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C. Vertical Price Fixing and Copyrighted Works

C. Vertical Price Fixing and Copyrighted Works

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490 Antitrust Law and Intellectual Property Rights

in the licenses they issued fixed minimum admission prices which the exhibitors

agreed to charge, whether the rental of the film was a flat amount or a percentage of

the receipts. It found that substantially uniform minimum prices had been established in the licenses of all defendants. Minimum prices were established in master

agreements or franchises which were made between various defendants as distributors and various defendants as exhibitors and in joint operating agreements made

by the five majors with each other and with independent theatre owners covering the operation of certain theatres. By these later contracts minimum admission

prices were often fixed for dozens of theatres owned by a particular defendant in a

given area of the United States. Minimum prices were fixed in licenses of each of

the five major defendants. The other three defendants made the same requirement

in licenses granted to the exhibitor-defendants. ***

The District Court found that two price-fixing conspiracies existed-a horizontal

one between all the defendants, a vertical one between each distributor-defendant

and its licensees. The latter was based on express agreements and was plainly established. The former was inferred from the pattern of price-fixing disclosed in the

record. We think there was adequate foundation for it too. It is not necessary to

find an express agreement in order to find a conspiracy. It is enough that a concert

of action is contemplated and that the defendants conformed to the arrangement.

[citation omitted] That was shown here.

On this phase of the case the main attack is on the decree which enjoins the

defendants and their affiliates from granting any license, except to their own theatres, in which minimum prices for admission to a theatre are fixed in any manner or by any means. The argument runs as follows: United States v. General Electric Co., 272 U.S. 476, held that an owner of a patent could, without violating the

Sherman Act, grant a license to manufacture and vend and could fix the price at

which the licensee could sell the patented article. It is pointed out that defendants

do not sell the films to exhibitors, but only license them and that the Copyright Act,

[citation omitted] like the patent statutes, grants the owner exclusive rights. And

it is argued that if the patentee can fix the price at which his licensee may sell the

patented article, the owner of the copyright should be allowed the same privilege.

It is maintained that such a privilege is essential to protect the value of the copyrighted films.

We start, of course, from the premise that so far as the Sherman Act is concerned, a price-fixing combination is illegal per se. [citation omitted] We recently

held in United States v. United States Gypsum Co., 333 U.S. 364, that even patentees could not regiment an entire industry by licenses containing price-fixing

agreements. What was said there is adequate to bar defendants, through their

horizontal conspiracy, from fixing prices for the exhibition of films in the movie

industry. Certainly the rights of the copyright owner are no greater than those of

the patentee.

Nor can the result be different when we come to the vertical conspiracy between

each distributor-defendant and his licensees. The District Court stated in its findings [citation omitted]: ‘In agreeing to maintain a stipulated minimum admission



Vertical Price Restraints and Intellectual Property 491



price, each exhibitor thereby consents to the minimum price level at which it will

compete against other licensees of the same distributor whether they exhibit on the

same run or not. The total effect is that through the separate contracts between the

distributor and its licensees a price structure is erected which regulates the licensees’

ability to compete against one another in admission prices.’

That consequence seems to us to be incontestable. We stated in United States

v. United States Gypsum Co., that ‘The rewards which flow to the patentee and

his licensees from the suppression of competition through the regulation of an

industry are not reasonably and normally adapted to secure pecuniary reward for

the patentee’s monopoly.’ The same is true of the rewards of the copyright owners

and their licensees in the present case. For here too the licenses are but a part of

the general plan to suppress competition. The case where a distributor fixes admission prices to be charged by a single independent exhibitor, no other licensees or

exhibitors being in contemplation, seems to be wholly academic, as the District

Court pointed out. It is, therefore, plain that United States v. General Electric Co.,

as applied in the patent cases, affords no haven to the defendants in this case. For a

copyright may no more be used than a patent to deter competition between rivals

in the exploitation of their licenses. [citation omitted] ***

Comments and Questions

1. Should movie studios or distributors be able to set the price that theaters

charge moviegoers? Why or why not?

One antitrust concern is that higher-priced theaters in a particular city might

attempt to convince their distributors to impose price restrictions (i.e., to set the

ticket prices) in order to prevent discount theaters from charging a lower price.

The Supreme Court addressed this issue in Interstate Circuit v. U.S., 306 U.S. 208

(1939), in which a group of exhibitors convinced distributors to refuse to license

their movies to theaters that either charged lower prices or showed high-quality

movies as part of a double feature.

