty, insecurity and the

risk that their actions will result in significant litigation costs and possibly even treble damages.

The Department of Justice and the Federal Trade Commission, to be sure, have

published Antitrust Guidelines for the Licensing of Intellectual Property, stating

that the agencies ‘‘will not presume that a patent, copyright, or trade secret confers

market power upon its owners.’’ Antitrust Guidelines for the Licensing of Intellectual

Property (1995). These guidelines, however, are just that—guidelines. They do not

bind any court; nor do they preclude private parties from filings law suits for treble

damages. Indeed, the guidelines are not even permanent, as any administration can

change them at any time. Consequently, despite the agencies’ welcome efforts, the

existing confusion among the federal courts may deter parties from entering into

beneficial marketing or licensing arrangements. For meaningful security against

9

vexatious lawsuits and flawed judgments in antitrust cases, intellectual property

owners and developers need legislation abolishing the presumption of market power.

WITHOUT THE PRESUMPTION, COURTS CAN SIMPLY APPLY THE FACTUAL ANALYSIS THAT

THEY USE IN OTHER ANTITRUST CASES

Eliminating the presumption of market power will not create an antitrust exemption; it will not legalize any conduct that is currently illegal. Eliminating the presumption simply requires a plaintiff suing a patent holder—like plaintiffs suing the

owners of other property—to prove that market power does, in fact, exist. Courts,

in turn, would resolve that issue employing the same factual analysis that they use

in other antirust cases. Courts would examine, among other factors, the availability

and closeness of substitutes, the existence of entry barriers, the defendant’s market

share, and the number and size of other sellers and buyers. Courts have experience

applying this fact-based analysis. Not only is it generally used with respect to traditional property, but most courts have employed it in the context of intellectual property. Indeed, the Supreme Court has suggested that a factual analysis of the ‘‘relevant market’’ is required when the antitrust claim is one of monopolization or attempted monopolization under section 2 of the Sherman Act, even if the case involves intellectual property. Walker Process Equipment, Inc. v. Food Machinery and

Chemical Corp., 382 U.S. 172 (1965); see also Spectrum Sports, Inc. v. McQuillan,

506 U.S. 447 (1993). Because courts have routinely applied the fact-based analysis

of market power, and have done so for several decades without substantial conflict

in results, IPO has confidence that courts can faithfully and consistently apply the

analysis without any difficulty.

We recognize that the Sherman Act, like the patent statute, plays an important

role in fostering innovation and consumer welfare, and that some members of this

Committee have in the past expressed concerns about amending in any way a law

that has served as the charter of economic liberty. A presumption that a patent confers market power, however, is inconsistent with the common aims of both statutes.

Recognizing the import of intellectual property to our nation’s vitality, the Framers

of our Constitution expressly empowered Congress ‘‘[t]o promote the Progress of

Science and useful Arts, by securing for limited Times to Authors and Inventors the

exclusive Right to their respective writings and Discoveries,’’ U.S. Const., Art I, § 8,

¶8. Intellectual property plays no less a role in preserving the general welfare today

than it did some 200 years ago. As evidenced by the economic explosion of the

1990s, intellectual property can pave the way for overwhelming gains in productivity and consumer welfare. The fact that economic prospects may have dimmed in

recent months only lends support to the argument for protecting intellectual property and encouraging entrepreneurs to create and develop competitive new products.

Because the proposed bill provides such protection and encouragement, IPO supports it.

IPO again thanks the Chairman and the Subcommittee for the opportunity to testify in favor of the proposed legislation.

Mr. COBLE. We have been joined by the distinguished gentlemen

from Virginia, Mr. Boucher and Mr. Goodlatte. Mr. Goodlatte was

here, but I see he has departed.

Mr. Baker.

STATEMENT OF CHARLES P. BAKER, FITZPATRICK, CELLA,

HARPER & SCINTO, ON BEHALF OF THE AMERICAN BAR ASSOCIATION

Mr. BAKER. Thank you, Mr. Chairman. Thank you Subcommittee

Members.

Good afternoon. I am Charles Baker, here on behalf of the

400,000 lawyers of the American Bar Association. I am Chair of the

Intellectual Property Law Section, which has 21,000 members. I

bring you in particular the greetings of the Association’s’ President,

Bob Hirshon, and its President-Elect, A.P. Carlton.

It is an honor to be here before Congress and before this Subcommittee and its Chair, which we know firsthand labor hard and

10

long with its staff to keep the American intellectual property system the strong engine of our economy which it has been for over

200 years.

In particular, I would like to congratulate you on the passage by

the House on Tuesday of H.R. 2047, the PTO authorization bill,

which calls for the PTO to have access to all the fees paid to it by

its users and for long-range planning to reduce pendency and improve quality. Without diminishing the importance of what we are

doing here today, Mr. Chairman, to me, patent pendency and quality and funding of the patent office are the most important threat

to issues facing our intellectual property system today, and I am

pleased to see progress is being made.

To turn to the subject at hand, the House of Delegates of the

ABA has passed a resolution urging Congress to enact legislation

which would eliminate any presumption that patents, copyrights or

other intellectual property defines a market or establishes market

power in actions under the antitrust laws. Among those experienced in this area there is no dispute about this policy. Not only

does the ABA, including both its IP section and antitrust section,

agree, but the Department of Justice and FTC in their guidelines

for licensing of intellectual property agree that market power

should not be presumed from the existence of IP rights. That is referred to on page 9 in my statement.

