U.S. PHILIPS CORP. v. INTERNATIONAL TRADE COM’N · PDF fileu.s. philips corp. v....

1179U.S. PHILIPS CORP. v. INTERNATIONAL TRADE COM’NCite as 424 F.3d 1179 (Fed. Cir. 2005)

U.S. PHILIPS CORPORATION,Appellant,

v.

INTERNATIONAL TRADECOMMISSION,

Appellee,

and

Princo Corporation, Princo AmericaCorporation, Gigastorage CorporationTaiwan, Gigastorage CorporationUSA, and Linberg Enterprise Inc., In-tervenors.

No. 04–1361.

United States Court of Appeals,Federal Circuit.

Sept. 21, 2005.Background: United States InternationalTrade Commission determined that sixpatents for manufacture of compact discswere unenforceable because of patent mis-use. Patentee appealed.Holdings: The Court of Appeals, Bryson,Circuit Judge, held that:(1) patentee’s claim to statutory safe har-

bor from claim of patent misuse had tobe based upon status of market at timeof alleged infringement;

(2) licensing policy did not constitute mis-use of patent per se;

(3) package licensing arrangement couldnot be fairly characterized as exploita-tion of power in one market to obtaincompetitive advantage in another;

(4) mere possibility that alternative tech-nology might have become available atsome point was not sufficient to sup-port finding that commercial alterna-tive was actually available;

(5) research interest in possible alterna-tive approach to solving problemsolved in patent did not establish exis-tence of actually available commercialalternative; and

(6) package licensing agreements did notconstitute patent misuse under rule ofreason analysis.

Reversed and remanded.

1. Patents O283(1)

Patent misuse is an equitable defenseto patent infringement.

2. Patents O283(1)

The key inquiry under the patent mis-use doctrine is whether, by imposing con-ditions that derive their force from thepatent, the patentee has impermissiblybroadened the scope of the patent grantwith anticompetitive effect.

3. Monopolies O12(1.10)Conduct is not considered per se anti-

competitive if it has redeeming competitivevirtues and the search for those values isnot almost sure to be in vain. ShermanAct, §§ 1, 2, as amended, 15 U.S.C.A.§§ 1, 2.

4. Patents O283(1)Conditional licenses in which the pat-

ent owner lacks market power are exclud-ed from the category of arrangements thatmay be found to constitute patent misuse.35 U.S.C.A. § 271(d)(5).

5. Patents O283(1)Patentee’s claim to statutory safe har-

bor from alleged infringer’s claim of patentmisuse had to be based upon status ofmarket at time of alleged infringement;although patentee may not have had mar-ket power at prior point in time, patenteedid have market power at time of allegedinfringement. 35 U.S.C.A. § 271(d)(5).

6. Monopolies O12(15)Per se patent misuse could not be

attributed to licensing arrangement which,for fixed and uniform fee, packaged pat-ented technology essential for manufactur-

1180 424 FEDERAL REPORTER, 3d SERIES

ing compact discs with patents that werenot essential for such manufacture, sinceroyalty charged was not increased becauseof inclusion of nonessential patents andlicensees had option of not using any pat-ents in package; although surrender ofrights might have meant that customerwould choose to not license competitor’salternative nonessential technology, cus-tomers were not restricted from obtaininglicenses from other sources to produce therelevant technology.

7. Patents O211(1)A nonexclusive patent license is sim-

ply a promise not to sue for infringement;conveyance of such a license does not obli-gate the licensee to do anything.

8. Monopolies O17.5(14)In the case of patent-to-product tying,

the patent owner uses the market powerconferred by the patent to compel custom-ers to purchase a product in a separatemarket that the customer might otherwisepurchase from a competitor; patent owneris thus able to use the market power con-ferred by the patent to foreclose competi-tion in the market for the product.

9. Patents O211(1)A package licensing agreement that

includes both essential and nonessentialpatents does not impose any requirementon the licensee; it does not bar the licen-see from using any alternative technologythat may be offered by a competitor of thelicensor and it does not foreclose the com-petitor from licensing his alternative tech-nology.

10. Monopolies O17.5(14)Package licensing arrangement, which

provided patented technology essential formanufacturing compact discs with patentsthat allegedly were not essential for suchmanufacture for fixed and uniform fee,could not be fairly characterized as exploi-tation of power in one market to obtaincompetitive advantage in another, for pur-

pose of patent misuse claim, where none ofpatentee’s licensees were forced by pack-age license agreements to license patentswhen they would have preferred to usecompetitor’s technology; although compet-itor was competing against patentee’s freetechnology, patentee was not using essen-tial patent to obtain power in market fortechnology covered by nonessential pat-ents.

11. Monopolies O17.5(7)In order to show that a tying arrange-

ment is per se unlawful, a complainingparty must demonstrate that it links twoseparate products and has an anticompeti-tive effect in the market for the secondproduct. Sherman Act, § 1, as amended,15 U.S.C.A. § 1.

12. Monopolies O17.5(14)On a claim that a tying arrangement

is per se unlawful, patents within a patentpackage can be regarded as ‘‘nonessential’’only if there are commercially feasible al-ternatives to those patents; if there are nocommercially practicable alternatives tothe allegedly nonessential patents, packag-ing those patents together with so-calledessential patents can have no anticompeti-tive effect in the marketplace, because nocompetition for a viable alternative productis foreclosed. Sherman Act, § 1, asamended, 15 U.S.C.A. § 1.

13. Monopolies O17.5(3)Generally, the main purpose of a sepa-

rate-products inquiry in tying cases is toensure that conduct is not condemned asanticompetitive unless there is sufficientdemand for the purchase of the tied prod-uct separate from the tying product toidentify a distinct product market in whichit is efficient to offer the tied product.

14. Patents O283(1)For purpose of claim of per se patent

misuse, mere possibility that alternative


technology might have become available atsome point was not sufficient to supportfinding that there was commercial alterna-tive actually available to technologyclaimed in so-called ‘‘nonessential’’ patentat time that patentee’s licenses were exe-cuted.

15. Patents O283(1)For purpose of claim of per se patent

misuse, research interest in possible alter-native approach to solving problem solvedin patent did not establish existence ofactually available commercial alternative totechnology claimed in so-called ‘‘nonessen-tial’’ patent.

16. Monopolies O17.5(14)For purpose of claim of per se patent

misuse, if a patent-holder has a package ofpatents, all of which are necessary to en-able a licensee to practice particular tech-nology, the patentee may lawfully insist onlicensing the patents as a package and mayrefuse to license them individually, sincethe group of patents could not reasonablybe viewed as distinct products.

17. Monopolies O17.5(14)Package licensing agreements, which

provided patented technology essential formanufacturing compact discs with patentsthat allegedly were not essential for suchmanufacture for fixed and uniform fee, didnot constitute patent misuse under rule ofreason analysis, since inclusion of nones-sential patents in patent packages did nothave negative effect on commercially avail-able technology and package licensing pro-duced certain efficiencies and had pro-competitive effect of reducing degree ofuncertainty associated with investment de-cisions.

18. Monopolies O12(15) Patents O283(1)

Under the rule of reason, the finder offact must determine if the practice at issueis reasonably within the patent grant, i.e.,that it relates to subject matter within the

scope of the patent claims; if the practicedoes not broaden the scope of the patent,either in terms of covered subject matteror temporally, then the patentee is notchargeable with patent misuse.

19. Monopolies O12(15)

If practice alleged to be patent misusehas effect of extending patentee’s statuto-ry rights and does so with anticompetitiveeffect, that practice must then be analyzedin accordance with ‘‘rule of reason,’’ whichrequires finder of fact must decide wheth-er the questioned practice imposes an un-reasonable restraint on competition, takinginto account a variety of factors, includingspecific information about the relevantbusiness, its condition before and after therestraint was imposed, and the restraint’shistory, nature, and effect.

Patents O328(2)

5,001,692, 5,060,219, 5,740,149. Cited.

A. Douglas Melamed, Wilmer CutlerPickering Hale and Dorr LLP, of Wash-ington, DC, argued for appellant. Withhim on the brief were William J. Kolasky,Edward C. DuMont, Jonathan G. Cedarb-aum, and Barbara R. Blank.

Clara Kuehn, Attorney, Office of Gener-al Counsel, United States InternationalTrade Commission, of Washington, DC,argued for appellee. With her on the briefwere James M. Lyons, Acting GeneralCounsel, and Wayne W. Herrington, Act-ing Deputy General Counsel for Litigation.

Alan D. Smith, Fish & Richardson P.C.,of Boston, Massachusetts, argued for in-tervenors. With him on the brief wereCharles H. Sanders of Boston, Massachu-setts; and Richard G. Green and Tina M.Chappell, of Washington, DC. Of counselwas Ahmed J. Davis, of Washington, DC.


