Appendix — Princo Corp. v. International Trade Commission

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Supreme Court, U.S.

O FILED

~ CU, ©6060 OFFICE OF :dTHE - CLER

Jn Che

ourt of the Wnited State

RINCO CORPORATION ANI

AMERICA CORPORATIO

ALViL ULES ‘ eS 4 a

VMitSs

N ALJ 4 ViIVEL SS

J } "> PORATION

in Petition For Writ Of Certiorar!

The United States Court Of Appea

For The Federal Circuit

APPENDIX TO

PETITION FOR WRIT OF CERTIORARI

ealed Portions Of Appendix Omitted He!

Eric L. WESENBI

BBINS, RUSSELL, EIN PERKINS Cole LLI

OrRSECK, UNTEREI 3150 Porter Drive

& SAUBER LLP Palo Alto, CA 943

L801 K Street N.W., Suite (650) 838-4300

Washington, D.C. 200 wesenberg@perkil

02) 775-4900 NNETH J. HAvpi

HN D. VANDENB TARRET G. RASM

ARQUIST SPARKMAN, L (DC Office)

yne World Trade Cents RICK, HERRIN«

121 S.W. Salmon St! SUTCLIFFE LLP

Suite 1600 O00 Marsh Roar

Portland, OR 9 Vienlo Park, CA !

> ~ ry

<a c fr) () f j

0.4) HOSED J 614 ‘

,_.PORATIO

AMERICA

RPORATI

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tre ri it) Potent 1) elopment. | ry !

+1) Ll Court held thiat i } IM proj }

er ol 1 patent retrivgeratinyg trans]

ickap r transporting and borin i}

ist that hh nse of that pat ni purcha e |

from the patent ownel rit itfiliate Phe ¢

ited Chat tI D rence nol

ynditi n of a license that Ih} tented } ibe] '

connection with the mnvention Nn

l] from the licensor ‘ i |

I the Court tated ha no ht | I

Ott) competition if) tine il ‘)] *) carb

ntrol over the upply oO} ich unpatented m

ond Line Ope r tne } C4 nor 16)

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mstitutes patent misus pul

Kastenmeier described the listed practices as “pate

licensing arrangements.” Id. Moreover, his catalogs

inlawful practices corresponded to the lst

proscribed practices set forth in the House bill

Patent Licensing Reform Act of 1988,” to which

illuded in his remarks. Id. at 32,294. Each of

prohibited practices listed in that bill was a conadit

eranting licenses, including the impositio1

tC to compete * 184

1QR : ‘ > . vet 4 + » . ) . YT? ; : '

1988) (statement of Rep. Robert Kastenmeler); H.]

mposing

1086, 100th Cong. (1988) (“unreasonably u

for a patent that th

Oovenants nm

condition of granting a license

censee may not produce or sell competing good

rom th ( VT xT 11 i< TNA} Repre 2E 7) f f

Kastenmelers reference nants n

npete on WI h.- the di ies was: vii

non-compete claus n patent licens Lot

ncerted refusals enseé among nol

mpetit T NO! T mnvthin -

egislative st pport

terpret

pecau Line L Lu nere i SSUC d S I

within anv of the five statutorily defined cat

Nonetheless, the statute is pertinent becaus:s

both the text ind the le f isl 1L1VE histor I the 1!

mendment to section 271(d) make clear, Cong

vas concerned about the open-ended scope of t

ctrine and sought nfin to anticompetiti

nduct by patentees wh ! é elr paten

btain econon idval

[his case presents a completely different scenar!