Why is this policy plain to those experienced in this area? Because we often see examples in our day-to-day work and we see

that the presumption makes no sense if considered carefully. For

example, let us look at DuPont’s super strong fiber Kevlar. It was

introduced to the public after years of research and after the expenditure of hundreds of millions of dollars on the plant to manufacture it.

Kevlar has unique properties. One pound of Kevlar is as strong

as five pounds of steel, but it is not a perfect fiber. Abrasion can

be a problem. Therefore, it is very good for bulletproof vests where

strength and light weight are primary, but it is not good for tire

cord, for example, where abrasion must be taken into account. Yet

patents cover Kevlar in both these uses.

It makes no sense to presume that DuPont has market power in

all fiber market or even in any fiber markets just because DuPont

has patents on Kevlar. In spite of this agreement in principle

among those experienced in the area and in spite of common sense,

we still have a conflict on this presumption among the circuit

courts of appeal. My paper identifies two decisions from 1999 which

rely on the fallacious presumption.

We could wait for the Supreme Court, but we have been waiting

for more than 15 years when two justices dissented from the denial

of cert in a case that would have clarified the issue. That is the

dissent in Digidyne, and it is cited on page 6 of my paper.

The only hesitation about this legislation that I have heard is

from those who say that we should not as a matter of principle

amend the 100-year-old antitrust laws. That thinking overlooks the

fact that, in 1988, Congress amended the patent law to address

antitrust market power issues in another context. That is § 271(d)

of title 35 U.S. Code, which is referred to on page 10 of my paper.

11

1 In 1990 the House of Delegates of the American Bar Association adopted a policy position,

which was reaffirmed in 2000, in support of H.R. 469, 101st Cong., a bill to provide that intellectual property rights shall not be presumed to define a market or to establish market power in

actions under the antitrust laws. The ABA testified in support of that bill. See testimony of Norman P. Rosen in ‘‘Intellectual Property Antitrust Protection Act of 1989,’’ Hearing on H.R. 469

Before the Subcommittee on Economic and Commercial Law of the House Judiciary Committee,

101st Cong., 2nd Sess., 59–70. In 1996 the ABA testified in support of H.R. 2674, which had

essentially the same provisions as H.R. 469. See testimony of John R. Kirk, Jr., ‘‘Intellectual

Property Antitrust Protection Act of 1995,’’ Hearing Before the Committee on the Judiciary,

House of Representatives, Serial No. 75, 104th Congress, May 14, 1996. 2The 1990 ABA resolution states: ‘‘BE IT RESOLVED, That the American Bar Association

favors in principal legislation such as H.R. 469, 101st Cong., 1st Sess. (1989) (Fish) and S. 270,

101st Cong., 1st Sess. (1989) (Leahy) which provides that intellectual property rights shall not

be presumed to define a market or to establish market power in actions under the antitrust

laws;

RESOLVED, That the Association recommends such legislation cover specifically the licensing

of or refusal to license such rights.’’ 3The antitrust law and the patent law are ‘‘complimentary’’ because they ‘‘both are aimed at

encouraging innovation, industry and competition.’’ Atari Games Corp. v. Nintendo of America,

Inc., 897 F.2d 1572, 1576 (Fed. Cir. 1990). 4This example shows an important thing about patents. They are not entirely for the inventors. Patents are also largely for investors—people who might otherwise invest in real estate

or other forms of property, but who, having patents to protect their investments from copiers

within the United States, and from unfair foreign competition, are encouraged to invest to create new jobs and even new industries based on new technologies.

The importance of this legislation is shown by the names and the

cases in my statement where this issue was addressed, companies

like Xerox, Kodak, MCA, Chrysler. For businesses like those which

contribute greatly to our economy, certainty is priceless; and the

greater the uncertainty, the more investment-created jobs are discouraged.

The ABA, therefore, urges legislation like that previously introduced that would preclude the presumption of market power in intellectual property litigation. The past legislation would be improved, however, if its principle is extended to cover expressly licensing and refusal to license intellectual property rights; and I

identified some alternative language on page 14.

Thank you for the opportunity to present the views of the ABA

and for your attention. If you have any questions, I will do my best

to respond.

[The prepared statement of Mr. Baker follows:]

PREPARED STATEMENT OF CHARLES P. BAKER

Mr. Chairman and Members of the Subcommittee:

We thank you for letting us present the views of the American Bar Association

on market power presumptions based on intellectual property in antitrust actions.1

The ABA is convinced that Congress should enact legislation which would eliminate any presumption that intellectual property defines a market or establishes

market power in actions under the antitrust laws.2 Because such presumptions are

arbitrary, ignoring real world facts, they have no proper basis from the point of view

of either intellectual property or antitrust law,3 and they lower incentives created

by intellectual property law to invest in new jobs and new industrial facilities based

on technical advances.

To illustrate how misguided such presumptions are, let me refer to DuPont’s patents on its super-strong fiber known as Kevlar, about which I have some personal

knowledge. DuPont invested for years in extensive research related to the chemistry

of the fiber, and in research into methods of extruding the fiber. For example, the

strength of the fiber makes extrusion of it very difficult. Eventually DuPont discovered a successful method of extrusion, but it uses hot, concentrated sulfuric acid.

Based in part on the patents it had obtained, DuPont then invested hundreds of

millions of dollars more in building a completely new plant to make Kevlar, which

was necessary because of the new chemistry and the new extrusion process involved.4

While there have been markets in fibers for thousands of years, Kevlar has

unique properties. One pound of Kevlar is as strong as five pounds of steel.

