Duty to Deal in Intellectual Property

 

 

 

 

 

 

 

 

 

 

Duty to Deal in Intellectual Property

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Duty to Deal in Intellectual Property

The Antitrust law provides a framework for analyzing the duty to deal in the intellectual property right, which states that any legally formed firm has no duty to deal or aid its competitors in the trade. Furthermore, the United States judicial system establishes the fundamental principles which apply universally to intellectual property and antitrust law. Accordingly,the prevailingantitrust law protects businesses against illegal competition and unfriendly commercial practices. Conversely, the intellectual property law rewards the innovative aspect of production, and creates the incentives on the products. The judicial analysis indicates that the intellectual property rights and competitive policies are complementary to each other. Currently, legal experts have sponsored a debate on section 2 of the Sherman Act which outlines conditions and terms for refusal to deal with rivals. Observably,under the section 2, the monopolist has opportunity and power over the resources that the rival prefers to use during the manufacturing process.

Cases of Duty to Deal in Intellectual Property

In Kodak 125 f3d 1195, and XeroxCorp (2003 case), 203 f3d 1322, the panelists contemplated on imposing the antitrust liability to the Kodak company for unilateral refusal to sell the license patent to the third party.[1]  The plaintiff to the case was an independent service organization (ISO) which claimed that the original equipment manufacturer (OEM), Kodak, intentionally refused to sell the patented right and copyright software to the third party. The plaintiff argued that the company violated section 2 of the Sherman Act which requires the firm to sell licensed and patented right to the ISO.  The defendant violated the section 2 because it was a monopoly in a large section of the market. Notably, the company refused to supply parts of its products to the ISO, thus, expanding their monopolies to the internal operations and services of their equipment.  The Court held that reluctance to sell was a legitimate business justification but the ruling can be rebutted based on the evidence of pretext.[2]  The Federal Circuit found that the plaintiff produced sufficient of pretext that the defendant intentionally refused to sell unpatented and patented parts of its items.

Panelists Views

The defendant company, Eastman Kodak, was dealing in the manufacturing and sales of the micrographic and the photocopier production equipment. The Plaintiff was a competitor of the Kodak that offered the repair and maintenance services to the consumers’ machines. Since the repairs required the essential parts that were only available at the producer’s enterprise. The client requested to buy the spare parts. In the past years, Kodak sold the replacement equipments to ISOs until the market gained intense competition.[3] As a result, the company changed its rules and policies and secured general agreement with the third party that they would not sell their products to the ISOs deal with other companies. The Court provided a ten year injunction which required Kodak to sell its products in totality to the ISO at reasonable prices.

The Panelists uniformly identified the problems in the Kodak’s subjective intent standard.  A panelist argued that the company exercised the fundamental flawed process which violated their duty to deal under the intellectual property rights. Furthermore, he stated that Kodak had interest on their desire to protect the research and development and avoid the requirements for refusal to deal. The second panelist argued that the intention of the Kodak to specifically focus on subjective motivation was out of the step.[4] The modern analysis on the antitrust law provides the basis for subjective economic aspect on the conduct of all the parties. Lastly, a panelist observed that the practical problems were within the intent-based-test. To elaborate, the Ninth Circuit did not provide the clear distinction between legitimate and pre-textual assertion of patent rights. Therefore, the companies could not determine the specific activities which are lawful.

Lorain Journal Co. v. United States

The case Lorain Journal Co. v. United States, 342 U.S. 143 (1951) is usually cited in some legal practices that explain the violation of monopoly power in the market[5]. The case emphasizes the violation of the monopolization based on the unilateral denial of access to essential parts of items under the control of a monopolist. After the establishment of the competing radio station at Ohio, Lorain Journal felt that their monopoly power wasunder a threat. As a result, the Journal Lorain introduced the policy of the denial in which they refused to carryout business activities with the company which advertised their items over the radio station. The Journal Publisher had an intention of eliminating the competition from the market and continues with the usual dominance in the long run.[6] The Supreme Court held that the company violated section 2 of the Sherman Antitrust Act by attempting to monopolize the trading activities in Lorain.

