First published in LES Insights
The Federal Circuit recently affirmed dismissal of a plaintiff’s federal antitrust claims, and its state-law claims for tortious interference and deceptive trade practices. The plaintiff had challenged restrictions that the defendant implemented in its stereolithography machines (used for rapid prototyping) that prevented the use of unauthorized materials with those machines. After a supplier of alternative materials was unable to obtain the machine manufacturer’s approval to sell authorized materials, the supplier pursued its claims in court. The Federal Circuit held that the supplier failed to show that either the machines or the materials form a distinct product market—an element necessary for the antitrust claims. The Court further held that the technological restrictions were not implemented out of spite or ill will, and that the manufacturer’s statements were not deceptive by stating that the supplier’s materials were not approved or licensed.
Manufacturers of machines that require other materials to operate (for example, printers and ink) often sell both the machines and these other materials to consumers. Often times, manufacturers would prefer to require purchasers of their machines to use only those materials supplied by the manufacturer. Such "tying" arrangements, however, may cause antitrust and other competition issues to arise. A recent case from the Federal Circuit addressed arguments that certain alleged tying restrictions applied by one manufacturer were a violation of antitrust law and gave rise to a claim of tortious interference.
In DSM Desotech, Inc. v. 3D Systems Corp.,1 the Federal Circuit affirmed the grant of summary judgment against three categories of claims brought by plaintiff DSM Desotech Inc. against defendant 3D Systems Corporation (3DS). The Federal Circuit held that Desotech failed to show genuine issues of material fact that (1) the machines or materials at issue form a distinct product market, an element necessary for its antitrust claims; (2) the manufacturer's refusal to approve a competitor's material for use with its machines was done out of spite or ill will, an element necessary to establish the competitor's tortious-interference claim; or (3) the manufacturer engaged in deceptive trade practice under the Illinois Uniform Deceptive Trade Practices Act ("UDTPA") by telling customers that the competitor's materials were not approved for use in its machines.
Desotech makes resins for use in stereolithography machines, a type of 3D printer used for rapid prototyping. 3DS makes stereolithography machines, as well as its own resins. Around 2005, 3DS began equipping some of its machines with Radio Frequency Identification ("RFID") capability, which allowed the machines to recognize resin bottles, and lock out the machine if an unapproved resin bottle is detected. 3DS approved two of Desotech's resins for use in 3DS machines. Desotech and 3DS entered into negotiations to approve additional Desotech resins. When those negotiations broke down, Desotech brought suit. Desotech's claims included (1) tying under § 1 of the Sherman Act; (2) tying under § 3 of the Clayton Act; (3) unreasonable restraint of trade under § 1 of the Sherman Act; (4) attempted monopolization under § 2 of the Sherman Act; (5) antitrust violations under the Illinois Antitrust Act; (6) a state-law claim for violation of the UDTPA; (7) tortious interference with prospective economic advantage; (8) tortious interference with contractual relations; and (9) a claim of patent infringement. At the close of fact discovery, the district court granted 3DS's motions for summary judgment regarding the antitrust claims (1-5), and the state-law claims (6) and (7). The district court entered final judgment after the parties stipulated dismissal of the remaining claims, including the patent infringement claim. Desotech appealed. The Federal Circuit retained jurisdiction over the appeal under 28 U.S.C. § 1295(a)(1) despite the dismissal with prejudice of the patent claim.
The DSM v. 3D Systems Decision
On appeal, the Federal Circuit affirmed the district court's grant of summary judgment on Desotech's antitrust claims, holding that Desotech failed to prove an independent market for stereolithography machines or resins. The Court applied the law of the Seventh Circuit, which requires economic evidence to prove the existence of a distinct market, and looked to the sufficiency of Desotech's data and analysis. The Court found, however, that "[r]ather than analyze economic data, Desotech and its expert relied on four of the Brown Shoe practical indicia." Brown Shoe was a 1962 antitrust case that analyzed the merger of two shoe companies under the Clayton Act. In weighing the vertical effects of the proposed merger—one company was primarily a manufacturer, the other primarily a retailer—the Supreme Court established several factors for defining product submarkets including: (1) distinct prices; (2) the product's peculiar characteristics and uses; (3) industry or public recognition of the submarket as a separate economic entity; and (4) sensitivity to price changes. The Federal Circuit weighed Desotech's evidence regarding the four Brown Shoe factors.
Regarding distinct prices, the Court noted that Desotech inflated the price distinction by "compar[ing] SL machines to some of the cheapest possible substitutes—3D printing machines," and "ignore[d] the evidence showing that 3DS offers a range of SL machines with a broad range of prices comparable to those of other rapid-prototyping technologies." Regarding peculiar characteristics and uses, the Court found that Desotech's arguments that 3DS's machines are more accurate and can produce larger parts than other technologies "are tenuous at best." But because the appeal came from a grant of summary judgment, the Court viewed this evidence in the light most favorable to Desotech: "Accordingly, we consider this factor as evidence of a potential distinct market for SL machines." Regarding "industry or public recognition of the submarket as a separate economic entity," the Court noted that the district court had dismissed customer testimony favorable to Desotech "because, although customers were asked about substitutes, none was asked about reasonable substitutes." The Court nevertheless found the testimony "insufficient to establish that SL machines constitute a separate market."
Regarding the final factor, "sensitivity to price changes," Desotech relied on the testimony of four customers, which it argued make up 12% of the market for stereolithography resin. The Court found, however, that this evidence failed to address the more pertinent question of what percentage of the stereolithography machine market the customers comprised. The Court further discounted this evidence because Desotech did not justify the conclusion that these purchasers were representative of purchasers at different price points. In sum, the Court found that only two out of the four Brown Shoe factors favored Desotech, and that "[g]iven the limited and tenuous nature of the evidence, . . . a reasonable jury could not find an independent market for [stereolithography] machines." The Court held similarly on the issue of whether stereolithography resins constituted an independent market.
The Court next addressed Desotech's state-law claims. The Court found that 3DS implemented its RFID and unapproved resin lockout features for the legitimate purposes of increasing sales and maintaining quality control, and was not "motivated by spite or ill will" as is required for a claim of tortious interference. Finally, the Court found that "[t]he allegedly wrongful statements about Desotech's resins not being authorized, approved, licensed, qualified, or tested all relate to 3DS's licensing and approval policy," and did not violate the UDTPA; nor did Desotech raise a genuine issue of material fact that the statements were false.
The Court accordingly affirmed the district court's grant of summary judgment on Desotech's seven claims.
Strategy and Conclusion
This case illustrates the potential difficulty of challenging tying arrangements. Challengers may need to be prepared with detailed economic data and analysis covering a wide range of capabilities and price points in the market in order to convince a court that the tying arrangement in question is sufficiently anticompetitive. That being said, the case also illustrates the potential dangers inherent in engaging in product tying and the need for careful analysis before proceeding with such marketing strategies.