12

5 A market is essentially a group of products or services that are reasonably interchangeable

with each other. United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 394–95 (1956);

Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451, 469 & n.15 (1992). 6 In a relevant market, market power is essentially the ability to raise prices above or restrict

output below the competitive level, and monopoly power is the extreme form of market power.

National Collegiate Athletic Assoc. v. Board of Regents, 468 U.S. 85, 109 n.38 (1984); Fortner

Enterprises, Inc. v. United States Steel Corp., 394 U.S. 495, 503 (1969); du Pont, 351 U.S. at

391; see Kodak, 504 U.S. at 481 (1992) (‘‘Monopoly power under § 2 requires, of course, something greater than market power under § 1’’). 7 United States v. Grinnell Corp., 384 U.S. 563, 570 (1966); Spectrum Sports, Inc. v. McQuillan

506 U.S. 447, 455 (1993). 8 Kodak, 504 U.S. at 462; Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 13–14 (1984). 9 United States v. Brown Univ., 5 F.3d 658, 668 (3d Cir. 1993); Wilk v. American Medical

Ass’n, 895 F.2d 352, 359 (7th Cir.), cert. denied, 498 U.S. 982 (1990). 10Walker Process Equipment Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172 (1965). 11Though not discussed in terms of market power, arguably market power was presumed from

patents in early tying cases, IBM v. United States, 298 U.S. 131 (1936), and International Salt

Co. v. United States, 332 U.S. 392, 395 (1947). 12 ‘‘[I]f the Government has granted the seller a patent or similar monopoly over a product,

it is fair to presume that the inability to buy the product elsewhere gives the seller market

power.’’ United States v. Loew’s Inc., 371 U.S. 38, 45–47, 83 S.Ct. 97, 102–03, 9 L.Ed.2d 11

(1962). Any effort to enlarge the scope of the patent monopoly by using the market power it

confers to restrain competition in the market for a second product will undermine competition

on the merits in that second market. Thus, the sale or lease of a patented item on condition

that the buyer makes all his purchases of a separate tied product from the patentee is unlawful.’’ Jefferson Parish, 466 U.S. at 16.

Kevlar, however, is not a perfect fiber. For example, it is particularly subject to

abrasion. Therefore, for some uses, such as bullet-proof jackets, where strength is

paramount and abrasion resistance is a minor factor, Kevlar is highly preferred,

though heavier bullet-proof jackets can be made from other fibers.5 For other uses,

however, where abrasion is a primary factor, as in reinforcing tires or in conventional ropes, Kevlar is less preferred, or if used, special precautions must be taken

to avoid abrasion. Whether considering Kevlar’s more preferred uses, such as bulletproof fabrics, or its other uses, there are possibilities of substitution that must be

considered before deciding whether the maker of Kevlar has ‘‘market power.’’ 6

It is plain that it does not make sense to say, in a knee-jerk way, that solely because there are patents on Kevlar, the owner of those patents has market power.

Rather, a fact-specific inquiry must be made to determine the demand for Kevlar

relative to possible substitutes. For some of its uses Kevlar may provide market

power, but for others it may not, yet patents cover Kevlar for all uses and markets.

As Congress knows, these three concepts—relevant market, market power, and

monopoly power—are important elements in establishing various types of antitrust

violations. They are essential to prove monopolization and attempted monopolization

in violation of Sherman Act § 2,7 and an illegal tie-in in violation of Sherman Act

§ 1.8 In addition, courts require or allow evidence of market power as an element

of proof of an illegal restraint of trade under the rule of reason in violation of Sherman Act § 1.9

At least as early as 1965 the Supreme Court in the Walker Process case recognized that market power could not be presumed from the existence of a patent.10

In remanding with respect to Section 2 of the Sherman Act, the Court explained,

‘‘There may be effective substitutes for the device which do not infringe the patent. This is a matter of proof, . . .’’ 382 U.S. at 178.

The Supreme Court, however, has not been entirely consistent and clear on this.

In 1962, before Walker Process, in United States v. Loew’s Inc., 371 U.S. 38, 45, the

Court expressly endorsed the presumption that an intellectual property right gives

rise to market power.11 In 1984, after Walker Process, in Jefferson Parish Hospital

District No. 2 v. Hyde, 466 U.S. 2, the Supreme Court in dicta split on the issue.

The majority in a comment repeated the presumption stated in Loew’s,12 while four

Justices in a concurring opinion concluded that a patent or copyright alone would

not demonstrate market power:

‘‘A common misconception has been that a patent or copyright, a high market

share, or a unique product that competitors are not able to offer suffices to demonstrate market power. While each of these three factors might help to give

market power to a seller, it is also possible that a seller in these situations will

have no market power: for example, a patent holder has no market power in

any relevant sense if there are close substitutes for the patented product.’’

466 U.S. at 37 n.7 (O’Connor, J., concurring).

13

13 E.g., C.R. Bard, Inc. v. M3 Sys., Inc., 157 F.3d 1340, 1367 & n.7 (Fed. Cir. 1998), cert. denied, 526 U.S. 1130 (1999); Town Sound and Custom Tops, Inc. v. Chrysler Motors Corp., 959

F.2d 468, 479–80 (3d Cir. (en banc) (Chrysler trademark does not confer market power), cert.

denied, 506 U.S. 868 (1992); Abbott Labs. v. Brennan, 952 F.2d 1346, 1354 (Fed. Cir. 1991) (‘‘[a]

patent does not of itself establish a presumption of market power in the antitrust sense’’), cert.

denied, 505 U.S. 1205 (1992); Mozart Co. v. Mercedes-Benz of N. Am., Inc., 833 F.2d 1342, 1346

n.4 (9th Cir. 1987) (noting that presumption of market power in copyright cases has been rejected by several courts and commentators), cert. denied, 488 U.S. 870 (1988); A.I. Root Co. v