Decisions of the Supreme Court

The justices made a unanimous ruling that the Journal Publisher enjoined from sabotaging the activities of the radio station and their actions amounted to violation of section 2. The judges noted that by refusing to advertise the products of the firms that associated with the radio station, the company demonstrated effective prohibition WEOL business and attempted to carry out monopolization.[7] Some of the clients to the Lorain Journal wished to supplement their advertising services with those offered at the local radio station but discontinued their activities because of the order from the publisher.

Moreover, the judges explained thatthe activities shall amount to violation section 2 of Sherman Act.This would occur incase all the newspapers vendors and publishers in different cities decided to eliminate their competitors through dominatingthe dissemination of the news. They can also do itby eliminating the radio stations or enter into a conspiracy deal to block the advertisements of the clients who carry out the promotion over the radio stations, The actions are punishable under the Act by different penalties including termination of the contract and paying of hefty fines.[8] Therefore, the advertising companies deal with the client and their competitors under the intellectual property right without discrimination.

Berkey Photo, Inc. v. Eastman Kodak co, (1980) no. 79-427

Berkey brought the case to the Supreme Court to determine whether the Kodak Inc. had operated contrary to the antitrust law. Berkey Photo was a small firm which operated in the photography and filming industry.[9] In particular, the company competed with the Eastman Kodak in the provision of the finishing equipmentsthat covert film’ contents into prints, movies and slides. Furthermore, the two companies competed in the sale of consumer cameras. Berkey Photo did not manufacture the cameras and relied on the products from Eastman Kodak to sell to their customers. In 1972, Kodak manufactured 110 cameras and Kodacolor II film. The Kodacolor film was only compatible to the 110 camera and could not accept any other product. As a result, the competitors could not successfully compete with the new combination of the Kodak products in the market. The Berkey Photo tried to sell the substitute products to the Kodak’s equipment but failed due to design defects.[10]

Consequently, the company initiated a law suit against the Kodak Inc. claiming that Kodak’s simultaneous release of the Kodacolor II and the 110 camera was an attempt to monopolize the market, therefore, not permissible by law. The Court of Appeal held that Kodak had no obligation to release the contents of the new film system and the 110 camera to the competitors. As per the second principle that sought to investigate monopolization, the Court held that the Kodak violated section 2 of the Sherman Act by using its market power to gain competitive advantage(603 F.2d 263, 279-285, 304).[11]In some cases, for instance, United States v. Grinnell Corp., 384 U.S. 563 (1966,the court ruled against the antitrust ligation and the statute that requires the customer to pre-disclose information to the competitors regarding the introduction of new products in the market.

In re Independent Service Organizations Antitrust Litigation v. Xerox Corporation

Xerox Corporation (Xerox) was an independent organization as a well a defendant in XeroxCorp (2003 case), 203 f3d 1322. Xerox dealt in manufacturing and selling of the photocopier to the clients in different markets.[12] The company competed with some independent service organization(ISOs) that distributed photocopying machines to the ultimate consumers. Notably, ISOs wanted to purchase the equipment for maintenance and repair of the machines and replacement of broken parts. The Xerox was the only company which had the spare parts for replacement and diagnostic software. Since Xerox had the intellectual property right for the patented photocopier parts, the ISO sort their authority to buy their products. Furthermore, the Xerox held the copyright for the photocopier software.

In 1984, Xerox passed a policy which stopped its agents from selling the products to ISOs. LLC (CSU), an ISO sued the Xerox Company for violated section 2 of Sherman Act that directs the companies on duty to deal.[13]The plaintiff argued that Xerox wanted to eliminate competition and eventually monopolize the market. The district court dismissed the application and the case in totality arguing that the action of Xerox did not amount to refusal to deal. In their summery ruling, the judges of the district court stated that Xerox unilateral refusal to sell or license its copyrighted expression or patented invention did not contradict any provision of the antitrust law, hence, was not unlawful.[14]

Other Examples of Cases

In United States v.Microsoft Corporation, the Department of Justice accused the Microsoft Corporation of creating a monopoly by engaging in anticompetitive practices as oppose to the antitrust laws under section 2 of the Sherman Act.[15] The company mishandled the operating system and web browser sales of the Intel-based personal computers. The legal team determined whether Microsoft was allowed to bundle the flagship Internet Explorer using its Microsoft Windows Operating system. Notably, legal experts observed that the Microsoft won the browsers war because of the bundling together of the Internet Explorer. The Window users had a copy of Internet Explorer, thus, interfering with their operation.[16] Furthermore, the action of the Microsoft Company restricted the competition in the web browsers.

