In IGT v. Alliance Gaming Corporation slot machine manufacturers, IGT and Alliance Gaming Corp., Bally Gaming International, Inc., and Bally Gaming, Inc. (collectively "Bally") squared off in a high stakes contest with IGT betting on the patent system and Bally on antitrust law to win the day. In the end, both placed losing bets.
The Patent Act and Section 2 of the Sherman Act
Section 2 of the Sherman Act does not proscribe monopolies or the possession of monopoly power; rather, it only proscribes its "willful acquisition or maintenance."  In turn, willful acquisition or maintenance of monopoly power has been defined as exclusionary tactics that prevent competition on the merits "as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident."
In the U.S., a patent gives the patentee or its assignee a right for a limited period of time to exclude others from producing the patented invention. The acquisition of a patent could therefore seem to be the quintessential act of monopolization. However, because patents are a creature of statute obtaining one is not considered an act of monopolization. In addition, the power to exclude granted by the statute does not give the patentee a monopoly or market power unless there are no substitutes for the patented art. If there are no substitutes, the patent might then confer a "monopoly" during the term of the patent.
But a patent is not an impenetrable shield against antitrust scrutiny. When a patentee obtains the patent by fraud or knowingly enforces an invalid patent and excludes others through an infringement action, the putative patentee commits an act of monopolization that may be actionable as a violation of Section 2 of the Sherman Act because the patentee is asserting a monopoly to which he is not entitled. But it is not enough for the plaintiff to establish the act of monopolization. The plaintiff must also establish the other elements of a Section 2 violation, including the identification of the relevant market, a "threshold issue in any monopolization claim." Failure to do so will doom the antitrust action even if the predicate fraud is proven. IGT v. Alliance Gaming Corporation illustrates the perils of failing to adequately allege and prove the "threshold issue" -- Bally's antitrust case was dismissed even though it had adequately shown that IGT had endeavored to enforce patents it knew were invalid.
Background of the Case
IGT and Bally Gaming International ("Bally") design, manufacture, distribute and sell computerized gaming machines and systems (slot machines) to casinos. Experts for both parties agreed that slot machines are "differentiated" products, that is, close but not perfect substitutes. The different machines have many features, such as type of display, theme, cabinet design, and bonus features. The most popular type of slot machine is called a "wheel game." Wheel games incorporate a secondary bonus game with a spinning wheel. IGT owned several patents on wheel games and used the patents to block other companies from manufacturing and selling wheel games. The patents allowed IGT command a premium price for its wheel games.
Bally also designs, manufactures, distributes and sells slot machines. When Bally began selling wheel games, IGT sued for patent infringement. As is not unusual, Bally countersued alleging that the infringement lawsuit was an attempt to monopolize the "wheel game market" by asserting patents that IGT knew to be invalid, unenforceable and not infringed. Ultimately, the district court, on Bally's motion for summary judgment, held that the wheel patents were, in fact, invalid and not infringed. The Federal Circuit affirmed.
At least for the purposes of summary judgment, the finding of invalidity and non-infringement provided Bally with the "fraud" predicate it needed as part of its monopolization claim. Bally's antitrust case folded, however, when Bally placed a bet on the wrong market definition. On a subsequent summary judgment motion filed by IGT, the district court dismissed Bally's antitrust claim holding that "the undisputed facts are insufficient to establish the existence of a relevant antitrust market in wheel games," even though IGT's patents were invalid and not infringed. The Federal Circuit affirmed with one judge dissenting.
Bally's Argument that Wheel Games Are a Distinct Market
Bally argued that market definition is a question for the fact finder and contended that wheel games are a distinct market because (i) IGT, as part of its proof of patent damages, had argued that there were no non-infringing substitutes for its wheel games and (ii) IGT was forced to lower its price for wheel games when Bally introduced its wheel models. This evidence was enough to persuade the dissent.
Bally offered evidence that, when it introduced wheel games into the market, IGT was required to reduce its prices, and that evidence included the amount by which those prices were reduced when competitive wheel games became available. That is precisely the kind of evidence that shows the effect of the allegedly monopolistic conduct on the market.
The Majority's Rationale
The major countered that, as with any other fact issue, the court can grant summary judgment on market definition if the parties do not dispute the material facts. In conducting an antitrust analysis, both the courts and the competition agencies place great weight on party admissions. Here, both parties provided un-rebutted evidence that wheel games competed with all other types of gaming machines on a casino floor. "Both Bally and IGT provided extensive evidence that wheel games compete in the broader gaming machine market." Bally's corporate designee on market definition, as well as its former VP of business development, its Senior VP of Domestic Sales and its Senior VP of Product Development each testified that wheel games "competed with everything that's on the floor ... against everything there." The district court, therefore, correctly concluded from this evidence that "casinos mix and match [different types of slot machines] to maximize floor-space revenue generation."
Bally next argued that even though all slot machines compete against each other, wheel games were a submarket. As support for this proposition, Bally argued that it was undisputed that IGT reduced the price of its wheel games in response to the entry of Bally's wheel games. The majority conceded this point, but found it irrelevant as it only proves that different brands of wheel games compete against each other; it does not prove that non-wheel games are not economic substitutes for wheel games. IGT's price reduction was "the inevitable result of competition among differentiated products following the entry of a substitute to the product at issue."
Bally also incorrectly argued that the price decrease satisfied the Horizontal Merger Guidelines' "small but significant and non-transitory increase in price test" ("SSNIP"). Even if IGT charged supracompetitive prices for its wheel games, which the Federal Circuit conceded, its prices do not represent a "SSNIP." The SSNIP test requires a baseline price from which an increase is then calculated. Bally, however, did not proffer any evidence establishing a baseline price. Moreover, if the supracompetitive price is the baseline, then Bally had only "shown that prices decreased, not that they increased."
Finally, Bally failed to provide evidence of "practical indicia" of a wheel game submarket. Again, according to the Federal Circuit, it was undisputed that wheel games do not require unique production facilities or specialized vendors versus ordinary gaming machines; and wheel games do not have distinct customers - both wheel and non-wheel games are purchased by casinos. The Federal Circuit agreed that some consumers prefer wheel games over non-wheel games. However, this does not support the notion that there is an "industry perception" that wheel games are a separate market. Rather this fact "is in harmony with the rest of the evidence that gaming machines are a differentiated market and that wheel games compete with all gaming machines to accommodate the spectrum of player preferences." Thus, given that all slot machines on the floor compete against each other "a market limited to wheel games would not encompass all economic substitutes."
Bally played one final card. In order to prove patent damages, IGT had argued that there were no non-infringing technological substitutes for its wheel games and that every infringing game sold represented a loss of profits to IGT. Bally argued that this proved that IGT admitted that "non-wheel games are not substitutes for wheel games."  Once again, Bally had the losing hand. The fact that "there were no non-infringing technological substitutes cannot be read to mean that there were no economic substitutes." IGT's damages expert had merely assumed, for the purposes of calculating patent damages, that the market was co-extensive with the patent. For antitrust purposes, however, such an assumption would be economically unreasonable.