Computer Dynamics, Inc., 806 F.2d 673, 676–77 (6th Cir. 1986) (holding that a copyright did

not confer a presumption of market power for tying purposes); American Hoist & Derrick Co.

v. Sowa & Sons, 725 F.2d 1350, 1367 (Fed. Cir.) (‘‘patent rights are not legal monopolies in the

antitrust sense of that word’’), cert. denied, 469 U.S. 821 (1984); Will v. Comprehensive Accounting Corp., 776 F.2d 665, 672 (7th Cir. 1985), cert. denied, 475 U.S. 1129 (1986); In re Pabst Licensing, 2000 U.S. Dist. LEXIS 12076 (E.D. La. 2000). 14 E.g., Virtual Maintenance, Inc. v. Prime Computer, Inc., 11 F.3d 660, 666 (6th Cir. 1993)

(licensee had market power in the derivative aftermarket for software support by virtue of its

exclusive software license and a manufacturer’s requirement that all suppliers use the licensed

software), cert. dismissed, 512 U.S. 1216 (1994); MCA Television Ltd. v. Public Interest Corp.,

171 F.3d 1265, 1277–79 (11th Cir. 1999); Digidyne Corp. v. Data General Corp., 734 F.2d 1336,

1341–42 (9th Cir. 1984), cert. denied, 473 U.S. 908 (1985) (presuming defendant’s computer software enjoyed market power because it was copyrighted); Sea-Land Service, Inc. v. Atlantic Pacific International, Inc., 61 F. Supp. 2d 1102 (D. Hawaii 1999). 15 171 F.3d 1265, 1277–79 (1999). 16 CSU, L.L.C. v. Xerox, 203 F.3d 1322, 1325 (2000); Abbott Labs. v. Brennan, 952 F.2d 1346,

1354 (Fed. Cir. 1991), cert. denied, 505 U.S. 1205 (1992). 17See Nobelpharma AB v. Implant Innovations, 141 F.3d 1059, 1067–68 (Fed. Cir. 1998). 18 Compare Abbott Labs., 952 F.2d at 1354 (applying law of Sixth Circuit, which rejects presumption), with Atari Games Corp. v. Nintendo of America, Inc., 897 F.2d 1572, 1576 (Fed. Cir.

1990) (applying in another context the law of Ninth Circuit, which endorses presumption). 19 Compare treatment of patent issues and copyright issues in CSU, 203 F.3d at 1325. 20 Antitrust Guidelines for the Licensing of Intellectual Property issued by the U.S. Department of Justice and Federal Trade Commission § 2.2, 1995 WL 229332 (April 6, 1995).

One year later, in 1985, Justices Blackmun and White dissented from the Court’s

decision to deny a petition for a writ of certiorari in Digidyne Corp. v. Data General

Corp., 734 F.2d 1336 (9th Cir. 1984), cert. denied, 473 U.S. 908 (1985), urging the

Court to address the issue of ‘‘what effect should be given the existence of a copyright or other legal monopoly in determining market power.’’ 473 U.S. at 909.

In the absence of clear guidance from the Supreme Court, some lower courts have

followed Walker Process and the concurring opinion in Jefferson Parish,13 while

other courts have applied the presumption.14 To mention only one recent example,

the Eleventh Circuit, using the presumption in MCA Television Ltd. v. Public Interest Corp.,15 reasoned that the ‘‘licensor by virtue of its copyright is presumed to

have economic leverage sufficient to induce customers to take the tied product along

with the typing item.’’ This split among the courts shows the need for clarifying legislation.

The problem of different circuits adopting different approaches to the market

power presumption may be a particular problem for the Federal Circuit, which decides appeals in most patent cases. That Court has rejected a market power presumption for patents in the antitrust context.16 On antitrust issues, where the Federal Circuit perceives a patent policy issue that would benefit from uniformity, it

follows its own precedent. Otherwise it will follow precedent of the circuit court of

appeals for the region of the trial court in the particular case,17 even though those

courts of appeals may vary in applying the presumption.18 The Federal Circuit may

find itself rejecting the presumption for patent matters, but adopting it for other

forms of intellectual property, in the same case.19

The two federal antitrust enforcement agencies—the U.S. Department of Justice

Antitrust Division and the Federal Trade Commission—have rejected the presumption. Their Guidelines for the Licensing of Intellectual Property provide:

‘‘The Agencies will not presume that a patent, copyright, or trade secret necessarily confers market power upon its owner. Although the intellectual property right confers the power to exclude with respect to the specific product, process, or work in question, there will often be sufficient actual or potential close

substitutes for such product, process, or work to prevent the exercise of market

power.’’ 20

Congress also has indicated that market power should be proven rather than presumed. Congress clarified the problem of divided circuit law in the closely related

14

21 ‘‘1988 Amendments to 35 U.S.C. ‘‘271(d)(5) provide in pertinent part that misuse shall not

exist in the case of tying unless ‘‘the patent owner has market power in the relevant market

for the patent or patented product on which the license or sale is conditioned.’’ See also, CSU,

203 F.3d at 1326 and In re Recombinant DNA Technology Patent and Contract Litigation, 850

F. Supp. 769, 775 (S.D. Ind. 1994) (indicating that no presumption of market power would suffice to establish misuse under § 271 (d)(5)). 22We recognize that the Ninth Circuit may disagree with this (see Image Technical Services,

Inc. v. Eastman Kodak Co., 125 F.3d 1195, cert. denied, 523 U.S. 1094 (1998)), but that Court

seems to be alone among the Circuits in its view.

patent misuse context by providing that a patent owner must have market power

to establish a tie-in misuse.21

In sum, we are no longer in a period, as we were in the middle of the last century,

where patents and other forms of intellectual property were automatically considered to be evil monopolies. The public, Congress, the executive branch and most judicial opinions recognize that properly obtained and issued patents promote investment, create new jobs and protect our industries from unfair foreign competition.

