The U.S. Court of Appeals for the Federal Circuit, reviving a controversial decision by the U.S. International Trade Commission, has held that a package license that includes "nonessential" patents along with "essential" patents, at no additional charge for the nonessential patents, is not per se patent misuse. U.S. Philips Corporation v. International Trade Commission, Case No. 04-1361 (Fed. Cir. Sept. 21, 2005) (Bryson, J.).
The U.S. International Trade Commission (ITC) held that notwithstanding its finding of infringement by several of the respondents, several of Philips’ patents directed to the manufacture of compact discs (CDs) were unenforceable due to patent misuse. As its reason, the ITC noted that Philips had not allowed its licensees to select which individual patents it wished to license at a fee corresponding to the selected patents. Instead, the challenged license was a package license where Philips charged a flat fee per disc for patents that were "essential" to practicing the published technical standards for manufacturing recordable compact discs and patents that were "nonessential" to practicing those standards. The ITC had found that such an arrangement constituted per se patent misuse by tying a license to the non-essential patents to a license in the essential patents. Further, it determined patent misuse under the rule of reason in that the royalty rate structure of the patent pooling arrangement constituted placed an unreasonable restraint on competition. Philips appealed.
Reversing and remanding, the Federal Circuit found the questioned patent pooling arrangement was not per se patent misuse. The Court distinguished the package license from a patent-to-product tying arrangement in which the patentee improperly conditions a patent license to the purchase of a separate, staple good. Instead, the Court found that the Philips’ package license was merely a promise not to sue and did not require the licensee to use any of the patented technology nor bar the licensee from using any competing technology. The Court concluded the ITC erred in finding that the package license forced licensees to license technology they did not want in exchange for patent rights they did want.
The Court also rejected the commission’s underlying premise that the package license would not have been unlawful if individual patents were offered at a lower price than the package as a whole. The evidence established that Philips charged the same price for the package license regardless of which patents the licensee used. The Court also noted that "[i]t is entirely rational for a patentee who has a patent that is essential to particular technology, as well as other patents that are not essential, to charge what the market will bear for the essential patent and to offer the others for free." The Court specifically set forth the benefits of package licenses, including reduced transaction and report costs, as well as a reduction in the risk of costly litigation over unlicensed nonessential technology.
The Federal Circuit also found a lack of evidence demonstrating that the package licensed linked two products with an anticompetitive effect in the second product market. Nonessential patents are those for which there are "commercially feasible" alternatives. The Court found a lack of evidence establishing that there were commercially feasible alternatives to the nonessential patents. With no such alternatives there can be no anticompetitive effect because no competition for a viable product is foreclosed. The Court stated the commission’s ruling could render an agreement per se unlawful later in time that was lawful when executed due to developments in technology that would convert an "essential" patent to a "nonessential" patent. Such a ruling would render patents unenforceable due to developments that occurred after execution of the license thereby increasing litigation "since the reward for showing that even a single license in a package was ‘nonessential’ would be to render all the patents in the package unenforceable."
For similar reasons, the Court also rejected the ITC’s rule of reason analysis, noting that contrary to the ITC’s findings, the respondents had failed to show any anticompetitive effect by virtue of the fact that some nonessential patents were bundled into their license. Further, there was no evidence supporting the ITC’s finding that competition in the area of the nonessential patients would be foreclosed as recipients of the license would be unwilling to consider alternatives.
The Philips decision distinguishes between "patent-to-product tying" cases, where the patent license is conditioned on the purchase of a product, and "package licensing" cases, where a group of patents are licensed at one price. Citing Supreme Court precedent, the Federal Circuit describes patent-to-product tying as a situation where "the patent owner uses the market power conferred by the patent to compel customers to purchase a product in a separate market that the customer might otherwise purchase from a competitor." In Philips, since licensees were "not compel[led] … to use [Philips’s] technology," the Court concluded the license was not anticompetitive. Interestingly. the Federal Circuit analyzed the case as if Philips was a licensor of its own intellectual property, not a licensor of pooled property rights of more than one company. The Philips case is now remanded to the ITC to determine whether "Philips’s package licensing agreements are more anticompetitive than procompetitive, and thus are unlawful under the rule of reason."
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