John DeQ. Briggs, III, Howrey SimonArnold & White, LLP, of Washington, DC,for amicus curiae Intellectual PropertyOwners Association. With him on thebrief were Marc G. Schildkraut and JosephP. Lavelle. Of counsel on the brief was J.Jeffrey Hawley, President, IntellectualProperty Owners Association, of Washing-ton, DC.

David F. Ryan, Fitzpatrick, Cella, Har-per & Scinto, of New York, New York, foramicus curiae New York Intellectual Prop-erty Law Association. With him on thebrief was Matthew S. Seidner. Of counselon the brief was John D. Murnane, Presi-dent, New York Intellectual Property LawAssociation, of New York, New York. Ofcounsel was Joseph B. Divinagracia.

Before BRYSON, GAJARSA, andLINN, Circuit Judges.

BRYSON, Circuit Judge.

U.S. Philips Corporation appeals from afinal order of the United States Interna-tional Trade Commission, in which theCommission held six of Philips’s patentsfor the manufacture of compact discs to beunenforceable because of patent misuse.The Commission ruled that Philips hademployed an impermissible tying arrange-ment because it required prospective licen-sees to license packages of patents ratherthan allowing them to choose which indi-vidual patents they wished to license andmaking the licensing fee correspond to theparticular patents designated by the licen-sees. In re Certain Recordable CompactDiscs & Rewritable Compact Discs, Inv.No. 337–TA–474 (Int’l Trade Comm’n Mar.25, 2004). We reverse and remand.

I

Philips owns patents to technology formanufacturing recordable compact discs(‘‘CD–Rs’’) and rewritable compact discs(‘‘CD–RWs’’) in accordance with the tech-nical standards set forth in a publication

called the Recordable CD Standard (the‘‘Orange Book’’), jointly authored by Phil-ips and Sony Corporation. Since the1990s, Philips has been licensing those pat-ents through package licenses. Philipsspecified that the same royalty was due foreach disc manufactured by the licenseeusing patents included in the package, re-gardless of how many of the patents wereused. Potential licensees who sought tolicense patents to the technology for manu-facturing CD–Rs or CD–RWs were notallowed to license those patents individual-ly and were not offered a lower royaltyrate for licenses to fewer than all thepatents in a package.

Initially, Philips offered four differentpools of patents for licensing: (1) a jointCD–R patent pool that included patentsowned by Philips and two other companies(Sony and Taiyo Yuden); (2) a joint CD–RW patent pool that included patentsowned by Philips and two other companies(Sony and Ricoh); (3) a CD–R patent poolthat included only patents owned by Phil-ips; and (4) a CD–RW patent pool thatincluded only patents owned by Philips.After 2001, Philips offered additional pack-age options by grouping its patents intotwo categories, which Philips denominated‘‘essential’’ and ‘‘nonessential’’ for produc-ing compact discs compliant with the tech-nical standards set forth in the OrangeBook.

In the late 1990s, Philips entered intopackage licensing agreements with PrincoCorporation and Princo America Corpora-tion (collectively, ‘‘Princo’’); GigaStorageCorporation Taiwan and GigaStorage Cor-poration USA (collectively, ‘‘GigaStorage’’);and Linberg Enterprise Inc. (‘‘Linberg’’).Soon after entering into the agreements,however, Princo, GigaStorage, and Lin-berg stopped paying the licensing fees.Philips filed a complaint with the Interna-tional Trade Commission that Princo, Gi-


gaStorage, and Linberg, among others,were violating section 337(a)(1)(B) of theTariff Act of 1930, 19 U.S.C.§ 1337(a)(1)(B), by importing into theUnited States certain CD–Rs and CD–RWs that infringed six of Philips’s patents.

The Commission instituted an investiga-tion and identified 19 respondents, includ-ing GigaStorage and Linberg. Additionalrespondents, including Princo, were addedthrough intervention. In the course of theproceedings before an administrative lawjudge, the respondents raised patent mis-use as an affirmative defense, alleging thatPhilips had improperly forced them, as acondition of licensing patents that werenecessary to manufacture CD–Rs or CD–RWs, to take licenses to other patents thatwere not necessary to manufacture thoseproducts. In particular, the respondentsargued that a number of the patents thatPhilips had included in the category of‘‘essential’’ patents were actually not es-sential for manufacturing compact discscompliant with the Orange Book stan-dards, because there were commerciallyviable alternative methods of manufactur-ing CD–Rs and CD–RWs that did notrequire the use of the technology coveredby those patents. The allegedly nonessen-tial patents included U.S. Patent Nos.5,001,692 (‘‘the Farla patent’’), 5,740,149(‘‘the Iwasaki patent’’), Re. 34,719 (‘‘theYamamoto patent’’), and 5,060,219 (‘‘theLokhoff patent’’).

The administrative law judge ruled thatthe intervenors had infringed variousclaims of the six asserted Philips patents.The administrative law judge furtherruled, however, that all six of the assertedpatents were unenforceable by reason ofpatent misuse. Among the grounds in-voked by the administrative law judge forfinding patent misuse was his conclusionthat the package licensing arrangementsconstituted tying arrangements that wereillegal under analogous antitrust law prin-

ciples and thus rendered the subject pat-ents unenforceable.

Philips petitioned the Commission forreview of the administrative law judge’sdecision. In an order that addressed onlythe findings concerning patent misuse, theCommission affirmed the administrativelaw judge’s ruling that Philips’s packagelicensing practice ‘‘constitutes patent mis-use per se as a tying arrangement between(1) licenses to patents that are essential tomanufacture CD–Rs or CD–RWs accord-ing to Orange Book standards and (2) li-censes to other patents that are not essen-tial to that activity.’’ The Commissionfound that the Farla, Iwasaki, Yamamoto,and Lokhoff patents were not essential tomanufacturing CD–Rs or CD–RWs. Spe-cifically, the Commission found that theFarla and Lokhoff patents were nonessen-tial with respect to the Philips-only CD–RW and CD–R licenses, and that the Far-la, Iwasaki, Yamamoto, and Lokhoff pat-ents were nonessential with respect to thejoint CD–RW license. The Commissionconcluded that the four nonessential pat-ents were impermissibly tied to patentsthat were essential to manufacturing CD–Rs and CD–RWs, because ‘‘none of the so-called essential patents could be licensedindividually for the manufacture of CD–RWs and CD–Rs apart from the package’’that Philips denominated as ‘‘essential.’’The Commission also found, based on theadministrative law judge’s findings andanalysis, that the joint license for CD–Rand CD–RW technology unlawfully tiedpatents for CD–Rs and CD–RWs in accor-dance with the Orange Book standards topatents that were not essential to manu-facture such discs.

The Commission explained why it con-cluded that each of the four patents wasnonessential. According to the Commis-sion, the Farla and Iwasaki patents werenot essential because there was an eco-


nomically viable alternative method ofwriting information to discs that did notrequire the producer to practice those pat-ents; the Yamamoto patent was not essen-tial because there was a potential alterna-tive method of creating master discs thatdid not require the producer to practicethat patent; and the Lokhoff patent wasnot essential because there were alterna-tive possible methods of accomplishingcopy protection that did not require theproducer to practice that patent. Basedon those findings, the Commission conclud-ed that the four ‘‘nonessential’’ patentsconstituted separate products from thepatents that were essential to the manufac-ture of the subject discs.

The Commission ruled that Philips’spatent package licensing arrangement con-stituted per se patent misuse because Phil-ips did not give prospective licensees theoption of licensing individual patents (pre-sumably for a lower fee) rather than li-censing one or more of the patent pack-ages as a whole. The Commission took noposition on the administrative law judge’sruling that patent pooling arrangementsbetween Philips and its colicensors consti-tuted patent misuse per se based on thetheories of price fixing and price discrimi-nation, and it took no position on the ad-ministrative law judge’s conclusion thatthe royalty structure of the patent poolswas an unreasonable restraint of trade.

As an alternative ground, the Commis-sion concluded that even if Philips’s patentpackage licensing practice was not per sepatent misuse, it constituted patent misuseunder the rule of reason. Adopting theadministrative law judge’s findings, theCommission ruled that the anticompetitiveeffects of including nonessential patents inthe packages of so-called essential patentsoutweighed the procompetitive effects ofthat practice. In particular, the Commis-sion held that including such nonessentialpatents in the licensing packages could

foreclose alternative technologies and in-jure competitors seeking to license suchalternative technologies to parties whoneeded to obtain licenses to Philips’s ‘‘es-sential’’ patents. The Commission took noposition with respect to the portion of theadministrative law judge’s rule of reasonanalysis in which the administrative lawjudge concluded that the royalty ratestructure of the patent pooling arrange-ments constituted an unreasonable re-straint on competition.

