Casino Games and Antitrust — UPDATED

Josh Wright —  2 December 2010

UPDATE: Link to opinion below.

A federal district court judge recently decided an interesting antitrust/ IP case involving “wheel game” slot machines.  IGT sued Bally’s in 2004 for allegedly infringing a number of patents on a “wheel game” slot machine.  Bally’s initially prevailed, winning a pair of summary judgment rulings on the validity of IGT’s patents and refusing to grant summary judgment on Bally’s antitrust counterclaims.

Here’s what happened next, as reported by American Lawyer’s Alison Frankel:

But then something unusual happened. After the U.S. Court of Appeals for the Federal Circuit upheld Judge Jones’s findings on the IGT patents in the fall of 2009, Bally asked the judge to lift a stay and proceed to trial on the remaining patent, antitrust, and Lanham Act issues. At a Feb. 1 hearing on Bally’s motion, Judge Jones said he wanted to revisit his previous denial of summary judgment on those questions. He invited both sides to submit additional briefs and renew their summary judgment motions.

On Tuesday, the judge showed he was dead serious about the reconsideration. Judge Jones granted IGT summary judgment on Bally’s antitrust and Lanham Act counterclaims, for which Bally had sought “pretty significant damages,” according to comments IGT chief legal officer Robert Melendres made to Reuters. (Judge Jones also tossed IGT’s remaining patent claims, but Melendres said the patent findings were “immaterial.”)

In addressing the antitrust allegations, IGT’s lawyers at O’Melveny & Myers (including Brett Williamson, David Murphy, David Enzminger, and Ian Simmons) asserted that there is not a relevant market, for antitrust purposes, for wheel games; contrary to Bally’s argument, IGT said, casinos don’t draw such fine distinctions between gaming machines. Judge Jones agreed, finding that casinos consider revenue potential, not shape or size, when they’re choosing between gaming machines.

“It is undisputed that casinos mix and match products to maximize floor-space revenue generation,” the judge wrote. “By limiting the relevant market to ‘wheel games,’ the court would not be including all reasonably interchangeable products in the market.” And since there was no relevant market, Jones concluded, Bally’s antitrust case couldn’t proceed.

Interesting.  Would love to see the opinion if anybody has a copy.

UPDATE: Here is a copy of the Order. The Court cites Newcal Industries for the proposition that “the Court must abide by the rule that the relevant market must encompass the product at issue as well as all economic substitutes for the product,” (emphasis added) and the identification of substitutes for the purposes of market definition is a matter of classification which proceeds without distinctions of degree.  The court also appears to directly endorse the related proposition that “any” competition between two products renders them within the same relevant market as a matter of law:

ln this matter. the relevant market is significantly broader than wheel games because there is ample 23 evidence that non-whecl games compete with wheel games. Bally conccdes that there is ‘some competition between wheel and non-wheel games*’ but asserts that such competition does not prevent whecl games from being a relevant market. However, the Court finds this argument without merit.

This is problematic approach to market definition and one that doesn’t comport to the methods of modern antitrust, e.g. perhaps the biggest change introduced by the new Horizontal Merger Guidelines is that it emphasizes market definition that focuses on competition between closer substitutes than remote ones.  It is difficult without seeing the underlying evidence to know whether a change in approach would alter the result.  Perhaps cross-elasticities of demand between wheel and non-wheel games would reveal that they are close enough substitutes to be included in the same market.  But the opinion — other than the reference to the concession that the two games do compete against one another — doesn’t mention any economic evidence.

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