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Issue 05/47 | September 30, 2005
Package License Upheld Where Licensees Not Forced to Use Unwanted Patents

The obligation to license unwanted patents along with those essential to a licensee does not constitute per se patent misuse where (1) there is no requirement that the unwanted patents must be used, (2) the royalty rate is unaffected by the patents actually licensed, and (3) there are no commercially practicable alternatives to the unwanted patents.

In U.S. Phillips v. USITC, No. 04-1361 (Fed. Cir. Sept. 21, 2005), the federal circuit reversed a decision of the ITC that six of Phillips' patents relating to the manufacture of recordable compact discs and rewritable compact discs were unenforceable due to patent misuse.

Philips offered package licenses, wherein the same royalty is due for each disc manufactured by the licensee using patents included in the package, regardless of how many of the patents were used. Potential licensees were not permitted to license patents individually and were not offered a lower royalty rate for licenses to fewer than all the patents in a package. Four different packages were offered, and eventually, Philips grouped its patents into "essential" and "nonessential" patents. At the conclusion of the investigation, the ALJ concluded that Philips' package licensing arrangements constituted tying arrangements that were illegal under antitrust law principles and therefore the subject patents were unenforceable.

On review, the Commission affirmed the ALJ's ruling that Philips's licensing practice constituted patent misuse per se as a tying arrangement between (1) licenses to patents that are essential to manufacture CDs according to industry standards and (2) licenses to other patents that are not essential to that activity. Alternatively, the Commission concluded that even if Philips's patent package licensing practice was not per se patent misuse, it constituted patent misuse under the rule of reason because the anticompetitive effects of including nonessential patents in the packages of "essential" patents outweighed the procompetitive effects of that practice.

On appeal, the federal circuit first affirmed the ALJ's conclusion that Philips was not shielded from liability for patent misuse under 35 U.S.C. ยง271(d)(5) because Philips had market power in the relevant market at the time it entered into licenses with ITC respondents. However, the federal circuit rejected the Commission's extension of Supreme Court and federal circuit precedent finding patent misuse based on tying arrangements between patents and products in a mandatory package license. The Supreme Court decisions relied upon by the ALJ (Paramount and Loew's) held as unlawful agreements conditioning the grant of a license on exhibiting movies sought by the licensee upon an agreement to license and exhibit other films unwanted by the licensee. The federal circuit considered these cases noncontrolling because they were more akin to a tying arrangement in which a patent license is tied to the purchase of a separate product, rather than to an arrangement in which a patent license is tied to another patent license. In contrast, Philips's package licenses did not require that licensees actually use the technology covered by any of the nonessential patents, and the royalty rate was not affected by the number of patents used.

The federal circuit rejected the Commission's conclusion that the licensees were "forced" to "take" patents from Philips that they did not want, and that they were restricted from obtaining licenses from other sources to produce the relevant technology. As a naked covenant not to sue, the package license neither obligated licensees to use all of the licensed technology nor precluded them from licensing alternatives to it; thus, the package was not anticompetitive in the way that a compelled purchase of a tied product would be.

The federal circuit also concluded there was insufficient evidence of commercially viable alternatives to the technology covered by the "nonessential" patents in the Philips licensing packages that any of its licensees would have preferred to use. For this reason, the finding of per se patent misuse was erroneous because no anticompetitive effect can result where no competition for a viable alternative product is foreclosed. For this same reason and because the Commission failed to considered the efficiencies of package licensing, the federal circuit rejected the finding of liability under the rule of reason approach.

Please visit http://media.aplf.org/rm/20050823-public/Tap.pdf for a copy of the case for your reference.

To discuss these topics further, please feel free to contact the author Michael R. Dzwonczyk, (mdzwonczyk@sughrue.com), at Sughrue Mion, PLLC in Washington DC, USA.

The information contained in this email is provided for informational purposes only and does not represent legal advice. Neither the APLF nor the author intends to create an attorney client relationship by providing this information to you through this message.

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