rom the cases previously identified by the Supreme

Court and by this court as implicating the doctrine of

patent misuse. Philips is not imposing restrictive

conditions on the use of the Raaymakers patents to

enlarge the physical or temporal scope of those

patents. Instead, the alleged act of patent misuse

that the panel focused on was the claimed horizontal

agreement between Philips and Sony to restrict the

availability of the Lagadec patent—an_ entirely

different patent that was never asserted in the

infringement action against Princo. Even if such an

agreement were shown to exist, and even if it were

shown to have anticompetitive effects, a horizontal

agreement restricting the availability of Sony's

Lagadec patent would not constitute mususe ol

Philips’ss Raaymakers patents or any of Philipss

ther patents 1n suit

Reduced to its simplest elements, the question in

his case comes down to this: When a patentee offers

to license a patent, does the patentee misuse that

patent by inducing a third party not to license its

separate, competitive technology? Princo has not

pointed to any authority suggesting that such

scenario constitutes patent misuse, and nothing in

the policy underlying the judge-made doctrine of

yatent misuse would support such a result

relies J A Lip it At WiItLNn WlusUuUal facts ‘ ompt

Metal Products. Inc., 453 F.2d 38 (4th Cir. 1971), as support

expansl Vé pal nt mist « the ry ly tnat ast th ‘

SUCH call agrTret Sies sa 4 ‘

increasing the pny sical or tempo! il CO}

patent in sult, and it therefore would not fall

the rationale of the patent m1susi Lloctt

“- ] cy ‘ 1

explicated by the Supreme Cou ind t!]

What patent misuse 1s about, In

leverage,” 1.e., the use of the patent power t 1m]

overbroad conditions on t

that are “not within the reach of the mono]

sranted by the Government.” Zenith, 395 U.S

136-38. What that requires, at minimum, is that 1

patent in suit must “itself significantly contribut:

to the practice under attack.” Kolene Corp., 440 f

at 85. Patent misuse will not be found when ther

“no connection” between the patent right and ft

misconduct in question, see Republic Molding Corp

B. W. Photo Utils., 319 F.2d 347, 351 (9th Cir. 196

or no “use” of the patent, ee Virginia Panel

ae _

F 3d at 870. In this AS! there 1] uch

] ny . ‘ ie

pecween tne putat

naaymakers

; y . |

patentee agreed pai

compete with the licensee for a period of ) yea Phe

held that the non-compete agreement violated “the common

prohibition against agreements 1n restraint of trade a

Section 1 of the Sherman Act,” and it further held tl

agreement constituted patent misuse that rendered

underlying patents unenforceable against any third-]

infringers. /d. at 44. That case is distinguishable on 11

but to the extent the court in that case held t

unenforceable based yn the patente iwreement tf limot

own freedom of action, we find the court’s conclu

iS patent n ‘

Princo makes several arguments in its effort to

bring this case within the scope of the traditional

patent misuse doctrine. First, Princo contends that

Philips “leveraged” its patents, as that term has been

used in patent misuse cases, because it used the

proceeds of its highly successful licensing program to

fund royalty payments to Sony and because those

payments gave Sony the incentive to enter into the

alleged agreement to suppress the Lagadec patent.

However, the use of funds from a lawful licensing

program to support other, anticompetitive behavior

is not the kind of “leveraging” that the Supreme

Court and this court have referred to in discussing

the leveraging of a patent that constitutes patent

misuse. See C.R. Bard, 157 F.3d at 1373 (“Although

the law should not condone wrongful commercial

activity, the body of misuse law and precedent need

not be enlarged into an open-ended pitfall for patent

supported commerce.”). Even if such use of funds

were to be deemed misconduct, it does not place any

conditions on the availability of Philips’s patents to

any potential licensees, so it is not the power of

Philips’s patent right that 1s being misused

Princo also argues that the Supreme Court ha

not required conventional “leveraging of a patent in

order to establish patent misuse For that

proposition, however, Princo relies on antitrust case:

in which the Court stated that a patentee is not

immunized against an antitrust violation by the

privilege of a patent; those cases did not involve

patent misuse or the enforceability of the defendants

patents. See United States v. U.S. Gypsum Co., 333

U.S. 364, 396-400 (1948) (finding unlawful pric

fixing and control of distribution of gypsum board)