The Interstate Circuit Court inferred an agreement among the movie distributors because the exhibitors had openly invited all of the distributors to participate

in the scheme to discipline discount theaters and the distributors each imposed

the same price restrictions on discount theaters, despite the fact that it would have

been economically irrational absent an agreement among distributors. The Court

further indicated that an agreement among distributors to license their movies

only to theaters that charged a certain price—and did not show double features—

violated the Sherman Act.

The case indicates how vertical price fixing can be part of a larger price-fixing

scheme that is horizontal in nature.

2. The Interstate Circuit case shows why a movie distributor might set a minimum resale price. Why might movie distributors—or other manufacturers—set a

maximum resale price?

If the movie distributors had tried to set a maximum ticket price, how might

the exhibitors attempt to circumvent the restriction?



492 Antitrust Law and Intellectual Property Rights

3. Despite an antitrust decree in the Paramount case that precludes movie distributors from setting ticket prices, uniform pricing remains the norm in American

movie theaters, which charge the same price for all movies shown regardless of

the variations in quality, demand, and lengths of movies. Professor Barak Orbach

explains how this may be a result of the Paramount decree in Antitrust and Pricing

in the Motion Picture Industry, 21 Yale J. on Reg. 317 (2004).

For more on the antitrust history of the motion picture industry, see Alexandra

Gil, Breaking the Studios: Antitrust and the Motion Picture Industry, 3 N.Y.U. J. L. &

Liberty 83 (2008).

4. The Paramount Court states: “Certainly the rights of the copyright owner are

no greater than those of the patentee.” United States v. Paramount Pictures, Inc.,

334 U.S. 131, 143 (1948). Should they be?



LucasArts Entertainment Co. v. Humongous Entertainment Co.

870 F.Supp. 285 (N.D. Cal. 1993)



WALKER, District Judge.

This suit arises as a result of an agreement between Electronic Arts, Inc. (“Electronic Arts”) and defendant Humongous Entertainment Company (“Humongous”), granting Electronic Arts the right to distribute Humongous’ products,

including a computer video game entitled Putt Putt Joins the Parade. Humongous’ principals are former employees of plaintiff LucasArts Entertainment

Company (“LucasArts”), who created a software tool called the Script Creation

Utility for Maniac Mansion (“SCUMM”) System. The SCUMM System is a tool

used in the development of computer video games. LucasArts subsequently

licensed the SCUMM System to Humongous under limited terms and conditions.

Among other things, the license agreement states that Humongous may not sell its

games which utilize the SCUMM program to any third party distributor other than

LucasArts for less than a certain price and that Humongous must verify its compliance with the licensing agreement at LucasArts’ request. The precise language as

outlined in section A.1.1.1(b) of the license agreement is as follows:

For a period of three (3) years commencing on the Effective Date, [Humongous] may

not sell any product it develops using the SCUMM System to any third party distributors

in North America other than [LucasArts] for less than seventy-five percent (75%) of the

six month rolling average wholesale price, net of any promotional allowances, at which

such products are re-sold to North American retailers (current examples of which

include Software, Etc.; Babbages; and Electronic Boutique). [LucasArts] reserves the

right to verify such wholesale price upon [LucasArts’] request in writing to Licensee.

After such three year period, the foregoing price restriction will be inapplicable.



LucasArts brings this suit alleging, among other things, that Humongous violated the terms of the licensing agreement by (1) failing to follow the terms of the

price restriction provision ***. Humongous and Electronic Arts deny such allegations and bring counterclaims for violation of federal and state antitrust laws ***.



Vertical Price Restraints and Intellectual Property 493



*** Electronic Arts moves for partial summary judgment on its antitrust claims

on the grounds that: (1) the price restriction in section A.1.1.1(b) of the Licensing

Agreement between LucasArts and Humongous is per se illegal and unenforceable;

(2) the restriction constitutes a per se illegal and unenforceable boycott; ***

Electronic Arts moves for partial summary judgment on its antitrust counterclaims, which allege that section A.1.1.1(b) constitutes an illegal price fixing agreement and an illegal boycott in violation of the Sherman and Cartwright Acts.*1Further,

Electronic Arts contends that LucasArts’ enforcement of section A.1.1.1(b) constitutes copyright misuse, thereby preventing enforcement of LucasArts’ copyright.