Although Microsoft argued that the merging of the Windows and Internet Explorer was meant to promote innovation and competition, some parties were aggrieved by their actions. For instance, the presiding judge held that the action of Microsoft was a violation of duty to deal since some version of the Internet Explorer was still in the market. Netscape Navigator or Opera was slow and could not function well with a modem and perform the download. The charges as well determined if Microsoft attempted or manipulated the application programming system.

Impacts of Antitrust Law on Duty to Deal

Businesses across the states can choose their partners without direct control by the antitrust policies and regulations. However, on some instance, the government imposes restriction even to the monopolists on the types of the partners they choose. Lawyers argue that firms with market power occasionally attempts to go against the antitrust laws by declining to enter into business partnership with other firms. According to Ganslandt (2007), the action demonstrates how the monopolist uses its market dominance power to chase competitors away from the market[17]. Furthermore, the monopolist can deploy the same tactics to monopolize another market.  The monopolists can resist dealing with the suppliers and the customers who buy from rivals to prevent them from transacting with the competitors in the market.

Perceptibly, the lawyers from different jurisdictions across the states have presented some cases in the court which explain the instances for refusal to deal. For instance, in case of 1950, a client took monopolist Newspaper outlet in the town to the court to establish whether the latter went against the law of the land. Notably, the Newspaper refused to deal with the vendor because the business enters into a deal with the radio company to include ads during advertisement. Consequently, the Supreme Court ruled that the refusal of the Newspapers to deal with the clients who ran ads adverts in the radio station was illegal and against the law. Furthermore, the action of the Newspaper Company amounted to refusal to deal which intentionally aimed at removing the radio station from the market.

Moreover, stakeholders and legal experts argue that the most unresolved antitrust law in the duty of the monopolistic companywith regard to dealing with its competitors. According to the antitrust law, the firm has no duty to deal with its market rivals. In case a firm imposes an obligation against dealing with the customer, then the firm shall have operated contrary to the statutory obligations of the antitrust rules. International best practices and the prescribed standard laws require that companies operating contrary to stated antitrust laws be taken to the court and charged with the antitrust liability.[18]  For instance, in some previous cases, the court imposed liability to a firm that refused to sell goods to his competitors thereby limiting the free flow of goods in the market. Furthermore, the court commanded the company which accidentally stops to conduct business with its competitors to explain the reason for its policies or face the law.

In the United States, some industries are under the strict regulation of the antitrust laws and the authority requires all firms to operate in non-discriminatory terms with other businesses. The antitrust laws protect the businesses of competitors and potential market players with verse interest in the same field. According to the statutory obligations which are spelled out in the section 2Sherman Act, the local, state and federal urgency has the mandate to enforce the law and ensure complete compliance, particularly, from the monopolists. Under the regulatory schemes, the antitrust laws do not impose additional duties for the firms that are obliged to share the assets with its competitors.[19]

For instance, in a case which involved a local telephone company; the plaintiff wanted the firm to provide access to its system which reasonably included advisory and support services to the new companies with interest in the market. The potential companies wanted to venture into the new market forlocal phone services.  However, United States Supreme Court dismissed the case arguing that the antitrust laws as constituted doe not provide additional duties contrary to those spelt out by a comprehensive set of regulations.

Application of Antitrust Law on Refusal to Deal

The application of the antitrust laws to different situation of refusal to deal with competitors continues to sparks debate among legal experts. From the economic perspectives, experts argue that if the monopolist were forced to share some skills and confidential information regarding the production of certain products to the competitors, the consumers are likely to benefit. To elaborate, the competitor can apply the acquired knowledge to produce different and better products that will eventually earn greater domestic income. On the contrary, if the monopoly were forced to share the information, they will not only lose their right to operate in the market but also experience reduced time and resources to innovate.  Furthermore, the aspiration of the firm regarding future investment and prosperity may face serious threats, thus, minimizing their overall returns. Therefore, in case the industry players agree to share the information to the competitors, the Court must define the need for the sharing, the price of the product, and the terms of the deal.

