Licensing a Package of Compact Disc Patents Did Not Constitute Patent Misuse

Case: U.S. Philips Corp. v. International Trade Comm'n, No. 04-1361 (Fed Cir. 9/21/05)

The One Sentence Summary: The licensing of a package of compact disc patents without separately offering licenses for the "essential" patents in the package did not constitute patent misuse because there was no effect on any market for alternative technologies and because there were valid, pro-competitive reasons for licensing packages of patents.

What They Were Fighting About: U.S. Philips Corporation licensed a group of patents for making recordable compact discs ("CD-Rs") and rewritable compact discs ("CD-RWs") only as a group of patents. Intervenors Princo, Gigastorage and Linco ceased payments on the licenses, and Philips filed a complaint with the International Trade Commission claiming patent infringement. An administrative law judge and later the Commission found that Philips had engaged in patent misuse by tying non-essential patents to essential patents. The Federal Circuit reversed.

Federal Circuit Holdings:

• Patent misuse is an equitable defense to patent infringement that prevents a patentee from using the patent to impermissibly broaden the scope of the patent grant with anticompetitive effect.
• The safe harbor of 35 U.S.C. § 271(d) which excludes from the definition of patent misuse the conditioning of the license of a patent on the license of another patent did not apply because Philips had market power. The proper time for analyzing market power was the present time rather than the time of the first creation of the package licenses.
• The Commission erred in finding that the tying of a patent to patent was per se illegal conduct. The "block-booking" cases relied upon by the Commission, United States v. Paramount Pictures, Inc., 334 U.S. 131, 156-59 (1948), and United States v. Loew’s, Inc., 371 U.S. 38, 44-51 (1962), were distinguishable because those cases relied upon the tying of a patent to an unpatented product. Unlike the situations in the block-booking cases, Philips did not require licensees to use the non-essential patents, and it did not offer the non-essential patents at a lower price outside of the packages.
• The purchase of a tied product necessarily affects the market for alternatives. In contrast, licensing a tied patent does not require the licensee to use the tied patent rather than an alternative technology.
• Philips' decision to include non-essential patents with essential patents in a package was no different than if Philips had offered the non-essential patents for free.
• There was no basis for the Commission to allocate any value to the non-essential patents.
• The Commission improperly ignored pro-competitive reasons for Philips to license a pool of patents, including the reduction of costs of licensing and increasing certainty of the licensee that it can practice the technology.
• The Commission also erred in finding that the non-essential patents were a separate tied market. There was no evidence that there was a separate market for the technology covered by the non-essential patents because there was no evidence of alternative technologies that Philips' customers wanted to use.
• The advance of technology will often make some patents in a pool become non-essential over time. Finding patent misuse in that situation would encourage litigation by licensees and is not good policy.
• The Commission erred in finding that the patent license pool constituted patent misuse under the rule of reason. There was no evidence that the patent license to the non-essential patents affected any alternative technologies. The Commission also failed to consider the advantages of licensing a pool of patents to an emerging technology.