While the public pays a price for a limited period of time, the rewards to the public

justify the price in terms of new jobs and a higher, healthier standard of living. As

mentioned above, antitrust law and intellectual property law are complimentary in

the common goal of encouraging innovation and competition. Arbitrary presumptions about market power hinder reaching that goal.

The ABA agrees with the antitrust enforcement agencies, the Supreme Court in

Walker Process, the concurring opinion in Jefferson Parish, and the other courts

that have rejected the presumption. As illustrated above, the presumption defies

common sense. When reasonable substitutes exist for a product protected by intellectual property—as is often the case in the American marketplace—the intellectual

property confers no real ability to raise or control prices. Similarly, where others

can readily enter the market if prices rise significantly, the intellectual property

confers no real market power. Thus, in many cases, intellectual property does not

yield market power, and any presumption of market power is unwarranted.

We understand that some lawyers will argue that in view of recent decisions such

as CSU v. Xerox and the recent guidance from executive branch, there is no need

for legislation. We respectfully disagree. The interface between antitrust and intellectual property law, if not examined carefully, can be misunderstood.

For example, the Federal Circuit stated in CSU v. Xerox that a patent holder has

the ‘‘right’’ to refuse to sell or license in markets within the scope of the statutory

patent grant:

‘‘Xerox’s refusal to sell its patent and parts [does not exceed] the scope of the

patent grant. . . . Therefore, our inquiry is at an end. Xerox was under no obligation to sell or license its patent parts and did not violate the antitrust laws

by refusing to do so.’’ 203 F.3d at 1328.

Thus, CSU v. Xerox stands for the proposition that as long as a patent owner does

not exercise power beyond the scope of the patent coverage (for example, by tie-ins,

by extensions in time or by price fixing in licenses), the owner may dominate the

market covered by the patent, even if that is a relevant product market for antitrust

purposes.22 According to the reasoning of that decision, by the grant of market exclusivity to the patent owner, the public obtains disclosure of the patent owner’s improvements and encourages investment in developing that improvement to make it

available to the public; only when the patent owner seeks to exercise that power

beyond the patent coverage does the owner run afoul of the antitrust laws.

Legislation is needed because a presumption that market power arises from intellectual property can harm competition. With the presumption to assist in proving

an antitrust violation where intellectual property is involved, the risk of antitrust

treble damage liability for licensing intellectual property increases. Common sense

teaches us that as that risk increases, the value of the intellectual property decreases. And decreased value lowers the incentives for American companies to invest

in developing new and improved technologies, and to license those improvements to

others. Yet these improvements in technology, used in the marketplace to compete

with older technologies and with other developments, keep competition vibrant in

our economy. As long as the Supreme Court or any courts of appeals employ that

presumption, that risk and those disincentives to developing, disseminating, and

competing with improved technology will continue.

Though it lessens the incentives for intellectual property owners to develop and

disseminate these tools for competition, the presumption does not further the antitrust law’s objective to prevent anticompetitive practices. Removing the presumption, on the other hand, will simply require antitrust plaintiffs in intellectual propVerDate 11-MAY-2000 12:37 Dec 10, 2001 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6621 G:\WORK\COURTS\110801\75981.000 HJUD2 PsN: HJUD2
15

erty cases to meet the same requirements as antitrust plaintiffs in other types of

cases.

Consequently, the ABA endorses the approach of bills such as H.R. 2674 of the

104th Congress.

The ABA, however, suggests certain changes to language previously considered by

Congress. Section 2 of H.R. 2674 would have prohibited the market power presumption in any action involving conduct ‘‘in connection with the marketing or distribution of a product or service protected by [an intellectual property] right. . . .’’ This

language appears to leave many situations in which the presumption could still

exist. For example, a court might not construe the quoted language to also include

provisions in agreements in connection with the licensing of or refusal to license an

intellectual property right, or in connection with intellectual property rights that

may result from research and development that have not yet resulted in a product

or service. No reason exists for the presumption in these circumstances, just as none

exists in the circumstances already covered by Section 2 of the bill as introduced.

The presumption can nonetheless work its harm in these types of situations as well,

especially in the development of technology through research and development and

in the dissemination of technology through licensing.

We therefore suggest including in the legislation language such as the following,

which would preclude a presumption of market power—including related issues of

economic power and product uniqueness or distinctiveness—from being based on arbitrary presumptions in contexts in addition to litigation.

In any action in which the conduct of an owner, licensor, licensee, or other

holder of an intellectual property right is alleged to be in violation of the antitrust laws, such right shall not be presumed to define a market, to establish

market, or to establish monopoly power.

To summarize, the American Bar Association recommends that Congress eliminate this unwarranted and harmful presumption by enacting a bill such as H.R.

2674 from the 104th Congress, with the suggested modification.

Mr. COBLE. Thank you, gentlemen, for your testimony.

Mr. Cannon, I am told, is on a short leash and about to depart

for California, so I will permit him to begin the questioning.

Mr. CANNON. Thank you. I would much prefer to sit here for the

rest of this testimony than sit in an airplane for 3, 4 hours. I appreciate your indulgence, Mr. Chairman.