Evidently, Panelists and commentators have come together to review the law regarding the unilateral and unconditional refusal to deal with the competitors. In particular, the scholars analyze the legal and economic implications of the antitrust laws and the fact that the unilateral and unconditional refusal to deal violates the section 2 of the Sherman Act.[20] Notably, the scholars strive to correct the fact that the antitrust laws do not focus specifically on refusal to deal but as well address the economic and competitive consequences of duty to deal.  The companies engaging in the unilateral and unconditional refusal to deal with the rival violate the basic principles and regulation found under section 2.[21] However, the company that agrees to sell its products to the rival must carry out the activities with strict conformity withthe antitrust laws such as charging reasonable prices. Furthermore, the client must observe the essential-facilities doctrine in law.

Importantly, legal experts discuss the recent jurisprudence and academic policies on unilateral and unconditional refusal to deal with the rival based of different principles. In the first principle, scholars argue that the antitrust law neither restrict nor prevent the rights of the individual to choose the rival firm with whom they will deal. Second, the antitrust laws protect all the competitive processes to preserve the interest of the consumers in the market. The third principle explains the short-term and long-term impacts of compelling the firm to deal with its competitors. To elaborate, compelling the firms to deal with the rivals will positively influence the short-term static competition.[22] Nevertheless, in the long-run, the initiative will likely eliminate or diminish the incentives for the firm to invest in the future activities. Lastly, the antitrust enforcers such as judges and jurists must not get ill-equipped while acting on the industry regulators and deciding the terms for the firms when selling the products.

Notably, the application of the antitrust laws that requires the monopolist to deal with the competitors can create adverse tension in the dynamic and static welfare considerations.  In the first principle, the regulatory authority can force the monopolist to deal with the rival company. The consumers are likely to benefit from short-term interactions with the sellers and buy the products at reduced prices. According to Fox(2002), short-term static benefits are likely to come at high cost resulting in long-term inefficiencies and diminution dynamics.[23]The law in some occasions can influence the businesses contrary to the theory of development. Economic experts argue that innovation creates a platform for satisfying the consumer demand and lowering the costs. To elaborate, innovation drives the economic growth, thus, improves the consumers’ welfare. Therefore, policies and regulations that diminish incentive to innovate createan impediment to development and harm the welfare of the consumers. Notably, the antitrust policies enhance opportunity for the firms to create enough market surpluses through its investment, foresight, industry and innovation.

Remedies for the Refusal to Deal

Analysts provide different versions in which forcing a firm into a deal with rival companies has the backing of the law. Furthermore, the scholars argue that the firm must consider the superiority of the investment both at present and in the future. The firms usually view the investment as superior and downplay the requirement by the regulatory authority to share their production contents. The law enforcers acting within the jurisdictions of the antitrust law deploy refusal to license the intellectual property as remedy for the refusal-to-deal claims(Pitofsky, 2000).[24] Committee of legal experts of the Department of FTC issued report regarding the application of the antitrust liability for the refusal to license the patents. Scholars argue that the antitrust enforcement and intellectual property must not be subject to the outcome of the refusal-to-deal.

Since the refusal to deal has direct negative impacts on consumers in the long run, the Court must strictly work within the confine of antitrust law to regulate prices and terms of operations. The panelists, from their research, observed that judges, jurists and the antitrust law enforcers are poor in ensuring successful protection of consumers’ right. In some cases, the courts ruled in favor of the refusal to deal despite the rising concerns from different legal experts. For instance, the Court in Trinko ruled that the right to refusal to deal with competitors in not unqualified.[25] Furthermore, the Court reserved that the refusal to sharing of information with other firms can constitute anticompetitive conduct and violation of the regulations. The panelists made an assertions regarding a per se rule of legality which may fail to prevent the anticompetitive conduct, thus, leading to regulation in specific sectors. Therefore, otherwisetheir action shall amount to deliberate refusal to allow competition.

 

 

 

 

 

References

Areeda, P. (1989). Essential facilities: an epithet in need of limiting principles. Antitrust Lj, 58, 841.