Philips took this appeal from the Com-mission’s order.

II

[1, 2] Patent misuse is an equitable de-fense to patent infringement. It ‘‘arose torestrain practices that did not in them-selves violate any law, but that drew anti-competitive strength from the patent right,and thus were deemed to be contrary topublic policy.’’ Mallinckrodt, Inc. v. Med-ipart, Inc., 976 F.2d 700, 704 (Fed.Cir.1992). The purpose of the patent misusedefense ‘‘was to prevent a patentee fromusing the patent to obtain market benefitbeyond that which inheres in the statutorypatent right.’’ Id. As the Supreme Courthas explained, the doctrine of patent mis-use bars a patentee from using the ‘‘pat-ent’s leverage’’ to ‘‘extend the monopoly ofhis patent to derive a benefit not attribut-able to the use of the patent’s teachings,’’such as requiring a licensee to pay a royal-ty on products that do not use the teachingof the patent. Zenith Radio Corp. v. Ha-zeltine Res., Inc., 395 U.S. 100, 135–36, 89S.Ct. 1562, 23 L.Ed.2d 129 (1969). The‘‘key inquiry is whether, by imposing con-ditions that derive their force from thepatent, the patentee has impermissiblybroadened the scope of the patent grantwith anticompetitive effect.’’ C.R. Bard,Inc. v. M3 Sys., Inc., 157 F.3d 1340, 1372(Fed.Cir.1998); Windsurfing Int’l, Inc. v.


AMF, Inc., 782 F.2d 995, 1001 (Fed.Cir.1986).

This court summarized the principles ofpatent misuse as applied to ‘‘tying’’ ar-rangements in Virginia Panel Corp. v.MAC Panel Co., 133 F.3d 860, 868–69(Fed.Cir.1997). The court there explainedthat because of the importance of anticom-petitive effects in shaping the defense ofpatent misuse, the analysis of tying ar-rangements in the context of patent mis-use is closely related to the analysis oftying arrangements in antitrust law. Thecourt further explained that, depending onthe circumstances, tying arrangements canbe viewed as per se patent misuse or canbe analyzed under the rule of reason. Id.The court noted that certain specific prac-tices have been identified as constitutingper se patent misuse, ‘‘including so-called‘tying’ arrangements in which a patenteeconditions a license under the patent onthe purchase of a separable, staple good,and arrangements in which a patentee ef-fectively extends the term of its patent byrequiring post-expiration royalties.’’ Id. at869 (citations omitted). If the particularlicensing arrangement in question is notone of those specific practices that hasbeen held to constitute per se misuse, itwill be analyzed under the rule of reason.Id. We have held that under the rule ofreason, a practice is impermissible only ifits effect is to restrain competition in arelevant market. Monsanto Co. v. McFar-ling, 363 F.3d 1336, 1341 (Fed.Cir.2004);Windsurfing Int’l, 782 F.2d at 1001–02.

[3] The Supreme Court’s decisions an-alyzing tying arrangements under anti-trust law principles are to the same effect.The Court has made clear that tying ar-rangements are deemed to be per se un-lawful only if they constitute a ‘‘nakedrestrain[t] of trade with no purpose exceptstifling of competition’’ and ‘‘always or al-most always tend to restrict competitionand decrease output’’ in some substantial

portion of a market. Broad. Music, Inc. v.Columbia Broad. Sys., Inc., 441 U.S. 1,19–20, 99 S.Ct. 1551, 60 L.Ed.2d 1 (1979).The Supreme Court has applied the per serule only when ‘‘experience with a particu-lar kind of restraint enables the Court topredict with confidence that the rule ofreason will condemn it TTTT’’ Arizona v.Maricopa County Med. Soc’y, 457 U.S.332, 344, 102 S.Ct. 2466, 73 L.Ed.2d 48(1982); see Broad. Music, 441 U.S. at 9–10, 99 S.Ct. 1551 (‘‘It is only after consid-erable experience with certain business re-lationships that courts classify them as perse violations.’’), quoting United States v.Topco Assocs., 405 U.S. 596, 607–08, 92S.Ct. 1126, 31 L.Ed.2d 515 (1972); Cont’lT.V., Inc. v. GTE Sylvania Inc., 433 U.S.36, 49–50, 97 S.Ct. 2549, 53 L.Ed.2d 568(1977) (per se rules are ‘‘appropriate onlywhen they relate to conduct that is mani-festly anticompetitive’’); see also JeffersonParish Hosp. Dist. v. Hyde, 466 U.S. 2, 14,104 S.Ct. 1551, 80 L.Ed.2d 2 (1983) (‘‘[T]helaw draws a distinction between the exploi-tation of market power by merely enhanc-ing the price of the tying product, on theone hand, and by attempting to imposerestraints on competition in the market fora tied product, on the other.’’). Conduct isnot considered per se anticompetitive if ithas ‘‘redeeming competitive virtues andTTT the search for those values is notalmost sure to be in vain.’’ Broad. Music,441 U.S. at 13, 99 S.Ct. 1551; Nat’l Colle-giate Athletic Ass’n v. Bd. of Regents ofthe Univ. of Okla., 468 U.S. 85, 104 n. 26,104 S.Ct. 2948, 82 L.Ed.2d 70 (1983)(‘‘[W]hile the court has spoken of a ‘per se’rule against tying arrangements, it hasalso recognized that tying may have pro-competitive justifications that make it in-appropriate to condemn without considera-ble market analysis.’’).

[4] While the doctrine of patent misuseclosely tracks antitrust law principles inmany respects, Congress has declared cer-tain practices not to be patent misuse even


though those practices might otherwise besubject to scrutiny under antitrust lawprinciples. In 35 U.S.C. § 271(d), Con-gress designated several specific practicesas not constituting patent misuse. Thedesignated practices include ‘‘condi-tion[ing] the license of any rights to thepatent or the sale of the patented producton the acquisition of a license to rights inanother patent or purchase of a separateproduct,’’ unless, in view of the circum-stances, the patent owner ‘‘has marketpower for the patent or patented producton which the license or sale is condi-tioned.’’ Id. § 271(d)(5). Because thestatute is phrased in the negative, it doesnot require that patent misuse be found inthe case of all such conditional licenses inwhich the patent owner has market power;instead, the statute simply excludes suchconditional licenses in which the patentowner lacks market power from the cate-gory of arrangements that may be foundto constitute patent misuse.

Although section 271(d)(5) does not de-fine the scope of the defense of patentmisuse, but merely provides a safe harboragainst the charge of patent misuse forcertain kinds of conduct by patentees, thestatute makes clear that the defense ofpatent misuse differs from traditional anti-trust law principles in an important re-spect, as applied to tying arrangementsinvolving patent rights. In the case of anantitrust claim based on a tying arrange-ment involving patent rights, this court hasheld that ownership of a patent on thetying good is presumed to give the paten-tee monopoly power. See Indep. Ink, Inc.v. Ill. Tool Works, Inc., 396 F.3d 1342,1349 n. 7 (Fed.Cir.), cert. granted, ––– U.S.––––, 125 S.Ct. 2937, 162 L.Ed.2d 865(2005). Section 271(d)(5) makes clear,however, that such a presumption does not

apply in the case of patent misuse. Toestablish the defense of patent misuse, theaccused infringer must show that the pat-entee has power in the market for thetying product. See id. at 1349 n. 7.

[5] Philips argues briefly that it lacksmarket power and that it is thus shieldedfrom liability by section 271(d)(5). Basedon detailed analysis by the administrativelaw judge, however, the Commission foundthat Philips has market power in the rele-vant market and that section 271(d)(5) istherefore inapplicable to this case. Wesustain that ruling.

Philips contends that at the time Philipsand Sony first created their package li-cense arrangements, CDs had significantcompetition among computer data storagedevices and thus Philips lacked marketpower in the market for computer datastorage discs. However, Philips first cre-ated the package licenses long before Gi-gaStorage and Princo entered into theiragreements. According to the administra-tive law judge, the patent package ar-rangements were instituted in the early1990s. Yet Princo did not enter into itsagreement until June of 1997, and GigaS-torage did not enter into its licensingagreement until October of 1999. Thus,any lack of market power that Philips andits colicensors may have had in the early1990s is irrelevant to the situation in thelate 1990s, when the parties entered intothe agreements at issue in this case. Atthat time, according to the administrativelaw judge’s well-supported finding, com-pact discs had become ‘‘unique products[with] no close practice substitutes.’’ Phil-ips’s argument about lack of market poweris therefore unpersuasive, and for that rea-son section 271(d)(5) does not provide Phil-ips a statutory safe haven from the judi-cially created defense of patent misuse.1

1. Before the Commission, Philips argued thatsection 271(d)(5) abolished the doctrine of perse patent misuse as applied to tying arrange-

ments. In making that argument, Philips re-lied heavily on the legislative history of the


[6] Apart from its specific challenge tothe Commission’s ruling on the marketpower issue, Philips launches a morebroad-based attack on the Commission’sconclusion that Philips’s patent licensingpolicies constitute per se patent misuse.In so doing, Philips makes essentially twoarguments: first, that the Commission waswrong as a legal matter in ruling that thepackage licensing arrangements at issue inthis case are among those few practicesthat the courts have identified as so clearlyanticompetitive as to warrant being con-demned as per se illegal; and second, thatthe Commission erred as a factual matterin concluding that Philips’s package licens-ing arrangements reflect the use of marketpower in one market to foreclose competi-tion in a separate market. We address thetwo arguments separately.