Gentlemen, both your testimonies makes a very persuasive case

that owners of intellectual property should have the inherent right

to control how that property is used. However, I would like to focus

a little bit more on a narrow facet of the issue. Specifically, how

does the market deal with circumstances when two or more competitors join forces with their intellectual property?

Professor Herbert Hovenkamp said in his treatise on antitrust

law, for instance, courts have suggested that while a single patentee may fix the price with a single licensee, it does not apply to

agreements involving multiple patentees. Such an agreement could

be an effective collusion facilitator in that it could permit the firms

to fix prices while deterring new entry. Do you see a distinction between a single patentee setting the price for his product and a

group of patentees joining forces to set market price for a product?

And I would like both of your ideas on this.

Let me explain why I am asking the question. While I recognize

the purpose of this hearing is to address patent issues, I would like

to take a moment to delve into the related topic of copyright in this

context.

The music industry is struggling with these issues as we speak.

I have heard of the collaboration among the major record labels to

create two entities to address on-line music sales and distribution.

Known as Press Play and Music Net, these two ventures will conVerDate 11-MAY-2000 12:37 Dec 10, 2001 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6601 G:\WORK\COURTS\110801\75981.000 HJUD2 PsN: HJUD2
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trol approximately 80 percent of the digital music content available

on line by cross-licensing each other’s content.

Recently, CEO Edgar Broffman explained how they hoped their

candidate, Press Play, will work. He said, Press Play has what we

call an affiliate model where we determine the price and we offer

a percentage of that price to the retailing partner, either Microsoft

or Yahoo or MP3. The reason we have chosen that, frankly, is because we are concerned that the continuing devaluation of music

will proceed unabated unless we do something about it. If you

allow an AOL or Microsoft or others who have very different business models to use music to promote their own business model and

simply pay the artist and the record companies the minimums,

they can advantage themselves on the back of the music industry

in a way which continues to devalue music. We don’t want to see

that happen. End of his quote.

Do you see antitrust concerns in such an environment where two

collaborative efforts are able to control 80 percent of the market to

prevent the so-called price devaluation that Mr. Broffman intends?

Mr. MYRICK. Mr. Cannon, thank you very much. That is a very

interesting question; and if the Chairman and you won’t object, I

think we will probably supplement that with the answer I am

about to give you as the record stays open.

Mr. MYRICK. The complex situation you just posited is something

that is in the music industry which I am not at all familiar with,

so I can’t opine on that at all and certainly wouldn’t want to opine

on something that is ongoing in the music industry or in the industry in that area, which is not at all familiar to me.

I think there is a concern naturally when more than one party

gets involved with another party and begins to amass more controlling power. That is relatively black letter law. I don’t know that

anything having to do with market presumption is an issue there.

I think it probably is more analyzable under standard Sherman

one type analysis.

So whether or not market power presumption has anything to do

with that, I would say I don’t think so. At least I don’t see that.

I think the analysis that would be applied to such a situation is

classic Sherman one analysis, and I don’t see any particular reason

to depart from that.

Mr. BAKER. Let me address that from a different point of view.

If you will forgive me, I will go back to Gilbert and Sullivan who

wrote Pirates of Penzance in 1886, 6 months from the time Edison

invented the phonograph. Mr. Edison has already been referred to.

This is a classic example of traditional copyright principles coming

face to face with new technology, and it is going to take time to

work it out. I think Congress is entirely right to look into this. Just

like the problems presented when Edison recorded the Pirates of

Penzance, the people knew that the performance involved copyright

rights. But does putting it on Mr. Edison’s new invention involve

a performance when he plays it out? Well, it took Congress until

1909 to sort that out.

Now we have the Digital Millennium Copyright Act. We are trying to sort through the impact of technology on old rights. I think

the Congress should study these emerging issues and keep the

right balance between the rights of the owner or the creator, the

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rights of the public and, at the same time, keep in mind the

rights—not the rights but the interest of the investor, because investment can’t be required. Investment can only be encouraged. So

that is a delicate balance.

We are a little conceited if we say that Congress has never faced

it before, because they faced it in the 1800’s. But it is something

that has to be thought through. If the ABA’s antitrust or intellectual property law section or the ABA as a whole can help in any

way, we will be glad to.

Mr. CANNON. This issue is very much with us, and I appreciate

the answers and yield back my time.

Mr. COBLE. The gentleman from Virginia, Mr. Boucher.

Mr. BOUCHER. Thank you, Mr. Chairman.

I want to say a word of welcome to our witnesses today. I am

a little bit perplexed about why we need to pass the bill, and I am

here mostly today to learn from our witnesses about why they

think this is necessary.

Mr. BOUCHER. Let me start by asking just a baseline question.

Would you agree that in the seminal Supreme Court treatment of

this subject, which is the Jefferson Parrish decision of 1984, that

the Court basically said that this presumption of market power

only arises when there is a showing that there is no alternative

source for the product? Is that correct?

Mr. MYRICK. I believe that is perhaps the case. But at the same

time—.

Mr. BOUCHER. Well, that is what the court said.

Mr. MYRICK. At the same time, when you look at the perplexity

that has been visited upon us by what has followed that case, we

even have the Justice Department and the FTC saying that the law

is unclear, sufficiently so—.

Mr. BOUCHER. Well, that actually brings me to question number

two. I am glad you raised that. The Justice Department was here.

