Federal Circuit Closes the Door on Antitrust Refusal to Deal Claim

© Copyright 2000.  All Rights Reserved.

 In a striking victory for intellectual property owners, the Federal Circuit has recently ruled that holders of intellectual property have a presumptive right to refuse to sell or license products incorporating that property to competitors without fear of violating the antitrust laws.  In In re: Independent Service Organizations Antitrust Litigation (CSU et al. v. Xerox Corporation), 203 F.3d 1322,(1) 2000 WL190351 (Fed. Cir.  February 17, 2000), the Federal Circuit rejected a claim brought by an independent service organization ("ISO") that Xerox's refusal to sell patented replacement parts  and copyrighted service manuals for its copiers violated the antitrust laws.

The case had a lengthy procedural history and involved allegations somewhat similar to those addressed by the Supreme Court in its seminal 1992 decision in Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451, 112 S. Ct. 2072 (1992) ("Kodak").  As in Kodak, a market for service of Xerox's copiers had developed independent of the sale of those copiers; a number of independent organizations competed with Xerox for the service of those copiers even though they did not themselves manufacture copiers.  Xerox implemented several policies allegedly to respond to this competitive threat.   In particular, CSU claimed that Xerox refused to sell certain key replacement parts to ISOs (or sold them at substantially increased prices) and refused to provide the ISOs with copyrighted service manuals and diagnostic software.  203 F.3d at ____; 2000 WL 190351 at *2-3.

The district court granted summary judgment in Xerox's favor and dismissed CSU's antitrust claims, holding that a patent or copyrightholder's unilateral refusal to sell or license its intellectual property presumptively does not constitute unlawful exclusionary conduct.  CSU appealed that decision to the Federal Circuit.


Significantly, the Federal Circuit accepted jurisdiction over CSU's antitrust claim, based primarily upon its earlier decision in Nobelpharma AB v. Implant Innovations, Inc., 141 F.3d 1059 (Fed. Cir. 1998).  Nobelpharma involved an antitrust counterclaim to a patent infringement suit in which the only exclusionary conduct alleged was the lawsuit itself.  In that case, the Federal Circuit had observed that, although it would normally look to the law of the regional Circuit Court of Appeals in situations involving nonpatent issues,(2) this claim was properly before the Federal Circuit because "whether conduct in procuring or enforcing a patent is sufficient to strip a patentee of its immunity is to be decided as a question of Federal Circuit law."  141 F.3d at 1068. With little discussion, the court expanded this concept to include antitrust claims arising from a refusal to sell patented parts, primarily because of the perceived need to promote uniformity regarding the scope of patent protection.  203 F.3d at ___, 2000 WL 190351 at *2.  In contrast, the Federal Circuit held that "consideration of the antitrust claim based on Xerox's refusal to sell or license its copyrighted manuals or software is under Tenth Circuit Law."  Id. at *2.

With the matter of jurisdiction out of the way, the Federal Circuit began its substantive analysis of both the patent and copyright components of CSU's refusal to deal claim.

The Substantive Decision

With respect to Xerox's refusal to sell patented parts, the Federal Circuit began its analysis with the now familiar litany that "intellectual property rights do not confer a privilege to violate the antitrust laws".  203 F.3d at ___, 2000 190 351 at *2.  In its next breath, however, the Federal Circuit circumscribed this notion by observing that "a patent alone does not demonstrate market power."  The court relied in part upon § 271(d) of the Patent Code and in part upon the survey of caselaw appearing in the Justice Department's Antitrust Guidelines for Licensing Intellectual Property for this principle.  Id.

Framed in this fashion, the court concluded that Xerox's refusal to sell patented parts for its copiers could not give rise to antitrust liability unless either: (1) Xerox's acquisition of the patents involved willful fraud on the Patent Office, within the meaning of Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172, 86 S. Ct. 347 (1965); or (2) Xerox's infringement counterclaim was a "mere sham to cover what is actually no more than an attempt to interfere directly with the business relationships of a competitor."  203 F.3d at ____, 2000 WL 190351 at *3, citing Eastern Railway President's Conference v. Noerr Motor Freight, Inc., 365 U.S. 127, 81 S. Ct. 523 (1961).  In order to demonstrate that an infringement suit is a "mere sham," a plaintiff must show that the suit "was both objectively baseless and subjectively motivated by a desire to impose collateral, anticompetitive injury . . . ."  Id.  Since Xerox's infringement counterclaim was clearly meritorious, and there was no allegation of fraud on the Patent Office, the court affirmed summary judgment in Xerox's favor.