A

In its brief, the Commission argues thatit is ‘‘hornbook law’’ that mandatory pack-age licensing has been held to be patentmisuse. While that broad characterizationcan be found in some treatises, see 6 Don-ald S. Chisum, Chisum on Patents§ 19.04[3] (2003), cited in C.R. Bard, Inc.,157 F.3d at 1373; 8 Ernest B. LipscombIII, Lipscomb’s Walter on Patents § 28:27(3d ed. 1989 & Supp.2003), Philips invitesus to consider whether that broad proposi-tion is sound. Upon consideration, we con-clude that the proposition as applied to thecircumstances of this case is not supportedby precedent or reason.

In its opinion, the Commission acknowl-edged that the Virginia Panel case andmany other patent tying cases ‘‘involve atying patent and a tied product, rather

than a tying patent and a tied patent.’’(emphasis in original). The Commissionnonetheless concluded that ‘‘finding patentmisuse based on a tying arrangement be-tween patents in a mandatory package li-cense is a reasonable application of Su-preme Court precedent.’’ In so ruling, theCommission relied primarily on two Su-preme Court cases: United States v. Para-mount Pictures, Inc., 334 U.S. 131, 156–59,68 S.Ct. 915, 92 L.Ed. 1260 (1948), andUnited States v. Loew’s, Inc., 371 U.S. 38,44–51, 83 S.Ct. 97, 9 L.Ed.2d 11 (1962).Those cases condemned the practice of‘‘block-booking’’ movies to theaters (in theParamount case) and to television stations(in the Loew’s case) as antitrust violations.

Block-booking is the practice in which adistributor licenses one feature or group offeatures to exhibitors on the condition thatthe exhibitors agree to license another(presumably inferior) feature or group offeatures released by the distributor duringa given period. In Paramount andLoew’s, the Court held that block-booking,as practiced in those cases, was per seillegal. The Commission reasoned that thepractice of block-booking that was the fo-cus of the Court’s condemnation in Para-mount and Loew’s is similar to the pack-age licensing agreements at issue in thiscase and that under the analysis employedin Paramount and Loew’s, Philips’s pack-age licensing agreements must be con-demned as per se patent misuse.

We do not agree with the Commissionthat the decisions in Paramount andLoew’s govern this case. In Paramount,the district court held that the defendantmovie distributor had engaged in unlawful

1988 Act that adopted section 271(d)(5). Be-cause Philips has not renewed that argumentin this court, we do not address it, althoughwe note that the legislative history cited byPhilips before the Commission indicates con-gressional skepticism about treating tying ar-rangements in the context of patent licensing

as per se patent misuse, rather than analyzingsuch arrangements under the rule of reason.See 134 Cong. Rec. 32,294–95 (1988) (state-ment of Rep. Kastenmeier); id. at 32,471(statement of Sen. DeConcini); id. at 32,471–72 (statement of Sen. Leahy).


conduct because it offered to permit exhib-itors to show the films they wished tolicense only if they agreed to license andexhibit other films that they were not in-terested in licensing. The Supreme Courtaffirmed that ruling. The Court held thatblock-booking was illegal because it ‘‘pre-vents competitors from bidding for singlefeatures on their individual merits,’’ andbecause it ‘‘adds to the monopoly of asingle copyrighted picture that of anothercopyrighted picture which must be takenand exhibited in order to secure the first.’’334 U.S. at 156–57, 68 S.Ct. 915. Theresult, the Court explained, ‘‘is to add tothe monopoly of the copyright in violationof the principle of the patent cases involv-ing tying clauses.’’ Id. at 158, 68 S.Ct.915.

Because the block-booking arrangementat issue in Paramount required the licen-see to exhibit all of the films in the groupfor which a license was taken, the Para-mount block-booking was more akin to atying arrangement in which a patent li-cense is tied to the purchase of a separateproduct, rather than to an arrangement inwhich a patent license is tied to anotherpatent license. Indeed, all of the patenttying cases to which the Supreme Courtreferred in Paramount involved tying ar-rangements in which, as the Court de-scribed them, ‘‘the owner of a patent [con-ditioned] its use on the purchase or use ofpatented or unpatented materials.’’ 334U.S. at 157, 68 S.Ct. 915. Because thearrangement in the Paramount case wasequivalent in substance to a patent-to-product tying arrangement, Paramountdoes not stand for the proposition that a

pure patent-to-patent tying arrangement,such as Philips’s package licensing agree-ment, is per se unlawful.2

Philips gives its licensees the option ofusing any of the patents in the package, atthe licensee’s option. Philips charges auniform licensing fee to manufacture discscovered by its patented technology, re-gardless of which, or how many, of thepatents in the package the licensee choosesto use in its manufacturing process. Inparticular, Philips’s package licenses donot require that licensees actually use thetechnology covered by any of the patentsthat the Commission characterized as non-essential. In that respect, Philips’s licens-ing agreements are different from theagreements at issue in Paramount, whichimposed an obligation on the purchasers ofpackage licenses to exhibit films they didnot wish to license. That obligation notonly extended the exclusive right in oneproduct to products in which the distribu-tor did not have exclusive rights, but italso precluded exhibitors, as a practicalmatter, from exhibiting other films thatthey may have preferred over the tiedfilms they were required to exhibit. Be-cause Philips’s package licensing agree-ments do not compel the licensees to useany particular technology covered by anyof the licensed patents, the Paramountcase is not a sound basis from which toconclude that the package licensing ar-rangements at issue in this case constitutepatent misuse per se.

In the Loew’s case, the district courtdetermined that the licensee television sta-tions were required to pay fees not only

2. The Commission argues that the SupremeCourt’s later decision in Automatic Radio Co.v. Hazeltine, 339 U.S. 827, 70 S.Ct. 894, 94L.Ed. 1312 (1950), supports its broad inter-pretation of the Paramount case because theSupreme Court in Automatic Radio character-ized Paramount as having ‘‘condemned’’ anarrangement ‘‘conditioning the granting of a

license under one patent upon the acceptanceof another and different license.’’ Id. at 830–31, 70 S.Ct. 894. We do not, however, inter-pret that shorthand characterization of Para-mount as effecting a broadening of the hold-ing of the earlier case and an extension of itsrationale to a class of cases far beyond Para-mount ’s facts.


for the feature films they wanted, but alsofor additional, inferior films. As in Para-mount, the fact that the package arrange-ment required the television stations topurchase exhibition rights for the packageat a price that was greater than the priceattributable to the desired films made thetying arrangement very much like a tyingarrangement involving products. Thus,the Supreme Court explained that a ‘‘sub-stantial portion of the licensing fees repre-sented the cost of the inferior films whichthe stations were required to accept.’’Loew’s, 371 U.S. at 49, 83 S.Ct. 97. Fol-lowing the approach employed in Para-mount, the Supreme Court applied theprinciples of cases involving tying arrange-ments between patents and unpatentedproducts and concluded that the tying ar-rangements in the case before it had allthe anticompetitive features of the block-booking arrangements in Paramount andno redeeming procompetitive features.

In this case, unlike in Loew’s, there is noevidence that a portion of the royalty wasattributable to the patents that the Com-mission characterized as nonessential.While the administrative law judge foundthat GigaStorage ‘‘inquired into obtaininga license to less than all of the patents onPhilips’s patent list,’’ the administrativelaw judge noted that GigaStorage did sobecause it ‘‘hoped that by eliminating somepatents the royalty rate would be lower.’’There is no evidence that GigaStorage hadany basis for its expectation that a smallerpatent package might result in a lowerroyalty rate. In fact, the administrativelaw judge found that Philips had respond-ed to that overture from GigaStorage byexplaining that ‘‘the royalty is the sameregardless of the number of patents used.’’Moreover, the administrative law judgefound that the royalty rate for licensingPhilips’s patents ‘‘remains the same re-gardless of which option(s) in the agree-ment one selects,’’ and that the royaltyrate ‘‘does not increase or decrease if more

or fewer patents are used.’’ Thus, it isclear that the royalty charged by Philipswas not increased because of the inclusionof the Farla, Iwasaki, Yamamoto, and Lok-hoff patents. There is therefore no basisfor conjecture that a hypothetical licensingfee would have been lower if Philips hadoffered to license the patents on an indi-vidual basis or in smaller packages.

