Earlier this month the United States District Court for the Eastern District of California extended the copyright misuse doctrine to the benefit of Costco, finding that an overzealous manufacturer of watches was attempting to use a copyright on a small logo stamped onto its watches to prohibit the resale of lawfully purchased watches by Costco. See Costco Prevails in First Sale Case Thanks to Copyright Misuse. Misuse defenses, such as copyright misuse and patent misuse, have historically be applied sporadically at best. This may be because misuse has been frequently found only when there is an underlying Antitrust violation. That is, however, not a prerequisite. A misuse defense is really about the unjustified extension of either a copyright or patent beyond the legitimate boundaries of the property right.
With copyright misuse having recently been successful in a rather high profile case I thought it would be worthwhile to revisit patent misuse and misuse concepts generally. To do that in a way that allows the casually interested reader to follow along probably requires first taking a step back away from the intellectual property centric theories to discuss some basic antitrust law concepts. This seems particularly appropriate since many of the misuse cases have a distinct antitrust flavor.
The antitrust laws, which can be found at 15 U.S.C. § 1 et seq, apply to virtually all industries and to every level of business, including manufacturing, transportation, distribution, and marketing. They prohibit a variety of practices that restrain trade, such as price-fixing conspiracies, corporate mergers likely to reduce the competitive vigor of particular markets, and predatory acts designed to achieve or maintain monopoly power.
The historic goal of the antitrust laws is to protect economic freedom and opportunity by promoting competition in the marketplace. Competition in a free market benefits American consumers through lower prices, better quality and greater choice. Competition provides businesses the opportunity to compete on price and quality, in an open market and on a level playing field, unhampered by anticompetitive restraints. Competition also tests and hardens American companies at home, the better to succeed abroad.
The Sherman Antitrust Act, the first of the major antitrust laws, makes illegal every contract, combination, or conspiracy, in the restraint of trade. Unfortunately, Antitrust Law is not so simple as a cursory reading of the statue would otherwise suggest.
One problem presented by the language of §1 of the Sherman Act is that it cannot mean what it says. The statute says that “every” contract that restrains trade is unlawful. But, as Justice Brandeis perceptively noted, restraint is the very essence of every contract; read literally, §1 would outlaw the entire body of private contract law. Yet it is that body of law that establishes the enforceability of commercial agreements and enables competitive markets — indeed, a competitive economy — to function effectively.
Congress, however, did not intend the test of the Sherman Act to delineate the full meaning of the statute or its application in concrete situations. The legislative history makes it perfectly clear that it expected the courts to give shape to the statute’s broad mandate by drawing on common-law tradition. The so-called Rule of Reason, for example, has its origins in common-law precedents long antedating the Sherman Act. It has been used to give the Act both flexibility and definition, and its central principle of antitrust analysis has remained constant. Contrary to its name, the Rule does not open the field of antitrust inquiry to any argument in favor of a challenged restraint that may fall within the realm of reason. Instead, it focuses directly on the challenged restraint’s impact on competitive conditions.
Rule of Reason & Per Se Violations
There are two types of antitrust analysis. In the first category are agreements whose nature and necessary effect are so plainly anticompetitive that no elaborate study of the industry is needed to establish their illegality. In this first category the complained of act is considered to be illegal per se. In the second category are agreements whose competitive effects can only be evaluated by analyzing the facts peculiar to the business, the history of the restraint and the reason why the restraint was imposed in the first place. The agreements that fall into this second category are judged by what is called the “rule of reason,” which requires a cases-by-case approach that sometimes cannot be easily defined.
Rule of Reason
In antitrust litigation most complained of practices are analyzed under what is called the “rule of reason.” The United States Supreme Court has explained:
[T]he inquiry mandated by the Rule of Reason is whether the challenged agreement is one that promotes competition or one that suppresses competition. The true test of legality is wehther the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition.
Under the rule of reason test the fact finder must weigh all circumstances of the case to decide whether the practice complained of unreasonably restrains competition. The test requires that the plaintiff show anticompetitive effects, or actual harm to competition. The rule of reason does not, however, require the plaintiff to demonstrate that the complained of practice is unfair or tortious.
Per se Violations
It is generally inappropriate for a judge to hold that a complained of violation is per se illegal. The per se rule is generally appropriate only after judges have had long experience with a certain practice, and have concluded that the practice produces many pernicious results and almost no beneficial ones. When a complained of violation is classified as a per se violation of the antitrust laws the court will not consider elaborate arguments (that are routine in rule of reason cases) that a particular practice is actually procompetitive. To the contrary, the court will condemn the practice without taking any arguments into account. The purpose of the per se rule is to avoid expensive litigation in areas in which it is not likely to be fruitful. Currently the per se rule is applied to horizontal price fixing, horizontal territorial or customer division, vertical price fixing and some concerted refusals to deal and tying arrangements.
Tying arrangements are those that have been frequently associated with patent misuse and copyright misuse. An agreement is said to be a tying arrangement when one conditions the sale of a particular product on a buyers promise to purchase an additional, unrelated product. Frequently in tying arrangements the desired product is patented and the patent that covers that product is attempted to be extended in order to force the buyer into purchasing the unrelated product. In this presentation you have a classical patent misuse scenario.
There is much more to patent misuse, however. Up next will be a review of patent misuse. Stay tuned!