In fact, Joel Klein representing the Justice Department was here

in 1996 when this same bill had been placed before the Committee

and was being considered. At that time, here is what Mr. Klein had

to say. He said, in addition to case law, the vast majority of antitrust scholars and commentators have for many years concluded

that the mere existence of a patent copyright or trade secret does

not necessarily confer market power upon its owner. Then he went

onto say and he concluded his testimony by saying, so strong is the

consensus on this point that it raises the question as to whether

this bill is really necessary.

So the Justice Department basically came here and said, we are

not sure that this ought to be passed because this is what the law

is already. And it would appear to me that the Supreme Court’s decision in 1984 basically said that, unless the plaintiff can demonstrate no alternative source for the product, there is no presumption of market power merely by virtue of the presence of an intellectual property interest. Do you disagree with that?

Mr. BAKER. Mr. Boucher, I wanted to address the earlier point

you made first, and that is I don’t disagree with the earlier testimony that scholars and others have come to this conclusion.

Mr. BOUCHER. Well, he said the case law, also.

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Mr. BAKER. My papers cite some cases from 1999 that disagree

with that. And as long as there is are such cases out there, every

businessman who is making a decision has got to be concerned

about it. So while I don’t mean to deprecate any district judge,

there are about 1,000 of them out there, and they are not all as

educated as these scholars and these other people Mr. Klein is referring to. So I prefer certainty and I would like to see this absolutely certain.

Mr. BOUCHER. Let me ask you this then. Have there been Federal cases that have been decided since this Supreme Court decision in 1984 that have determined that a presumption does exist

of market power simply by virtue of the existence of a patent,

trademark or copyright in the absence of a showing that there was

no substitutable source for the product? Just a yes or no.

Mr. BAKER. I am not able to answer that question.

Mr. BOUCHER. If you can’t answer the question, then you haven’t

persuaded me that anything has happened since the Supreme

Court decision to upset the very clear statement that is contained

there that there is no presumption in the absence of a showing of

no substitute for the product.

Mr. BAKER. Let me—if you will, give me permission to reread the

MCA Television case which said, a licensor or by virtue of the copyright is presumed to have the economic leverage sufficient to induce customers to take the product and see if the other things you

talked about are included in that case; and I would like to supplement the record on that.

[The information referred to follows:]

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Mr. MYRICK. May I respond?

Mr. BOUCHER. I have one other thing I wanted to say, but go

ahead.

Mr. MYRICK. I just wanted to mention that in the 1995 guidelines, which may be a year before Mr. Klein was here, but they

still, I believe, are appropriate to this discussion, the 1995 guidelines jointly put out by the Justice Department and the Federal

Trade Commission, they made this reference. The footnote is a particularly interesting piece of it.

‘‘The agencies will not presume that a patent, copyright or trade

secret necessarily confers market power upon its owner. Although

the intellectual property right confers the power to exclude with respect to the specific product, process or work in question, there will

often be sufficient actual or potential close substitutes for such

product, process or work to prevent the exercise of market power.’’

The footnote is where the interesting piece is. The footnote says,

‘‘The Agencies note that the law is unclear on this issue. Compare

Jefferson Parrish Hospital District Number 2 . . . (expressing the

view in dictum, if a product is protected by a patent, ‘it is fair to

presume that the inability to buy the product elsewhere gives the

seller market power.’) . . .

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Then it goes on, noting by the way, Justice O’Connor. But it says,

compare also Abbott Laboratories v. Brennan, Federal Circuit,

1991, no presumption of market power from intellectual property

right.

Then it goes on to Digidyne and one other case which—there

were three cases cited here. It also goes under Digidyne which does

find market power presumption.

My point simply is this—.

Mr. BOUCHER. But was that market power presumption found

upon a showing that there was no substitutable source for the

product?

Mr. MYRICK. I will have to check that.

Mr. BOUCHER. See, that is the key question. These cases really

don’t mean anything.

Mr. MYRICK. We will certainly make the clarification on the

record.

[The information referred to follows:]

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Mr. BOUCHER. Let me simply conclude my time here by saying

something. I really don’t perceive a need to adopt this legislation,

and let me just put that belief on the record here. I am concerned

that if we pass this in the absence of a clear need to do it, it is

a change to the Nation’s antitrust laws.

We make those changes very sparingly and for good reason. Because, when we make a change, it is going to be interpreted by the

courts to mean something. And if the Supreme Court, which already says there is no presumption in the absence of a showing of

lack of substitutable product, sees that we have gone ahead and

made this change anyway, I am concerned about how our action is

going to be interpreted and whether, for example, it is going to

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make it more difficult to establish market power in appropriate

cases where it really does exist; and that will now become a burden

on the plaintiff in those instances.

I am concerned about what effect this change might have on collateral well-settled antitrust policies, such as, for example, the

abuse of intellectual property concept; and I would just hesitate to

see us act in the absence of a clear showing that it is necessary.

Thank you, Mr. Chairman.

Mr. COBLE. The gentleman’s time has expired.

The gentleman from Virginia, Mr. Goodlatte.

Mr. GOODLATTE. I would like to ask the gentlemen to comment

about the effect that the traditional definition of market power has

in the digital environment as well. For example, in a world where

communications are in a network, is there a multiplier effect to

market power that requires us to look at this? Mr. Baker?

Mr. BAKER. I am not sure. I have to say that I have not thought

about that, and I don’t think I can say anything useful at this time.

Mr. MYRICK. That is equally a difficult question, but I will attempt to supplement the record with some further comments.

[The information referred to follows:]

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Mr. MYRICK. But asking whether there is a multiplier effect on

market power in a digital world, what market power are we talking

about? The market power of the copyright owner? I am curious as

to how the market power of a patent owner—those are the defining

questions we will have to think about before we can answer that.

