On June 22, 2015, the US Supreme Court in Kimble v. Marvel Entertainment LLC declined on stare decisis grounds to overturn a criticized intellectual property precedent on royalty payments. In both the majority and dissenting opinions, the justices said that their respect for precedent would have been less had it been one interpreting the Sherman Antitrust Act. These comments prompt the question: Which old and criticized antitrust precedent might be subject to reversal?
Kimble had a patent on a device that allowed a user to shoot webs—really, just pressurized foam string—from the palm of his hand. Kimble and Spider-Man’s owner, Marvel, reached an agreement that allowed Marvel to sell such toys in exchange for a lump sum payment to Kimble plus a 3% annual royalty that had no end date. After years of payments, Marvel discovered Brulotte v. Thys Co., a 1964 Supreme Court case that had read the patent laws to prevent a patent owner from receiving royalties for sales made after the patent’s expiration. The Court considered such arrangements illegal per se because they were attempts to extend the patent’s monopoly beyond the patent’s life. Relying on that precedent, Marvel convinced lower courts that its payments to Kimble should stop with the 2010 expiration of the patent.
Kimble asked the Court to overturn Brulotte and replace it with a rule of reason analysis. Six justices declined that invitation, saying the long-standing precedent was based on an interpretation of patent statutes that Congress could, but had declined to, amend and that contracting parties might have relied on. The dissent would have overturned Brulotte because its rationale was based on now-discredited antitrust policy, not statutory interpretation.
Perhaps more interesting to antitrust practitioners, the two opinions discussed the lower level of respect for the Court’s antitrust precedents. As the majority opinion pointed out, Congress “intended [the Sherman Act’s] reference to ‘restraint of trade’ to have ‘changing content,’ and authorized courts to oversee the term’s ‘dynamic potential.’” As a result, the Court has “felt relatively free to revise our legal analysis as economic understanding evolves.” The dissent agreed, saying “we have been more willing to reexamine antitrust precedents because they have attributes of common-law decisions.”
Given that seeming-unanimity on the weakness of antitrust precedents, the next obvious question for antitrust lawyers is which antitrust precedents might be overturned. One perennial candidate, raised by many over many years, is the so-called baseball exemption. In 1922’s Federal Baseball Club v. National League, the Court found that the “business [of] giving exhibitions of base ball” did not constitute interstate commerce and so was not reached by the Sherman Act. Commentators and even subsequent Court opinions have termed the decision an “anomaly” (though refusing to overturn it). Even retired Justice Stevens criticized the breadth of the exemption in a recent speech. In reaching this conclusion, Stevens relied on his experience on the Court, his early representation of the former A’s owner, and his work for Congress in the 1950s as it studied the exemption. Yet, while lower court decisions and The Curt Flood Act of 1998 have narrowed its scope, the exemption is still very much alive and has been used recently to cut short actions involving both the Cubs and the A’s. The Court could revisit the exemption yet again if it accepts the cert petition from the City of San Jose in the case involving the latest possible relocation of the A’s franchise. The Court might well decide that this exemption, having been implicitly blessed by Congress over many years, meets the Spider-Man standard.
Another candidate is the per se rule against tying, the only remaining vertical restraint to which the per se rule applies. In a tying arrangement, a seller agrees to sell one product (“tying product”) but only on the condition that the buyer also purchase a different product (“tied product”). Early Court cases applied the per se rule and described the arrangements harshly, saying they “serve hardly any purpose beyond the suppression of competition.” More recently, the Court has recognized that tying might be pro-competitive in certain circumstances. It has retained a rule that it calls per se; however, unlike per se rules against horizontal price fixing and the like, the tying per se rule requires proof of the seller’s power in the market for the tying product. If an appropriate case reaches the Court, it might complete the evolution of vertical restraints analysis and make all tying arrangements subject only to the rule of reason.
Finally, the Court’s 1963 Philadelphia National Bank opinion has faced severe criticism. In that case, the Court found that a merger that “produces a firm controlling an undue percentage share of the relevant market, and results in a significant increase in the concentration of firms” is presumptively anticompetitive. While that presumption has been significantly weakened in the various iterations of the DOJ/FTC Horizontal Merger Guidelines, it still plays a role at least when the agencies challenge a merger in court. FTC Commissioner Wright has called it bad law based on outdated economics and has criticized its continued use by the agencies. DOJ Assistant Attorney General Bill Baer, on the other hand, has called the presumption a useful tool for the agencies when challenging mergers in court. Because so few merger cases go beyond the preliminary injunction standard, let alone all the way to the Supreme Court, this precedent might remain safe.
The Schiff Hardin Antitrust and Trade Regulation Group has advised on all these issues. To discuss how these issues might relate to your business, contact Steve Cernak, Bill Hannay, or any of the attorneys in the Group.
This article was republished in Law360.