Antitrust

This infamous political cartoon [1] depicts Standard Oil as a giant octopus controlling government and the copper, steel and shipping industries. It invokes the visceral reaction that Standard Oil really is an octopus-monster, its meaty tentacles threatening 360 degrees of surrounding landscape with a suffocating grip.

Antitrust law has grown out of a historical appreciation that at some point, corporate growth can turn healthy competition into a massive trade-restricting and anti-competitive beast. Standard Oil grew through the business acumen of its founders but ultimately turned to buying out competitors and securing favored treatment in shipping and railroad transportation to cement its position as the market leader. [2] In 1911, the Supreme Court ordered the dissolution of Standard Oil, finding the company’s trade restraints unreasonable and against the public interest, and consequently, the restraints violated the Sherman Act. [3] After the court decision, Standard Oil broke up into smaller companies, each eventually becoming Exxon, Mobile, Chevron, Amoco, Conoco, Sun and the American arm of BP. [4]

The Sherman Act is still the backbone of the penalization of trade monopolies. Section 2 of the Act provides that “Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $100,000,000 if a corporation, or, if any other person, $1,000,000, or by imprisonment not exceeding 10 years, or by both said punishments, in the discretion of the court.” [5]

Monopoly under Section 2 of the Act has two elements: possession of monopoly power in the relevant market and willful acquisition or maintenance of that power, as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident. [6]

Monopoly power is defined as “the power to control prices or exclude competition,” and the existence of monopoly power may be inferred from a predominant share of the market. [7] Of course, the monopolist will naturally argue that the conduct involved is actually a form of legal competition because it increases efficiency and consumer appeal. [8]

To constitute a violation of the Act, monopolistic practices need not extend to an entire industry.  The statute prohibits the monopolization of “any part of the trade or commerce.” [9] Additionally, the requisite intent for a violation of the Sherman Act is not necessarily specific intent in a criminal sense; “if there is a unification and concentration of power and control over a commodity, this in itself may make a prima facie case of intent and purpose to exercise illegal restraints and to monopolize.  It is sufficient to satisfy this requirement if the consequence of a defendant’s conduct or business arrangements results in a monopoly.” [10]

Patents: Legal Monopolies

A patent is a government-granted right to exclude others from making, using, or selling a patented invention.  Patent protection is granted to inventions that are novel, non-obvious, and fall within the category of any useful process, machine, manufacture, or composition of matter. [11]

Patent rights give the right-holder a monopoly over that particular invention. [12] Intuitively, this is an authorized form of monopoly granted for the purpose of spurring innovation. Indeed, standing alone, the legal patent-created monopoly is insufficient to violate the Sherman Act—in order to fall under the Act, a patent-granted monopoly must be accompanied by possession of monopoly power and the willful acquisition or maintenance of that power.

Patent laws clearly protect the competitive advantage a company gains from the patented invention as a means of encouraging innovation and securing public disclosure of innovative products and methods.  A heavy public interest accompanies the grant of patent protection.  A patent is an exception to the general rule against monopolies and to the right to access a free and open market. [13] “The far-reaching social and economic consequences of a patent . . . give the public a paramount interest in seeing that patent monopolies spring from backgrounds free from fraud or other inequitable conduct and that such monopolies are kept within their legitimate scope.” [14]

Abuse of Patent Rights to Secure a Monopoly

Patent rights confer a legal exclusive monopoly to those who invent novel and non-obvious processes, machines, compositions, or articles of manufacture. [15] When the patent right-holder is also in control of monopolistic share of a relevant market, this broad grant of exclusive power can be in problematic opposition to antitrust laws.  The challenge becomes identifying the point at which an attempt to enforce a patent becomes exclusionary. [16]

A patent grant does not automatically confer a complete safe harbor from anti-trust legislation. [17] There is a recognized difference between protecting the legitimate interest of a patent-right holder and violations of antitrust law.  A patent owner must be allowed to exercise the property right granted under the patent laws, however, a patent owner may not use the patent to improperly extend their power in the marketplace beyond the limits of what Congress intended. [18]

A patent owner can violate anti-trust law by using patent rights “not only as a shield to protect his invention, but as a sword to eviscerate competition unfairly.” [19] Some recognized examples of antitrust liability for patent right-holders include enforcement of a patent knowingly obtained though fraud, [20] bad faith patent enforcement,[21] and use of a general scheme to circumvent anti-trust laws with patent rights. [22]

Similarly, agreements which require licensees to assign future inventions or patents to a single entity can violate the Sherman Act where the agreements have the effect of restraining trade or creating monopolies. [23] Likewise, cross-licensing agreements in which patentees fix prices for all their products and use their patents to force cooperation have been considered a violation of the Sherman Act, where the required intent to monopolize also exists. [24]

The intersection of patent property rights and antitrust laws remains a controversial and unsettled topic.  The proper exercise of a patent monopoly can stifle competition and increase the market position of the right-holder. This should not be enough to warrant abridging the benefits of patent protection.  However, when patent enforcement crosses the line from legal enforcement into abusive enforcement that exceeds the meets and bounds of the government-granted patent monopoly protection, reconsideration of the patent grant is proper and contributes to an environment of fair competition and innovation. Unsurprisingly, the differences between proper and improper use of patent rights are not always clear.

[1] Other great 8-legged depictions of Standard Oil with some explanatory text: http://nationalhumanitiescenter.org/pds/gilded/power/text1/octopusimages.pdf

[2] Ida M. Tarbell, The History of the Standard Oil Company, Volume One 38-69 (McClure, Phillips, & Co. 1904).

[3] Daniel Yergin, The Prize: The Epic Quest for Oil, Money, and Power 92-94 (Free Press 2008).

[4] Id.

[5] 15 U.S.C.A. § 2 (2004).

[6] United States v. Grinnell Corp., 384 U.S. 563, 571 (1966).

[7] Id. (Finding monopoly power in an 87% market share).

[8] Constance E. Bagley et al., Adverse Possession for Intellectual Property, 16 Harv. J.L. & Tech. 327, 334 (2003).

[9] United States v. Yellow Cab Co., 332 U.S. 218, 225 (1947).

[10] Kobe v. Dempsey Pump Co., 198 F.2d 416, 423 (1952).

[11] 35 U.S.C. §§ 101, 102, 103 (2002).

[12] An exclusive monopoly: a patent does not automatically confer the right to make or use a patented invention, for example where use of an invention is prohibited by law. For the purposes of this short column, we will assume that the right-holder has the legal ability to make and use the patented invention.

[13] Walker Process Equip., Inc. v. Food Mach. and Chem. Corp., 382 U.S. 172, 177 (1965).

[14] Id.

[15] 35 U.S.C. § 101 (2002).

[16] Handgards, Inc. v. Ethicon, Inc., 601 F.2d 986, 992-93 (1979)(citing L. Sullivan, Handbook of the Law of Antitrusts 181 at 522 (1977)).

[17] Atari Games Corp. v. Nintendo of America, Inc., 897 F.2d 1572, 1576 (1990).

[18] Id.

[19] Id.

[20] Walker, 382 U.S. at 174.

[21] Ethicon, 601 F.2d at 993.

[22] Atari, 897 F.2d at 1576-77.

[23] Kobe, 198 F.2d at 416.

[24] United States v. Line Material Co., 333 U.S. 287, 308 (1948).

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