Patent Misuse And Antitrust Tying Analysis – Close But Imperfect Substitutes

Federal Circuit Holds That Patent Pools Without Anticompetitive Effects Are Lawful In U.S. Philips Corp. v. International Trade Commission.

On September 21, 2005, the Court of Appeals for the Federal Circuit reversed a ruling of the International Trade Commission (“ITC”) which had found that U.S. Philips Corp. (“Philips”) had committed “per se” patent misuse by “tying” the license of “essential” compact disk patents to the license of “nonessential” patents in a package licensing pool. The ITC found misuse both under a “per se” standard, and under the rule of reason.

As a threshold matter, the Federal Circuit sustained the ITC’s holding that Philips was not entitled to the statutory “safe harbor” of 35 U.S.C. Sec. 271(d)(5). This section, added in 1988 requires that in order to establish a claim of patent misuse, a defendant in a patent infringement action must show that the patentee had market power in the tying item, in the same fashion that it must be shown in a non-patent antitrust case. Commentators have suggested that the section was a Congressional repudiation of venerable pronouncements by the United States Supreme Court that economic power is presumed, where the alleged tying product is patented or copyrighted, and that proof of market power or economic effects is therefore unnecessary.1 Until informed by the Supreme Court that these pronouncements have been abrogated, the Federal Circuit acknowledges a doctrine of “per se” patent misuse. The issue of whether a presumption of market power is appropriate in patent cases is before the United States Supreme Court in Independent Ink., Inc. v. Illinois Tool Works, Inc.2

Section 271(d)(5) was inapplicable because, as the ITC found, and the Federal Circuit affirmed, Philips had market power in the market for computer data storage disks, at least by the late 1990’s, when it licensed the respondents. In adopting and affirming the ITC’s holding of market power, however, the Federal Circuit rejected the ITC analysis that Philips package licensing arrangement constituted “per se” patent misuse, under the “block booking” authorities of Paramount and Loew’s.

The court discussed the distinction between cases, such as Loew’s and Paramount, where the alleged tie was of a product to a patent, rather than a tie of one patent license to another patent license. While the tied products in Paramount and Loew’s were indeed copyrighted intellectual property, they were akin to the “staples” found in other venerable cases, including International Salt Co. v. United States,3 and United States v. U.S. Gypsum Co.4 The court found a “patent to product” tie to be much more “propitious” than a patent-to-patent tie, because the former practice forces a buyer to purchase and use an unwanted product, and forecloses opportunities to competitors in the market for the tied product. The court made it clear, however, that it indulges the concept of “per se patent misuse” in cases that have the vestigial blessing of the Supreme Court in Paramount and Loew’s. However, the “per se” patent issues doctrine will be limited to those specific fact patterns recognized by the Supreme Court.5

The court noted that the Philips package license did not require a licensee to practice or use any of the “nonessential” patents included in the pool. Accordingly, there would be no foreclosure of competitors in the art practiced by the nonessential patents. Rather the license merely conferred a covenant not to sue as to the “nonessential” patents in the pool. Nor, was there any evidence that Philips would have priced its licenses differently, had it been required to license the “essential” patents separately from the “nonessential” patents. The value of the package was largely, if not entirely, based upon the “essential” patents. Essentially, the “nonessential” patents were “free goods”. As such, they could have no anticompetitive effects in a downstream tied product market.

The court recognized that the ITC application of a “per se” misuse standard ignored the procompetitive effects of package licensing, including reduced transaction costs, avoidance of costly infringement litigation, and the elimination of uncertainty associated with technology investment decisions.

The Federal Circuit also agreed with Philips that the ITC had failed to properly analyze the factual issue of “essentiality” in determining whether there were “commercially feasible” substitute technologies for the teachings of the “nonessential” patents. Absent “commercially feasible” substitutable technologies, there could be no foreclosure of competitive opportunities in any downstream market. The evidence failed to disclose that there were any commercially viable substitutes for these patents that could impact the manufacture or sale of compact disk by manufactures who would have an interest in practicing the “nonessential” patents. Again, the Federal Circuit pointed out that the very concept of “essentiality” is one that is ephemeral and time-bound. The subsequent emergence of alternative technologies may render the patents that were originally considered “essential” to be something less than “essential”, if not “nonessential”. The application of a rigid “per se” misuse standard would therefore encourage licensees to opportunistically challenge package licenses after entering into them, in the hope of having all of the patents declared nonenforceable.

Finally, the court held that the ITC’s finding of misuse under the rule of reason was similarly flawed. This was because there was no evidence to support a claim that there could be any anticompetitive foreclosure as to any commercially viable alternative technologies relative to the “nonessential” patents in the packaged license. Again, the ITC had failed to credit the procompetitive efficiencies in Broadcast Music.6

The panel acknowledged the grant of certiorari in Independent Ink., but reasoned that it should go ahead and decide the case rather than waiting for the Supreme Court to determine whether or not Paramount and Loew’s were venerable, vestigial, void, or voidable.

  1. See, United States v. Loew’s, Inc., 371 U.S. 38, 45 (1962); United States v. Paramount Pictures, Inc., 334 U.S. 131 (1948).
  2. 396 F.3d 1342 (Fed. Cir. 2005), cert. granted, No. 04-1329 (United States Supreme Court, 2005).
  3. 332 U.S. 392, 395 (1947).
  4. 333 U.S. 364 400 (1948).
  5. See, e.g., Zenith Radio Corp. v. Hazeltine Res., Inc., 395 U.S. 100, 135-36 (1969) (“key inquiry is whether by imposing conditions that derive their force from the patent, the patentee has impermissibly broadened the scope of the patent grant with anticompetitive effects.”) C.R. Bard, Inc. v. The 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).
  6. Broadcast Music, Inc. v. CBS, 441 U.S. 1 (1979).

Authored by:

Don T. Hibner, Jr.

213-617-4115

dhibner@sheppardmullin.com