Fox, E. M. (2002). What is harm to competition? Exclusionary practices and anticompetitive effect. Antitrust Law Journal, 70(2), 371-411.

Ganslandt, M. (2007). Chapter 7 Intellectual Property Rights and Competition Policy. In Intellectual Property, Growth and Trade (pp. 233-261). Emerald Group Publishing Limited.

Kodak v. Berky Photo 603 f2d 263 (1979).

Lorain Journal Co. v. United States, 342 U.S. 143 (1951)

Moran, P. H. (2003). The Federal and Ninth Circuits Square Off: Refusals to Deal and the Precarious Intersection Between Antitrust and Patent Law. Marq. L. Rev., 87, 387.

Microsoft (2001), 253 f3d 34,

Page, W. H. (2009). Mandatory Contracting Remedies in the American and European Microsoft Cases. Antitrust Law Journal, 75(3), 787-809.

Pitofsky, R. (2000). Challenges of the New Economy: Issues at the intersection of Antitrust and Intellectual Property. Antitrust LJ, 68, 913.

United States v. Microsoft Corporation 253 F.3d 34 (D.C. Cir. 2001)

Werden, G. J. (2005). Identifying exclusionary conduct under Section 2: The no economic sense test. Antitrust Lj, 73, 413.

XeroxCorp (2003 case), 203 f3d 1322

[1]Kodak v. Berky Photo 603 f2d 263 (1979).

 

[2]Kodak v. Berky Photo 603 f2d 263 (1979).

[3]Kodak v. Berky Photo 603 f2d 263 (1979).

 

[4]Kodak v. Berky Photo 603 f2d 263 (1979).

[5]Lorain Journal Co. v. United States, 342 U.S. 143 (1951)

[6]Lorain Journal Co. v. United States, 342 U.S. 143 (1951)

 

[7]Lorain Journal Co. v. United States, 342 U.S. 143 (1951)

[8]Lorain Journal Co. v. United States, 342 U.S. 143 (1951)

[9] Kodak v. Berky Photo 603 f2d 263 (1979)

[10] Kodak v. Berky Photo 603 f2d 263 (1979).

[11] Kodak v. Berky Photo 603 f2d 263 (1979).

[12]XeroxCorp (2003 case), 203 f3d 1322

[13]XeroxCorp (2003 case), 203 f3d 1322

[14]XeroxCorp (2003 case), 203 f3d 1322

[15] Microsoft (2001), 253 f3d 34,

 

[16]Areeda, P. (1989). Essential facilities: an epithet in need of limiting principles. Antitrust Lj, 58, 841.

[17]Ganslandt, M. (2007). Chapter 7 Intellectual Property Rights and Competition Policy. In Intellectual Property, Growth and Trade (pp. 233-261). Emerald Group Publishing Limited.

 

[18]Areeda, P. (1989). Essential facilities: an epithet in need of limiting principles. Antitrust Lj, 58, 841.

[19]Ganslandt, M. (2007). Chapter 7 Intellectual Property Rights and Competition Policy. In Intellectual Property, Growth and Trade (pp. 233-261). Emerald Group Publishing Limited.

 

[20]Fox, E. M. (2002). What is harm to competition? Exclusionary practices and anticompetitive effect. Antitrust Law Journal, 70(2), 371-411.

[21]Fox, E. M. (2002). What is harm to competition? Exclusionary practices and anticompetitive effect. Antitrust Law Journal, 70(2), 371-411.

[22]Moran, P. H. (2003). The Federal and Ninth Circuits Square Off: Refusals to Deal and the Precarious Intersection Between Antitrust and Patent Law. Marq. L. Rev., 87, 387.

 

[23]Pitofsky, R. (2000). Challenges of the New Economy: Issues at the intersection of Antitrust and Intellectual Property. Antitrust LJ, 68, 913.

 

[24]Pitofsky, R. (2000). Challenges of the New Economy: Issues at the intersection of Antitrust and Intellectual Property. Antitrust LJ, 68, 913.

[25]Werden, G. J. (2005). Identifying exclusionary conduct under Section 2: The no economic sense test. Antitrust Lj, 73, 413.

 

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