In its analysis, the Federal Circuit expressly rejected CSU's reliance on a footnote in the Supreme Court's decision in Kodak that "the Court has held many times that power gained through some natural and legal advantage such as a patent can give rise to liability if a seller exploits his dominant position in one market to expand his empire into the next."  504 U.S. at 480, n. 29.  The Federal Circuit distinguished this footnote on the grounds that it was made in the context of a tying claim, as opposed to a simple refusal to deal claim.(3)  The court also rejected the Ninth Circuit's (on remand)  interpretation of this footnote as allowing an inquiry into the patentholder's subjective motivation for refusing to sell patented parts; the court stated that a patentholder's alleged anticompetitive intent is irrelevant even if its actions exclude competition in multiple antitrust markets.  203 F.3d at ______, 2000 WL 190351 at *4-5.  They key factor, voiced the court, was whether the patentholder was acting "within the scope of the statutory patent grant" regardless of whether those actions fall in multiplex antitrust markets.  Id.

With respect to the copyright component of the refusal to deal claim, the Federal Circuit Court noted that "the Tenth Circuit has not addressed in any published opinion the extent to which the unilateral refusal to sell or license copyrighted expression can form the basis of a violation of the Sherman Act."  203 F.3d at ___, 2000 WL 190351 at *6.  As a result, the Federal Circuit did a survey of other circuits that had addressed this issue, including the First Circuit (Data General Corp. v. Grumman Systems Support Corp., 36 F.3d 1147), the Fourth Circuit (Service & Training, Inc. v. Data General Corp., 963 F.2d 680), and the Ninth Circuit (Image Technical Services v. Eastman Kodak Co., 125 F.3d 1195).  The Fourth Circuit had rejected a claim of illegal tying premised solely upon a unilateral refusal to license copyrighted diagnostic software.  Similarly, the First Circuit rejected an antitrust claim based upon the unilateral refusal to license copyrighted software, explaining that "while exclusionary conduct can include a monopolist's unilateral refusal to license a copyright, an author's desire to exclude others from use of its copyrighted work is a presumptively valid business justification for any immediate harm to consumers."  36 F.3d at 1187.  The First Circuit noted that evidence that the author had acquired the copyright in an unlawful manner would suffice to rebut the presumption.  Id.

The Ninth Circuit had adopted a modified version of the First Circuit's standard.  The effect of this modification was to make it easier to rebut the business justification presumption.  Specifically, the Ninth Circuit extended the possible means of rebutting the presumption to include not only evidence of unlawful acquisition but also evidence that the assertion of copyrights "was merely a pretextual business justification to mask anticompetitive conduct."  125 F.3d at 1219.  This standard placed a premium on discovering the copyright holder's intent and state of mind.

After summarizing these competing standard, the Federal Circuit rejected the Ninth Circuit's approach in favor of the First Circuit's approach.  With little discussion or analysis, the Federal Circuit characterized the Ninth Circuit's approach as hazardous because its vagueness would essentially undermine any presumption of legitimacy associated with asserting one's rights under the copyright laws.  203 F.3d at ___, 2000 WL 19035, at *7. The court then concluded, without any discussion, that the Tenth Circuit would likely adopt the First Circuit's approach; i.e., the presumption could only be rebutted by evidence that the copyright holder acquired its rights in an unlawful manner.  As there was no evidence or assertion that Xerox had acted improperly in obtaining its copyrights, the Federal Circuit affirmed the dismissal of the copyright component of the antitrust claim.  Id.

Overall, the CSU/Xerox decision represents the culmination in a series of recent victories for intellectual property holders over putative antitrust plaintiffs.  The Federal Circuit has clearly stretched its role as arbiter of the contours of intellectual property law to the maximum.  In so doing, it has guaranteed that, for the time being, the rights of the former will hold sway over the latter in the legal arena.

1. At the time of the posting of this article, this citation had been reserved for this decision, but the advance sheets had not yet been published. Accordingly, the jump citations to F.3d have necessarily been left blank.
2. In this case, it would have been the Tenth Circuit because the case was filed in the District of Kansas.
3. The court conceded that a patentholder would also violate the patent laws by illegally tying the patented to unpatented articles.  Other courts have long recognized this principle.

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