Patent Watch: IGT v. Alliance Gaming Corp

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As a threshold issue in any monopolization claim, the court must identify the relevant market.

On December 17, 2012, in IGT v. Alliance Gaming Corp., the U.S. Court of Appeals for the Federal Circuit (Bryson, Linn, Reyna*) affirmed the district court's summary judgment against Bally with respect to its antitrust counterclaims against IGT in a case involving patents related to the wheel feature of the Wheel of Fortune game. The Federal Circuit stated:

To prevail in this appeal, Bally must show that the district court erred when it granted summary judgment that wheel games are not a relevant antitrust market. Bally offers three arguments why this is so: (1) that the district court improperly resolved disputed facts when it determined that wheel games were not a relevant market because wheel games competed with all gaming machines; (2) that the district court erred in concluding that the existence of some substitution between wheel and nonwheel games foreclosed the existence of a wheel game market; and (3) that the district court improperly focused on functional, rather than economic, substitution. . . . As a threshold issue in any monopolization claim, the court must identify the relevant market. "The relevant market is the field in which meaningful competition is said to exist." "Market definition can be broadly characterized in terms of the 'cross-elasticity of demand' for or 'reasonable interchangeability' of a given set of products or services."

Bally does not dispute the district court's conclusion that wheel games compete with all gaming machines. Nor does it argue for or against the existence of a relevant market in gaming machines, a position it has abandoned. . . . Both Bally and IGT provided extensive evidence that wheel games compete in the broader gaming machine market. . . . As Bally has failed to produce evidence to show there is a genuine issue of material fact that wheel games compete with all gaming machines, the district court did not resolve a disputed factual issue. Indeed, absent additional facts suggesting otherwise, the district court could conceivably have gone one step farther and concluded that the relevant market was all gaming machines. . . .
The district court rejected wheel games as a relevant market because a market limited to wheel games would not encompass all economic substitutes. Focusing on the same undisputed evidence that supported its conclusion that wheel games compete with all gaming machines -- specifically, that "casinos mix and match products to maximize floor-space revenue generation" -- the court reasoned that "the relevant market is significantly broader than 'wheel games' because there is ample evidence that non-wheel games compete with wheel games." The court rejected Bally's argument that this competition does not prevent wheel games from being a relevant market, concluding that "[b]ecause all gaming machines compete, wheel games are not an economically distinct submarket." Bally argues this was error because (1) the existence of some substitution does not preclude wheel games from being a submarket, and (2) the analysis focused on functional, rather than economic, substitution. . . .

Bally argues that it has shown a lack of economic substitution by satisfying what is known as the small but significant and non-transitory increase in price test ("SSNIP"). Under this test, Bally argues that the relevant question is "whether the degree of substitutability between the two products is sufficiently great that it would restrain a hypothetical monopolist from profitably imposing a substantial price increase." Even assuming that SSNIP by itself is the proper test, Bally has not alleged facts that would satisfy it. Bally contends that introduction of wheel games forced IGT to lower its prices. From this assertion, Bally argues that IGT's prior prices were supracompetitive. We accept bothof these assertions as true. But Bally next asserts that these supracompetitive prices represented a SSNIP. With this we cannot agree. Bally has not explained what the baseline price for wheel games was from which IGT imposed a SSNIP. Although Bally implies that the baseline price should be similar to non-wheel games, no evidence supports this. Indeed, in a differentiated market, one would expect the prices for two differentiated products to be different. Having failed to establish such a baseline, Bally cannot successfully argue that IGT imposed a SSNIP. Furthermore, if we regard the supracompetitive prices as a baseline, Bally has shown that the prices decreased, not that they increased. Thus, even if the Guidelines test governs here, Bally has failed to put forth evidence that would satisfy it. . . .

"[A]lthough the general market must include all economic substitutes, it is legally permissible to premise antitrust allegations on a submarket." [T]he Supreme Court listed several "practical indicia" of an economically distinct submarket: "industry or public recognition of the submarket as a separate economic entity, the product's peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes, and specialized vendors." "[These] indicia are practical aids for identifying the areas of actual or potential competition and . . . their presence or absence does not decide automatically the submarket issue." "Whether isolating a submarket is justified turns ultimately upon whether the factors used to define the submarket are 'economically significant.'" . . .

The undisputed facts in this case show that meaningful competition exists between wheel games and all gaming machines. Furthermore, even viewing all evidence in the light most favorable to Bally, the [factors] do not support a conclusion that wheel games should be considered a separate submarket. The district court correctly granted summary judgment that a wheel game market did not exist . . .

If you have questions about the material presented above, please contact Dr. Lawrence M. Sung ( lsung@bakerlaw.com or 202.861.1537) or any member of our Intellectual Property Team.

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