Aside from Paramount and Loew’s, theCommission relies on cases involving tyingarrangements in which the patent ownerconditions the availability of a patent li-cense on the patentee’s agreement to pur-chase a staple item of commerce from thepatentee. See Va. Panel, 133 F.3d at 869;Senza–Gel Corp. v. Seiffhart, 803 F.2d 661(Fed.Cir.1986). Those cases, however, arereadily distinguishable because of the fun-damental difference between an obligationto purchase a product and the extension ofa nonexclusive license to practice a patent.

[7] A nonexclusive patent license issimply a promise not to sue for infringe-ment. See Rite–Hite Corp. v. Kelley Co.,56 F.3d 1538, 1552 (Fed.Cir.1995) (enbanc); Spindelfabrik Suessen–SchurrStahlecker & Grill GmbH v. Schubert &Salzer Maschinenfabrik Aktiengesells-chaft, 829 F.2d 1075, 1081 (Fed.Cir.1987).The conveyance of such a license does notobligate the licensee to do anything; itsimply provides the licensee with a guar-antee that it will not be sued for engagingin conduct that would infringe the patentin question.

[8] In the case of patent-to-product ty-ing, the patent owner uses the marketpower conferred by the patent to compelcustomers to purchase a product in a sepa-rate market that the customer might oth-erwise purchase from a competitor. Unit-ed States v. U.S. Gypsum Co., 333 U.S.364, 400, 68 S.Ct. 525, 92 L.Ed. 746 (1948);Int’l Salt Co. v. United States, 332 U.S.392, 395, 68 S.Ct. 12, 92 L.Ed. 20 (1947);


Morton Salt Co. v. G.S. Suppiger Co., 314U.S. 488, 493, 62 S.Ct. 402, 86 L.Ed. 363(1942). The patent owner is thus able touse the market power conferred by thepatent to foreclose competition in the mar-ket for the product.

[9] By contrast, a package licensingagreement that includes both essential andnonessential patents does not impose anyrequirement on the licensee. It does notbar the licensee from using any alternativetechnology that may be offered by a com-petitor of the licensor. Nor does it fore-close the competitor from licensing his al-ternative technology; it merely puts thecompetitor in the same position he wouldbe in if he were competing with unpatent-ed technology.

A package license is in effect a promiseby the patentee not to sue his customer forinfringing any patents on whatever tech-nology the customer employs in makingcommercial use of the licensed patent.That surrender of rights might mean thatthe customer will choose not to license thealternative technology offered by the pat-entee’s competition, but it does not compelthe customer to use the patentee’s technol-ogy. The package license is thus not anti-competitive in the way that a compelledpurchase of a tied product would be.

Contrary to the Commission’s character-ization, the intervenors were not ‘‘forced’’to ‘‘take’’ anything from Philips that theydid not want, nor were they restrictedfrom obtaining licenses from other sourcesto produce the relevant technology. Phil-

ips simply provided that for a fixed licens-ing fee, it would not sue any licensee forengaging in any conduct covered by theentire group of patents in the package.By analogy, if Philips had decided to sur-render its ‘‘nonessential’’ patents or hadsimply announced that it did not intend toenforce them, there would have been noway for the manufacturers to decline orreject Philips’s decision. Yet the economiceffect of the package licensing arrange-ment for Philips’s patents is not fundamen-tally different from the effect that suchdecisions would have had on third partiesseeking to compete with the technologycovered by those ‘‘nonessential’’ patents.Thus, we conclude that the Commissionerred when it characterized the packagelicense agreements as a way of forcing theintervenors to license technology that theydid not want in order to obtain patentrights that they did.3

The Commission stated that it would nothave found the package licenses to consti-tute improper tying if Philips had offeredto license its patents on an individual basis,as an alternative to licensing them in pack-ages. The Commission’s position, howev-er, must necessarily be based on an as-sumption that, if the patents were offeredon an individual basis, individual patentswould be offered for a lower price than thepatent packages as a whole. If that as-sumption were not implicit in the Commis-sion’s conclusion, the Commission would besaying in effect that it would be unlawfulfor Philips to charge the same royalty for

3. The effect of a nonexclusive license wasdifferent before the Supreme Court, in Lear,Inc. v. Adkins, 395 U.S. 653, 89 S.Ct. 1902, 23L.Ed.2d 610 (1969), abolished the patent doc-trine of licensee estoppel. Before Lear, a non-exclusive license had a legal effect that madeit more than a mere covenant by the licenseenot to sue. Acceptance of the license barredthe licensee from challenging the validity ofthe patent. Some of the early decisions re-garding patent-to-patent tying arrangements

appear to have been based, at least in part, onthat feature of pre-Lear patent licenses. See,e.g., Am. Securit Co. v. Shatterproof GlassCorp., 268 F.2d 769, 777 (3d Cir.1959); Int’lMfg. Co. v. Landon, 336 F.2d 723, 731 (9thCir.1964); see also Duplan Corp. v. DeeringMilliken, Inc., 444 F.Supp. 648, 699 (D.S.C.1977), aff’d in pertinent part, 594 F.2d 979(4th Cir.1979). In the post-Lear era, the ‘‘ac-ceptance’’ of a license has no such restrictiveeffect on the licensee’s freedom.


its essential patents that it charges for itspatent packages and to offer the nonessen-tial patents for free. Yet that sort ofpricing policy plainly would not be unlaw-ful. See Directory Sales Mgmt. Corp. v.Ohio Bell Tel. Co., 833 F.2d 606, 609–10(6th Cir.1987).4

To the extent that the Commission’sdecision is based on an assumption thatindividual licenses would necessarily beavailable for a lower price than packagelicenses, that assumption is directly con-trary to the evidence and even to the ad-ministrative law judge’s findings of fact.As noted above, the administrative lawjudge found that the royalty rate underPhilips’s package licenses depended onthe number of discs the manufacturerproduced under the authority of the li-cense, not the number of individual pat-ents the manufacturer used to producethose discs. That is, the royalty rate didnot vary depending on whether the licen-sees used only the essential patents orused all of the patents in the package.Thus, it seems evident that if Philipswere forced to offer licenses on an indi-vidual basis, it would continue to chargethe same per unit royalty regardless ofthe number of patents the manufacturerchose to license. That alteration in Phil-ips’s practice would have absolutely no ef-fect on the would-be competitors whowished to offer alternatives to the tech-nology represented by Philips’s so-callednonessential patents, since those patentswould effectively be offered for free, and

the competitors would therefore still haveto face exactly the same barriers—theavailability of a free alternative to thetechnology that they were trying to li-cense for a fee.

More generally, the Commission’s as-sumption that a license to fewer than allthe patents in a package would presum-ably carry a lower fee than the packageitself ignores the reality that the value ofany patent package is largely, if not entire-ly, based on the patents that are essentialto the technology in question. A patentthat is nonessential because it covers tech-nology that can be fully replaced by alter-native technology that is available for freeis essentially valueless. A patent that isnonessential because it covers technologythat can be fully replaced by alternativetechnology that is available through a li-cense from another patent owner has val-ue, but its value is limited by the price ofthe alternative technology. Short of im-posing an obligation on the licensor tomake some sort of allocation of fees acrossa group of licenses, there is no basis forthe Commission to conclude that a smallergroup of the licenses—the so-called ‘‘es-sential’’ licenses—would have been avail-able for a lower fee if they had not been‘‘tied to’’ the so-called nonessential patents.