In support of its argument that section A.1.1.1(b) constitutes a per se illegal

price fixing agreement, Electronic Arts cites some of the antitrust laws’ greatest

hits: United States v. Socony-Vacuum Oil Company, 310 U.S. 150, 223 (1940);

United States v. New Wrinkle, Inc., 342 U.S. 371, 377 (1952) (“[P]rice fixing in

commerce, reasonable or unreasonable, has been considered a per se violation

of the Sherman Act.”); Northern Pacific Railway Co. v. United States, 356 U.S. 1,

5 (1958) (certain practices, including price fixing, “are conclusively presumed to

be unreasonable and therefore illegal without elaborate inquiry as to the precise

harm they have caused or the business excuse for their use”); Arizona v. Maricopa County Medical Society, 457 U.S. 332, 351 (1982) (the anticompetitive potential inherent in all price-fixing agreements justifies their facial invalidation even if

procompetitive justifications are offered for some).

LucasArts correctly notes that none of these cases involve intellectual property

rights of the type here and citation to these cases merely begs the principle question in this case; namely, whether section A.1.1.1(b) falls outside the safe harbor

accorded to intellectual property owners by the Supreme Court in United States v.

General Electric, 272 U.S. 476 (1926).

In General Electric, the Supreme Court held that the statutory right of intellectual property owners to forbid entirely sales by licensees necessarily includes the

power to restrict the prices at which such licensees may sell licensed material:

The patentee may make and grant a license to another to make and use the patented

articles but withhold his right to sell them * * *. [If the licensee] sells [the patented

articles,] he infringes the right of the patentee, and may be held for damages and

enjoined. If the patentee goes further, and licenses the selling of the articles, may

he limit the selling by limiting the method of sale and the price? We think he may

do so provided the conditions of sale are normally and reasonably adapted to

secure pecuniary reward for the patentee’s monopoly * * *. It would seem entirely

reasonable that he should say to the licensee, “Yes, you may make and sell articles

under my patent but not so as to destroy the profit that I wish to obtain by making

them and selling them myself.”



Id. at 490.

Applying the foregoing principle to the case at bar, the court finds that the

price restriction found in section A.1.1.1(b) of the Licensing Agreement does not

*



Editor: The Cartwright Act is California’s state antitrust statute.



494 Antitrust Law and Intellectual Property Rights

violate the Sherman or Cartwright Acts because it is “reasonably adapted to secure

pecuniary reward for the [LucasArts’ lawful] monopoly.”

In any event, the per se rule is reserved only where experience has demonstrated that anticompetitive effects predictably and regularly flow from a particular

practice, [citation omitted] or where the potential harm to competition is “so clear

and so great,” [citation omitted] or where the challenged activity would almost

always tend to have a predominantly anticompetitive effect, [citation omitted].

The present case involves a licensing provision which is plainly procompetitive,

namely the licensing of SCUMM code to Humongous so that Humongous can

create more computer video games. There can be no serious question that such

licensing activities foster consumer welfare.

Limitations imposed by the antitrust laws are thought to improve consumer welfare because they force firms to increase output from monopolistic to competitive

levels. This is based upon the notion that firms face increasing marginal costs (i.e., the

laws of diminishing returns). If returns to scale are increasing, however (i.e., falling

marginal costs), the competitive model upon which the antitrust laws are premised

is stood on its head and “the role of imperfect competition plays.” [citation omitted] Where “imperfect competition” provides the economic standard, the antitrust

laws’ restrictions against extension of monopoly should not apply. Here, the high

initial costs of programming code compared to the relatively low cost of producing

copies of the code, make application of traditional antitrust concepts inappropriate.

In such a setting, marginal costs decline with increases in production rather than

the other way around, the situation to which the antitrust laws apply. As such, the

application of the per se rule in judging the legality of the license agreement does

not comport with the principles underlying the establishment of the per se rule.

Even if the foregoing were not true, section A.1.1.1(b) runs afoul of the

antitrust laws only if it forecloses Electronic Arts from competition. It does not.