Mr. GOODLATTE. Mr. Chairman, I would request one point for ‘‘stump the panel’’ on that one.

Mr. COBLE. Duly noted.

Mr. GOODLATTE. Let me try another one.

The testimony cites several cases in the Ninth Circuit and some

have argued that we need a national appellate court to review antitrust cases that would guarantee bringing expertise and greater

consistency to these matters. What are your thoughts about establishing such a court like the Federal Circuit Court of Appeals?

Mr. MYRICK. The Federal Circuit has been, in many respects, a

great success. I think particularly in the first 15 years of its life

it served a very, very useful purpose. There are those who wonder

today whether the Federal Circuit is as quite as successful as it

used to be, and I think that is something that I am not going to

opine on, but there is a debate that goes on as to whether specialized courts ultimately can maintain the focus that they have in the

early stages when they are populated with specialized judges when

ultimately they may not be so populated with specialized judges in

later times. So to say that a particular court would be better for

antitrust law than the existing courts of appeal I think has to have

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a subordinate question answered, which is how would the judges

for that court be appointed and would they be sought from the bar

or other judges who have particular expertise in that area or would

they be general judges from all sorts of walks of life?

I don’t particularly believe that there is any particular significance to where the court sits. The issue is the judges who sit on

the court.

Mr. GOODLATTE. Mr. Baker.

Mr. BAKER. I don’t disagree with anything Ron said, but I would

supplement it by saying that I do have a personal reaction to specialized courts. I believe that there is a benefit in having judges address different issues and bringing broad concepts to bear on specific issues rather than the other way around. Perhaps selecting

them—and there are other ways to deal with it. But I have that

reaction—speaking personally.

Mr. GOODLATTE. In that regard in terms of specialized review,

how does enforcement of the antitrust laws by the Federal Trade

Commission play into this at all? Does market power play a role

in merger policy?

Mr. BAKER. I am not—I will supplement the record on that, too,

please.

[The information referred to follows:]

Mr. GOODLATTE. Yield back. Thank you.

Mr. COBLE. The gentleman from the Roanoke Valley is on a roll.

Mr. Baker, your testimony obviously reflects the position of the

section you chair. Does it also reflect the position of the entire ABA

or the ABA as a whole?

Mr. BAKER. It does. This is a policy that has been adopted by the

ABA as a whole.

Mr. COBLE. Let me put this question to each of you. Is it your

belief that the court made presumption is a rebuttable presumption?

Mr. BAKER. If I may go first, since my mike is on, the case law

does not discuss that at length. In fact, I don’t recall any case

law—any court discussing it. But as it is used, it seems to be a

pretty heavy presumption.

Mr. MYRICK. The case law that we have researched has not expressly articulated whether the presumption is rebuttable or simply a heavy thumb on the scale. IPO opposes even a rebuttable presumption. The reasons are two-fold.

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First, IPO has found no published opinion in which a court has

invoked the presumption yet concluded that the patent does not

confer market power.

Second, by shifting the burden of proof on market power, one of

the most important factors in establishing antitrust liability, a rebuttable presumption makes it far more likely that a meritless

antitrust suit will survive a motion to dismiss and motion for summary judgment. Consequently, even a presumption that may be rebutted will lead to added litigation costs and decrease the value of

intellectual property.

Mr. COBLE. Thank you, gentlemen.

We are concerned about the economy, obviously, and particularly

in view of the September 11 attack. How would the economy or

how might the economy benefit from the proposed legislation that

you all discussed?

Mr. BAKER. Without having any hard, specific survey information, it seems to me that certainty is pro-investment. So this would

lend certainty in this area, and that is good.

Mr. MYRICK. The market power presumption increases the likelihood that intellectual property owners will face vexatious litigation

and be saddled with burdensome litigation costs. The presumption

thus lowers the value of intellectual property, thereby reducing the

incentive that inventors have to develop intellectual property in the

first place. Because our country’s continued economic expansion depends on, in large part, on technological innovations, market power

presumption undermines expansion by adversely affecting the incentive to motivate. The fact remains there is uncertainty in this

law.

Mr. COBLE. Some of the cases you all cited in your testimony

were known to the Congress in 1996 when the House Judiciary

Committee last examined this subject. Let me ask Mr. Baker this,

since that time, is it your belief that these cases were mainly,

quote, patent cases, unquote, or were other forms of intellectual

property implicated?

Mr. BAKER. I am familiar with patents and copyrights. I don’t recall any cases involving any other form of intellectual property. But

I think the principles are the same.

Mr. COBLE. You concur, Mr. Myrick?

Mr. Myrick, in your testimony you recommended a legislative

remedy. You may want to get with us subsequently about this, but

in light of the cases you cite, since the previous bills were before

the Congress, would you have any specific advice for the Subcommittee in the event that we do draft a bill? And you can submit

that in writing.

Mr. MYRICK. I will be happy to do that. But I have looked at the

draft proposal that has been submitted by the ABA, and it appears

to me to be a step in the right direction as well in terms of an

amendment.

[The information referred to follows:]

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Mr. COBLE. Thank you both for being here.

I ask my two Virginia friends if they have any questions?

Gentlemen, thank you both for being here; and thank you all in

the audience for attending this hearing.

This concludes the oversight hearing on market power and intellectual property litigation. The record will remain open for 1 week.

We thank you again.

The Subcommittee stands adjourned.

[Whereupon, at 2:45 p.m., the Subcommittee was adjourned.]

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