It is entirely rational for a patentee whohas a patent that is essential to particulartechnology, as well as other patents thatare not essential, to charge what the mar-ket will bear for the essential patent andto offer the others for free. Because a

4. Of course, in a tying case if the evidenceshows that the price of a bundled productreflects any of the cost of the tied product,‘‘customers are purchasing the tied product,even if it is touted as being free.’’ MultistateLegal Studies, Inc. v. Harcourt Brace Jovano-vich Legal & Prof’l Publ’ns, Inc., 63 F.3d1540, 1548 (10th Cir.1995), citing 3 Phillip E.Areeda & Donald F. Turner, Antitrust Law¶ 733a (1978) (tying may exist ‘‘when a ma-chine is sold or leased at a price that covers

‘free’ servicing’’); see also United States v.Microsoft Corp., 253 F.3d 34, 68 (D.C.Cir.2001) (‘‘the antitrust laws do not condemneven a monopolist for offering its product atan attractive price, and we therefore have nowarrant to condemn Microsoft for offeringeither IE or the IEAK free of charge’’). Theevidence in this case, however, does not indi-cate that there is a hidden charge for the so-called nonessential patents in the Philips pat-ent packages.


license to the essential patent is, by defini-tion, a prerequisite to practice the technol-ogy in question, the patentee can chargewhatever maximum amount a willing licen-see is able to pay to practice the technolo-gy in question. If the patentee allocatesroyalty fees between its essential and non-essential patents, it runs the risk that li-censees will take a license to the essentialpatent but not to the nonessential patents.The effect of that choice will be that thepatentee will not be able to obtain the fullroyalty value of the essential patent. Forthe patentee in this situation to offer itsnonessential patents as part of a packagewith the essential patent at no additionalcharge is no more anticompetitive than if ithad surrendered the nonessential patentsor had simply announced a policy that itwould not enforce them against personswho licensed the essential patent. In ei-ther case, those offering technology thatcompeted with the nonessential patentswould be unhappy, because they would becompeting against free technology. Butthe patentee would not be using his essen-tial patent to obtain power in the marketfor the technology covered by the nones-sential patents. This package licensing ar-rangement cannot fairly be characterizedas an exploitation of power in one marketto obtain a competitive advantage in anoth-er.5

Aside from the absence of evidence thatthe package licensing arrangements in thiscase had the effect of impermissibly broad-ening the scope of the ‘‘essential’’ patentswith anticompetitive effect, Philips argues

that the Commission failed to acknowledgethe unique procompetitive benefits associ-ated with package licensing. Philipspoints to the federal government’s guide-lines for licensing intellectual property,which recognize that patent packages‘‘may provide procompetitive benefits byintegrating complementary technologies,reducing transaction costs, clearing block-ing positions, and avoiding costly infringe-ment litigation. By promoting the dissem-ination of technology, cross-licensing andpooling arrangements are often procom-petitive.’’ U.S. Department of Justice andFederal Trade Commission, AntitrustGuidelines for the Licensing of Intellectu-al Property § 5.5 (1995); see also HerbertHovenkamp, IP and Antitrust § 34.2c, at34–7 (2004).

Philips introduced evidence that packagelicensing reduces transaction costs byeliminating the need for multiple contractsand reducing licensors’ administrative andmonitoring costs. See Tex. Instruments,Inc. v. Hyundai Elecs., 49 F.Supp.2d 893,901 (E.D.Tex.1999) (describing how ‘‘ex-tremely expensive and time-consuming’’ itis for parties to license and manage thelicensing of technology by using individualpatents and how it is preferable to employa patent portfolio). Package licensing canalso obviate any potential patent disputesbetween a licensor and a licensee and thusreduce the likelihood that a licensee willfind itself involved in costly litigation overunlicensed patents with potentially adverseconsequences for both parties, such as afinding that the licensee infringed the unli-

5. The implication of the Commission’s deci-sion is that a party with both an essentialpatent and a nonessential patent is not al-lowed to package the two together and onlyoffer the package for a single price. Thatwould have the perverse effect of potentiallyputting a party owning both an essential pat-ent and a nonessential but related patent in aworse position than a party owning only theessential patent. The party owning only the

essential patent would be free to charge anylicensing fee up to the maximum that a manu-facturer would be willing to pay to practicethe patented technology, while a party owningboth the essential patent and a nonessentialpatent would be barred from extracting thatmaximum licensing fee for its essential patentand assuring the manufacturer that it wouldnot be subject to suit on the nonessentialpatent.


censed patents or that the unlicensed pat-ents were invalid. See Steven C. Carlson,Patent Pools and the Antitrust Dilemma,16 Yale J. on Reg. 359, 379–81 (1999).Thus, package licensing provides the par-ties a way of ensuring that a single licens-ing fee will cover all the patents needed topractice a particular technology and pro-tecting against the unpleasant surprise fora licensee who learns, after making a sub-stantial investment, that he needed a li-cense to more patents than he originallyobtained. Finally, grouping licenses in apackage allows the parties to price thepackage based on their estimate of what itis worth to practice a particular technolo-gy, which is typically much easier to calcu-late than determining the marginal benefitprovided by a license to each individualpatent. In short, package licensing hasthe procompetitive effect of reducing thedegree of uncertainty associated with in-vestment decisions.

The package licenses in this case havesome of the same advantages as the pack-age licenses at issue in the Broadcast Mu-sic case. The Supreme Court determinedin that case that the blanket copyrightpackage licenses at issue had useful, pro-competitive purposes because they gavethe licensees ‘‘unplanned, rapid, and in-demnified access to any and all of therepertory of [musical] compositions, and[they gave the owners] a reliable methodof collecting for the use of the their copy-rights.’’ 441 U.S. at 20, 99 S.Ct. 1551.While ‘‘[i]ndividual sales transactions[would be] quite expensive, as would beindividual monitoring and enforcement,’’ apackage licensing agreement would ensure

access and save costs. Id. Hence, theSupreme Court determined that such con-duct should fall under ‘‘a more discriminat-ing examination under the rule of reason.’’Id. at 24, 99 S.Ct. 1551.

In light of the efficiencies of packagepatent licensing and the important differ-ences between product-to-patent tying ar-rangements and arrangements involvinggroup licensing of patents, we reject theCommission’s conclusion that Philips’s con-duct shows a ‘‘lack of any redeeming vir-tue’’ and should be ‘‘conclusively presumedto be unreasonable and therefore illegalwithout elaborate inquiry as to the preciseharm they have caused or the businessexcuse for their use.’’ N. Pac. Ry. Co. v.United States, 356 U.S. 1, 5, 78 S.Ct. 514, 2L.Ed.2d 545 (1958). We therefore holdthat the analysis that led the Commissionto apply the rule of per se illegality toPhilips’s package licensing agreementswas legally flawed.6

B

[10] In the alternative, Philips arguesthat the Commission’s finding of per sepatent misuse was not justified by thefacts of this case. In particular, Philipscontends that the evidence did not showthat there were commercially viable alter-natives to the technology covered by theso-called ‘‘nonessential’’ patents in thePhilips licensing packages that any of itslicensees would have preferred to use.

[11] In order to show that a tying ar-rangement is per se unlawful, a complain-ing party must demonstrate that it links

6. The Supreme Court recently granted certio-rari in Independent Ink, Inc. v. Illinois ToolWorks, Inc., 396 F.3d 1342 (Fed.Cir.), cert.granted, ––– U.S. ––––, 125 S.Ct. 2937, 162L.Ed.2d 865 (2005), a case involving a tyingarrangement involving a patent and an unpat-ented product. It is possible that the Su-preme Court’s decision in that case will offer

some guidance with respect to the patent mis-use issue presented by this case, but becausethe circumstances of the two cases are quitedifferent, we have determined that the propercourse is to resolve this appeal without wait-ing for the Supreme Court’s decision in Inde-pendent Ink.


two separate products and has an anticom-petitive effect in the market for the secondproduct. The Supreme Court explainedthat the ‘‘essential characteristic’’ of aninvalid tying arrangement

lies in the seller’s exploitation of its con-trol over the tying product to force thebuyer in to the purchase of a tied prod-uct that the buyer either did not want atall, or might have preferred to purchaseelsewhere on different terms. Whensuch ‘‘forcing’’ is present, competition onthe merits in the market for the tieditem is restrained TTTT

Jefferson Parish, 466 U.S. at 12, 104 S.Ct.1551; id. at 20–21, 104 S.Ct. 1551 (‘‘[A]tying arrangement cannot exist unless twoseparate markets have been linked.’’); B.Braun Med., Inc. v. Abbott Labs., 124 F.3d1419, 1426 (Fed.Cir.1997) (impermissibletying in the context of patent misuse ifpatentee uses a patent ‘‘which enjoys mar-ket power in the relevant market TTT torestrain competition in an unpatentedproduct’’). The Commission found thatthe ‘‘nonessential’’ patents, i.e., the Farla,Iwasaki, Yamamoto, and Lokhoff patents,constituted separate products from the‘‘essential’’ patents in the package and thatthe package licensing agreements adverse-ly affected competition in the market forthe nonessential technology.7 The Com-mission’s analysis of that factual issue wasflawed, however.

[12] Patents within a patent packagecan be regarded as ‘‘nonessential’’ only ifthere are ‘‘commercially feasible’’ alterna-tives to those patents. See Int’l Mfg. Co.v. Landon, 336 F.2d 723, 729 (9th Cir.1964). If there are no commercially prac-ticable alternatives to the allegedly nones-sential patents, packaging those patents

together with so-called essential patentscan have no anticompetitive effect in themarketplace, because no competition for aviable alternative product is foreclosed.In such a case, the only effect of findingper se patent misuse is to give licensees away of avoiding their obligations under thelicensing agreements, with no correspond-ing benefit to competition in any real-world market.