Electronic Arts relies on Northwest Wholesale Stationers, Inc. v. Pacific Stationery and Printing Co., 472 U.S. 284 (1985), correctly reading that decision as

barring unreasonable concerted refusals to deal or group boycotts. In this case,

however, the court finds nothing unreasonable in LucasArts, a holder of a valid

copyright in the SCUMM System Code, imposing on its licensee resale price restrictions on the copyrighted material or material derived therefrom. Such conduct in

no way forecloses Electronic Arts from offering competing copyrighted material

if it produces such material or licenses it from others. In short, competition can

suffer no injury from section A.1.1.1(b).

Finally, the court notes that the essence of a copyright interest is the power to

exclude use of the copyrighted work by those who did not originate it or who are

not authorized to use it. The right to license a patent or copyright (and to dictate

the terms of such a license) is the “untrammeled right” of the intellectual property

owner. [citation omitted] In Simpson v. Union Oil Co., 377 U.S. 13, 24 (1964), the

Supreme Court noted that the laws of intellectual property “are in pari materia

with the antitrust laws and modify them pro tanto.” Accordingly, a court must

tread gingerly before permitting an antitrust plaintiff to modify the scope of the



Vertical Price Restraints and Intellectual Property 495



statutory copyright grant that Congress has seen fit to impose. Applying the foregoing considerations to the present case, the court declines to find anything unreasonable or illegal in the resale price restriction found in section A.1.1.1(b).

Comments and Questions

1. Does the pricing restriction in this case reduce output?

Should antitrust only be concerned about reduced output? Or do higher prices

alone create antitrust injury?

The court suggests that the per se rule should not apply when marginal costs

are declining. Would that essentially allow cartelization in such industries? If so, is

the court’s reasoning too broad?

2. The LucasArts Court held that “the Licensing Agreement does not violate the

Sherman or Cartwright Acts because it is ‘reasonably adapted to secure pecuniary

reward for the [LucasArts’ lawful] monopoly.’”

Do you agree?

Why couldn’t the licensor simply charge a higher royalty “to secure pecuniary

reward”?

3. If the price restriction in this case is permissible, why shouldn’t LucasArts be

able to impose a tying requirement?

A Note on the First Sale Doctrine

Independent of antitrust law, copyright law also condemns resale price maintenance. However, copyright law employs different terminology: the first sale

doctrine. In Quality King Distributors, Inc. v. L’anza Research Int’l, Inc., 523 U.S.

135 (1998), the Supreme Court explained:

we first endorsed the first sale doctrine in a case involving a claim by a publisher

that the resale of its books at discounted prices infringed its copyright on the books.

Bobbs-Merrill Co. v. Straus, 210 U.S. 339 (1908).

In that case, the publisher, Bobbs-Merrill, had inserted a notice in its books that

any retail sale at a price under $1 would constitute an infringement of its copyright.

The defendants, who owned Macy’s department store, disregarded the notice and sold

the books at a lower price without Bobbs-Merrill’s consent. We held that the exclusive

statutory right to “vend” applied only to the first sale of the copyrighted work:

“What does the statute mean in granting ‘the sole right of vending the

same’? Was it intended to create a right which would permit the holder

of the copyright to fasten, by notice in a book or upon one of the articles

mentioned within the statute, a restriction upon the subsequent alienation

of the subject-matter of copyright after the owner had parted with the title

to one who had acquired full dominion over it and had given a satisfactory

price for it? It is not denied that one who has sold a copyrighted article,

without restriction, has parted with all right to control the sale of it. The

purchaser of a book, once sold by authority of the owner of the copyright,

may sell it again, although he could not publish a new edition of it.



496 Antitrust Law and Intellectual Property Rights

“In this case the stipulated facts show that the books sold by the

appellant were sold at wholesale, and purchased by those who made no

agreement as to the control of future sales of the book, and took upon

themselves no obligation to enforce the notice printed in the book,

undertaking to restrict retail sales to a price of one dollar per copy.”

Id., at 349–350.

The statute in force when Bobbs-Merrill was decided provided that the

copyright owner had the exclusive right to “vend” the copyrighted work. Congress

subsequently codified our holding in Bobbs-Merrill that the exclusive right to

“vend” was limited to first sales of the work. Under the 1976 Act, the comparable

exclusive right granted in 17 U.S.C. § 106(3) is the right “to distribute copies . . .

by sale or other transfer of ownership.” The comparable limitation on that right is

provided not by judicial interpretation, but by an express statutory provision.



Id. at 1128–29 (citing 17 U.S.C. § 109(a)).