[13] The Department of Justice hasrecognized that the availability of commer-cially viable alternative technology is rele-vant to the analysis of package licensingagreements. In particular, the Depart-ment has stated that patent packages donot have the undesirable effects of tying ifthey include patents to technology forwhich there is no practical or realistic al-ternative. See, e.g., Business Review Let-ter, U.S. Department of Justice, AntitrustDivision (Dec. 16, 1998). That principle isconsistent with the main purpose of theseparate-products inquiry in tying casesgenerally, which is to ensure that conductis not condemned as anticompetitive ‘‘un-less there is sufficient demand for thepurchase of [the tied product] separatefrom the [tying product] to identify a dis-tinct product market in which it is efficientto offer [the tied product].’’ JeffersonParish, 466 U.S. at 21–22, 104 S.Ct. 1551;see Mallinckrodt, 976 F.2d at 704 (tying ismisuse only when the patentee uses itspatent to obtain ‘‘market benefit’’ beyondthat conferred by the patent).

In this case, the evidence did not showthat there were commercially viable substi-tutes for the Farla, Iwasaki, Yamamoto,and Lokhoff patents that disc manufactur-ers wished to use in making compact discs

7. The intervenors note that ‘‘there existed anumber of commercially-available CD–R discsutilizing alternative technology that did notinfringe these supposedly essential patents.’’For support, intervenors cite the opinion of

the administrative law judge, who determinedthat two patents held by Taiyo Yuden werenot essential. Because the Commission didnot address those patents, however, they arenot relevant to this appeal.


compliant with the Orange Book stan-dards. There was thus insufficient evi-dence that including the four ‘‘nonessen-tial’’ patents in the Philips patent packageshad an actual anticompetitive effect. Thatis, the evidence did not show that therewere commercially viable substitutes forthose four ‘‘nonessential’’ patents that discmanufacturers wished to use in makingcompact discs compliant with the OrangeBook standards.

Two of those four patents, the Farlaand Iwasaki patents, cover a method ofcontrolling the recording of informationonto compact discs, i.e., a ‘‘write strategy,’’including an ‘‘optimum power control pro-cedure.’’ 8 The Commission found that an-other company, Calimetrics, Inc., had de-veloped a commercially viable, alternativemethod of performing the write strategyand the optimum power control procedurethat is not covered by the Farla and Iwa-saki patents. In making that finding, theCommission relied solely on the testimonyof Dr. Stephen McLaughlin, Calimetrics’sprincipal scientist, who had helped to cre-ate the technology in question. Dr.McLaughlin testified that Calimetrics hadcreated a general write strategy; that ‘‘inthe development of [that] technology [Cali-metrics] determined that this write strate-gy was applicable to CD–R and CD–RWsystems’’; and that the company has‘‘spent an enormous amount of effort pro-moting [its] idea TTTT’’ While that testimo-ny was sufficient to support the Commis-sion’s finding that there was an alternativetechnology to the Farla and Iwasaki pat-

ents, it did not show that the Calimetricstechnology was an alternative that Phil-ips’s licensees wished to use in place ofthe technology covered by the Farla andIwasaki patents. The Commission did notpoint to any evidence that any licensee orpotential licensee asked to have any of thefour ‘‘nonessential’’ patents removed fromthe package license and that Philips re-fused to do so. Although, as noted, Gi-gaStorage asked about obtaining a licenseto only certain patents, in the hope thatby eliminating some patents the royaltyrate would be lower, the evidence did notshow that GigaStorage’s request related tothe four ‘‘nonessential’’ patents or that Gi-gaStorage had any interest in licensingCalimetrics’s technology.

Dr. McLaughlin testified, regarding ahypothetical situation, that ‘‘[w]hen we goand try to license this technology, the com-panies say we have technology that per-forms a function of this type, and TTT Ipresume they would be referring to [thenonessential CD–R/CD–RW] patents.’’That testimony, however, falls short ofshowing that any of Philips’s licenseeswere forced by the package license agree-ments to license the Farla and Iwasakipatents when they would have preferred touse Calimetrics’s technology. Dr.McLaughlin did not testify as to even asingle specific instance on which a discmanufacturer expressed a preference forthe Calimetrics technology but was dis-suaded from licensing it by Philips’s insis-tence on licensing the Farla and Iwasakipatents as part of its package license ar-

8. In its amicus curiae brief, the New YorkIntellectual Property Association notes that,unlike the other three allegedly nonessentialpatents, the Iwasaki patent would expire afterall of the undisputedly essential patents. As aresult, the presence of the Iwasaki patent in apatent licensing package could have the effectof extending the obligation to pay royaltiesbeyond the expiration date of the ‘‘essential’’patents. A provision requiring that royalties

be paid beyond the life of a patent has beenheld to be unenforceable. See Brulotte v.Thys Co., 379 U.S. 29, 30, 85 S.Ct. 176, 13L.Ed.2d 99 (1964). However, because nei-ther the Commission nor the administrativelaw judge addressed the impact of that poten-tial temporal extension of the royalty obli-gation, and none of the parties addressed thatissue on appeal in their briefs, we do notaddress the issue here.


rangements. The evidence thus did notshow that there was a demand for theCalimetrics technology that went unmetbecause of the coercive effect of Philips’sinclusion of the Farla and Iwasaki patentsin its package licensing agreements.

[14] As for the Yamamoto patent,which covers a method of creating masterdiscs by using one laser beam, the Com-mission again relied on the testimony ofDr. McLaughlin. The Commission foundthat Calimetrics had developed a commer-cially viable alternative method of creatingmaster discs by using two laser beams.Dr. McLaughlin’s testimony, however,does not support the Commission’s finding.Dr. McLaughlin stated that it was ‘‘fairlyeasy to conceive of alternative methods forimplementing the functionality of the in-tention of TTT what [the Yamamoto] patentis directed towards’’ and that it would‘‘certainly [be] possible to do this using twobeams TTTT’’ Yet the mere possibility thatalternative technology might at some pointbecome available is not sufficient to sup-port a finding that at the time the Philipslicenses were executed, there was actuallya commercially available alternative to thetechnology claimed in the Yamamoto pat-ent.

[15] Finally, the Commission foundthat the Lokhoff patent was not ‘‘technical-ly essential’’ to manufacturing discs com-pliant with the Orange Book standard.The Lokhoff patent covers a system forproviding copy protection by placing a‘‘copy bit’’ into a compact disc for thepurpose of determining the type of infor-mation that may be received for recording.The Commission found that an alternativeexists to the Lokhoff patent. In so doing,the Commission again relied on testimonyby Dr. McLaughlin, who stated that copyprotection could be achieved by ‘‘embed-ding copy protection and user data,’’ in-stead of by using a copy bit. Dr.McLaughlin’s testimony, however, does not

establish that the alternative technologywas commercially available to be substitut-ed for the technology of the Lokhoff pat-ent. He stated that the alternative em-bedding method was a ‘‘very wide area ofresearch. There’s a lot of activity goingon these days in using this general ap-proach TTTT’’ That testimony indicates re-search interest in a possible approach tosolving the problem of embedding, but itdoes not establish the existence of an avail-able, commercially practicable alternativeto Philips’s technology.

[16] Beyond the absence of factualsupport for the Commission’s findings, theCommission’s analysis of the four ‘‘nones-sential’’ patents demonstrates a more fun-damental problem with applying the per serule of illegality to patent packages suchas the ones at issue in this case. If apatentholder has a package of patents, allof which are necessary to enable a licenseeto practice particular technology, it is wellestablished that the patentee may lawfullyinsist on licensing the patents as a packageand may refuse to license them individual-ly, since the group of patents could notreasonably be viewed as distinct products.See Landon, 336 F.2d at 729. Yet overtime, the development of alternative tech-nology may raise questions whether someof the patents in the package are essentialor whether, as in this case, there are alter-natives available for the technology cov-ered by some of the patents. Indeed, in afast-developing field such as the one atissue in this case, it seems quite likely thatquestions will arise over time, such aswhat constitutes an ‘‘essential’’ patent forpurposes of manufacturing compact discscompliant with the Orange Book standard.Roger B. Andewelt, Analyzing PatentPools Under the Antitrust Laws, 53 Anti-trust L.J. 611, 616 (1985) (‘‘the line be-tween competitive patents and blocking orcomplementary patents is frequently very


difficult to draw’’). Under the Commis-sion’s approach, an agreement that wasperfectly lawful when executed could bechallenged as per se patent misuse due todevelopments in the technology of whichthe patentees are unaware, or which havejust become commercially viable. Such arule would make patents subject to beingdeclared unenforceable due to develop-ments that occurred after execution of thelicense or were unknown to the parties atthe time of licensing. Not only would sucha rule render licenses subject to invalida-tion on grounds unknown at the time oflicensing, but it would also provide astrong incentive to litigation by any licen-see, since the reward for showing thateven a single license in a package was‘‘nonessential’’ would be to render all thepatents in the package unenforceable.For that reason as well, we reject theCommission’s ruling that package agree-ments of the sort entered into by Philipsand the intervenors must be invalidated onthe ground that they constitute per sepatent misuse.