The first sale doctrine allows used book stores to sell— and libraries to lend out—

physical copies of the books that they own without either infringing a copyright or

being subjected to resale price restrictions imposed by the copyright owner.

A copyright owner may attempt to characterize its sales as licenses in order to

evade the first sale doctrine. (Notice that both Paramount and LucasArts involved

licenses.) For example, a software company may sell a disk with its program on it

but claim that it is not selling a copy of its product but merely selling a license to

use the copyrighted product subject to the licensing restrictions. The software may

then impose a licensing restriction prevents licensees from disposing of their copy

of the program by selling it to another person.

Why would a software company impose such a restriction?

What are the potential anticompetitive effects of such a restriction?

If you believe that there are potential anticompetitive effects, does that mean

that such policies necessarily violate antitrust laws?



D. Resale Price Maintenance and Trademarked Goods

U.S. v. Frankfort Distilleries,

324 U.S. 293 (1945)



The facts alleged in the indictment ***indicate a pattern which bears all the earmarks

of a traditional restraint of trade. The participants are producers, middlemen, and

retailers. They have agreed among themselves to adopt a single course in making

contracts of sale and to boycott all others who would not adopt the same course.

The effect, and if it were material, the purpose of the combination charged

was to fix prices at an artificial level. Such combinations, affecting commerce

among the states, tend to eliminate competition, and violate the Sherman Act

per se. [citation omitted] Price maintenance contracts fall under the same ban,

Ethyl Gasoline Corp. v. United States, 309 U.S. 436, 458, except as provided by the



Vertical Price Restraints and Intellectual Property 497



1937 Miller-Tydings Amendment to the Sherman Act. [citation omitted] The combination charged against respondents does not fall within this exception. It permits

the seller of an article which bears his trade mark, brand, or name, to prescribe a

minimum resale price by contract, if such contracts are lawful in the state where

the resale is to be made and if the trademarked article is in free and open competition with other articles of the same commodity. This type of ‘Fair Trade’ price

maintenance contract is lawful in Colorado. [citation omitted] But the Miller-Tydings Amendment to the Sherman Act does not permit combinations of business

men to coerce others into making such contracts, and Colorado has not attempted

to grant such permission. Both the federal and state ‘Fair Trade’ Acts expressly

provide that they shall not apply to price maintenance contracts among producers,

wholesalers and competitors. It follows that whatever may be the rights of an individual producer under the Miller-Tydings Amendment to make price maintenance

contracts or to refuse to sell his goods to those who will not make such contracts, a

combination to compel price maintenance in commerce among the states violates

the Sherman Act. [citation omitted]



Hudson Distributors, Inc. v. Eli Lilly & Co.

377 U.S. 386 (1964)



Mr. Justice GOLDBERG delivered the opinion of the Court.

These appeals raise the question of whether the McGuire Act, 66 Stat. 631,

15 U.S.C. §§ 45(a)(1)-(5), permits the application and enforcement of the Ohio

Fair Trade Act against appellant in support of appellees’ systems of retail price

maintenance.

*** Appellant, Hudson Distributors, Inc., owns and operates a retail drug

chain in Cleveland, Ohio. Appellee, Eli Lilly & Co., manufactures pharmaceutical

products bearing its trademarks and trade names. Lilly sells its products directly to

wholesalers and makes no sales to retailers. Hudson purchases Lilly brand products

from Regal D.S., Inc., a Michigan wholesaler.

In June 1959, the Ohio Legislature enacted a new Fair Trade Act [cit]. Subsequently Lilly sent letters to all Ohio retailers of Lilly products, including Hudson,

to notify them of Lilly’s intention to establish minimum retail resale prices for its

trademarked products pursuant to the new Ohio Act and to invite the retailers to

enter into written fair-trade contracts. More than 1,400 Ohio retailers of Lilly products (about 65% of all the retail pharmacists in Ohio) signed fair-trade contracts

with Lilly. Hudson, however, refused to enter into a written contract with Lilly and

ignored the specified minimum resale prices. Lilly formally notified Hudson that

the Ohio Act required Hudson to observe the minimum retail resale prices for Lilly

commodities. Hudson, nevertheless, continued to purchase and then to resell Lilly

products at less than the stipulated minimum retail resale prices.

Hudson thereupon filed a petition in the Court of Common Pleas for Cuyahoga County, Ohio, for a judgment declaring the Ohio Act invalid under the State



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