III

[17] In the alternative, the Commis-sion held that Philips’s package licensingagreements constituted patent misuse un-der the rule of reason. The Commission’sanalysis under the rule of reason largelytracked the analysis that led it to concludethat the package licensing agreements con-stituted per se patent misuse.

As in the case of its ruling on per sepatent misuse, the fulcrum of the Commis-sion’s conclusion that Philips was guilty ofpatent misuse under the rule of reason wasits conclusion that the package licenses atissue in this case had ‘‘the anticompetitiveeffect of foreclosing competition in the al-ternative technology that competes withthe technology covered by a nonessentialpatent that was included as a so-called‘essential’ patent.’’ On that issue, theCommission adopted the administrative

law judge’s analysis and conclusions withrespect to the Farla, Iwasaki, Yamamoto,and Lokhoff patents, but it took no posi-tion with respect to other patents that theadministrative law judge found to be non-essential.

Focusing particularly on the Farla andIwasaki patents, the Commission foundthat those patents were not essential tomanufacturing CD–Rs and CD–RWs com-pliant with the Orange Book standardsand that including those patents in thepatent packages foreclosed competition byCalimetrics. The Commission briefly ad-dressed the assertedly procompetitive ef-fects of the package licensing arrange-ments but upheld the administrative lawjudge’s conclusion that those arrange-ments had a net anticompetitive effect be-cause ‘‘the convenience to manufacturersof a broad package of patents was out-weighed by the anticompetitive effect onalternative technologies of packaging non-essential patents with essential patents.’’

[18, 19] Under the rule of reason, thefinder of fact must determine if the prac-tice at issue is ‘‘reasonably within the pat-ent grant, i.e., that it relates to subjectmatter within the scope of the patentclaims.’’ Va. Panel, 133 F.3d at 869, quot-ing Mallinckrodt, 976 F.2d at 708. If thepractice does not ‘‘broaden the scope of thepatent, either in terms of covered subjectmatter or temporally,’’ then the patentee isnot chargeable with patent misuse. Va.Panel, 133 F.3d at 869. More specifically,‘‘the finder of fact must decide whether thequestioned practice imposes an unreason-able restraint on competition, taking intoaccount a variety of factors, including spe-cific information about the relevant busi-ness, its condition before and after therestraint was imposed, and the restraint’shistory, nature and effect.’’ Va. Panel,133 F.3d at 869, quoting State Oil Co. v.Khan, 522 U.S. 3, 10, 118 S.Ct. 275, 139


L.Ed.2d 199 (1997); see also MonsantoCo., 363 F.3d at 1341.

The Commission’s rule of reason analy-sis is flawed for two reasons. Most im-portantly, its conclusion was largely predi-cated on the anticompetitive effect oncompetitors offering alternatives to thefour so-called nonessential patents in thePhilips patent packages. Yet, as we havealready held, the evidence did not showthat including those patents in the patentpackages had a negative effect on com-mercially available technology. The Com-mission assumed that there was a foreclo-sure of competition because compact discmanufacturers would be induced to acceptlicenses to the technology covered by theFarla and Iwasaki patents and thereforewould be unwilling to consider alterna-tives. As noted, however, there was noevidence before the Commission that anymanufacturer had actually refused to con-sider alternatives to the technology cov-ered by those patents or for that matterthat any commercially viable alternativeactually existed.

In addition, as in its per se analysis, theCommission did not acknowledge the prob-lems with licensing patents individually,such as the transaction costs associatedwith making individual patent-by-patentroyalty determinations and monitoringpossible infringement of patents that par-ticular licensees chose not to license. TheCommission also did not address the prob-lem, noted above, that changes in the tech-nology for manufacturing compact discscould render some patents that were indis-putably essential at the time of licensingarguably nonessential at some later pointin the life of the license. To hold that alicensing agreement that satisfied the ruleof reason when executed became unreason-able at some later point because of techno-logical development would introduce sub-stantial uncertainty into the market anddisplace settled commercial arrangements

in favor of uncertainty that could only beresolved through expensive litigation.

Finally, the Commission failed to consid-er the efficiencies that package licensingmay produce because of the innovativecharacter of the technology at hand. Giv-en that the technology surrounding theOrange Book standard was still evolving,there were many uncertainties regardingwhat patents might be needed to producethe compact discs. As noted, package li-cense agreements in which the royalty wasbased on the number of units produced,not the number of patents used to producethem, can resolve in advance all potentialpatent disputes between the licensor andthe licensee, whereas licensing patentrights on a patent-by-patent basis can re-sult in continuing disputes over whetherthe licensee’s technology infringes certainancillary patents owned by the licensorthat are not part of the group elected bythe licensee.

We therefore conclude that the line ofanalysis that the Commission employed inreaching its conclusion that Philips’s pack-age licensing agreements are more anti-competitive than procompetitive, and thusare unlawful under the rule of reason, waspredicated on legal errors and on factualfindings that were not supported by sub-stantial evidence. For these reasons, wecannot uphold the Commission’s decisionthat Philips’s patents are unenforceablebecause of patent misuse under the rule ofreason.

Because the Commission did not addressall of the issues presented by the adminis-trative law judge’s decision under both theper se and rule of reason analysis, furtherproceedings before the Commission maybe necessary with respect to whether Phil-ips’s patents are enforceable and, if so,whether Philips is entitled to any relieffrom the Commission. Accordingly, wereverse the Commission’s ruling on patent

1199LOCKHEED MARTIN CORP. v. ENGLANDCite as 424 F.3d 1199 (Fed. Cir. 2005)

misuse for the reasons stated, and we re-mand this case to the Commission for fur-ther proceedings consistent with this opin-ion.

REVERSED AND REMANDED.

,

LOCKHEED MARTINCORPORATION,

Appellant,

v.

Gordon R. ENGLAND, Secretaryof the Navy, Appellee.

No. 04–1461.

United States Court of Appeals,Federal Circuit.

Sept. 21, 2005.Background: Naval contractor appealedfrom decision of the Armed Services Boardof Contract Appeals in which Board heldthat contractor was not entitled to recoverfor subcontract effort in a termination set-tlement.Holdings: The Court of Appeals, Prost,Circuit Judge, held that:(1) contractor, which had cost-plus-fixed-

fee (CPFF) contract with government,could not recover fee for the effort ofits subcontractors, upon termination ofcontract for convenience, and

(2) Subcontract Data Requirements Listitems (SDRLs) delivered by subcon-tractors were properly valued upontermination.

Affirmed.

1. United States O73(15)Review by Court of Appeals of agency

boards of contract appeals is very limited;board’s factual conclusions may not be setaside unless fraudulent, or arbitrary orcapricious, or so grossly erroneous as to

necessarily imply bad faith, or if such deci-sion is not supported by substantial evi-dence. Contract Disputes Act of 1978,§ 10(b), 41 U.S.C.A. § 609(b).

2. United States O73(15)

When Court of Appeals reviews agen-cy boards of contract appeals, legal deci-sions are reviewed de novo; on mixedquestions of fact and law, Court gives care-ful consideration and great respect toboard decisions. Contract Disputes Act of1978, § 10(b), 41 U.S.C.A. § 609(b).


Federal Acquisition Regulation (FAR)governing award of profit upon termi-nation of government contract for conven-ience does not allow a higher-tier contrac-tor to recover fee for the effort of itssubcontractors when the higher-tier con-tractor has a cost-plus-fixed-fee (CPFF)contract with its next-higher-tier contrac-tor or with the government. 48 C.F.R.§§ 49.202, 49.305-1.


Subcontract Data Requirements Listitems (SDRLs) delivered by subcontrac-tors were properly valued in accord withinstructions in Department of Defense In-struction and Military Standard incorpo-rated by reference into primary contract,upon government’s termination of contractfor convenience, notwithstanding testimo-ny of employees of contractor and its sub-contractor allegedly supporting a greatervalue.

E. Sanderson Hoe, McKenna Long &Aldridge LLP, of Washington, DC, arguedfor appellant. With him on the brief wereDaniel G. Jarcho and Jason N. Workmas-ter.

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