Standard Oil Co. (Ind.) v. United States, 283 U.5

163, 174 (1931) (“[T]he limited monopolies granted to

patent owners do not exempt them from the

prohibitions of the Sherman Act.”). That is a

different issue altogether from the issue before us,

which is whether an infringing party can obtain

immunity against a valid charge’ of patent

infringement by showing an unrelated antitrust

violation. Although the Lagadec patent and the

Raaymakers patents were all included together in

the Orange Book package licenses offered by Philips,

those package licenses are independent of the

antitrust violation that is now being alleged, i.e., a

separate agreement between Philips and Sony to

suppress the availability of the Lagadec technology

[In theory, the reason an agreement with Sony ha:

value to Philips is because suppressing potential

competition with the Raaymakers technology makes

the Philips licenses more valuable. But that value

does not derive from the fact that Sony is a co

licensor with Philips or the fact that the Lagadec

patent is included in the package licenses. If the

Lagadec patent were owned by an independent third

party and not included in the Philips-Sony package

licenses at all, an agreement between Philips and the

third party to suppress the Lagadec technology

would have exactly the same economic impact on

Philips and Princo as the hypothesized agreement

with Sony. That agreement might be vulnerable to

challenge under the antitrust laws, but it could not

reasonably be characterized as misuse of the

Raaymakers patents. Thus, it does not follow from

the possible existence of an antitrust violation with

respect to Sony's Lagadec patent that Philips 1

L1ity | J

Raaymakers patent

The dissent does not find

the licensing agreements between Philips

licensees, but instead focuses its full attention on th

purported horizontal agreement between Philips and

Sony to suppress the Lagadec technology

dissent then characterizes that agreement

invoking the doctrine of patent misuse becaus«

‘oart and parcel” of the lhcensing agreeme

between Philips and Its licensees That

characterization, however, is incorrect. The Orange

Book licensing agreements control what the licensee

may do; the purported agreement between Philip

and Sony controls what Sony may do. At bottom

Princo’s complaint is not that its heense to the

Raaymakers patent: unreasonably conditioned

but that the Lagadec patent has not been mad

wailable for non-Orange-Book uses. And that 1

patent misuse ider any court's definition

purported apy WeeD Philip

ony has none of the features courts

characterized as constituting patent misus«

particular, it does not leverage the power of a patent

LO exact CONnCeSSIONS from a licensee that are not

fairly within the ambit of the patent rnght. Althoug!t

the dissent contends that using the leverage ol

patent against licensees ; not a necessar

component of patent misuse, every one ol the “patent

misuse cases cited by dissent a) that

proposition have that very fact pattern (except ic

ne Compton CASI ( Cu

—_

partner

j ~ - - , a

pm ~~ - 4 bah

wt a - ~ 1 ‘3

. — f

, -

>i p~

that Philips “included Sony in the [pa |}

because Sony brought anything nec ,

R/RW ter hnology but rather be V1) Sé

player in the industry, whose cooperati

wanted.” The Commi n found that ass

baseless and contrary to the t

witnesses th il Philiy | CI

technical reasons Thu though P)

length that the _ pooln arran

designed as a joint technical project det\ I

ind Sony, but rathe) wing PI

share its rovalt)

Book ta

mtra}

bilciti\ vv i i

} j } ;

> " q YoY f

-Lnat iInciuding tn I

licenses enabled Phili 1voI1d

non-( Yrangebook discs, tl _Lomm I Lal ]

Princo had “not identified evidence tablish

if Sony's |Lagadec patent

Lie enses, Sony LK

technologies that compr PamMst ti '

standard in a relevant market

adds d that there NQ viden 8 ora 1

Sonv “would have entered and

rinco 11d not I I potent

panutacture na é } een }! » license

Fe dec paten l? ( | | odau

ranye¢ book I lL ¢ u ht |

it possibilit P) pon

C I ‘ I il LI Ter | iT | 1 rT)

1 Tn oreti i hut [ ( Lf [1 if i if

e} ifact lice} I | ( )) f '

' } 7 | orn

ivreem«* f ] ! etl

ympetition in the re ant market Cal. Dei

Ass'n v. FTC, 526 U.S. 756, 775 n.1: 1999): In

Ciprofloxacin Hydrochloride Antitrust Lit;

F.3d 1323, 1332 (Fed. Cir. 2008) (noting tl!

ititrust plaintiff bears the initial burden of

} |

») actual adverse effect on competition); s

rox Co. v. Sterling Winthrop, Inc., 117 F.3d

d Cir. 1997) (antitrust plaintiff required to prod

dencs that th challengs i apreeme!l

mificantly Tes petitio! LU) S. Healtheca

Healthsou 986 | 1 589, 596 (Ist

m3) (no ruil reasol lat 11D

plaintiff must show restraint is likely “to impair

competition significantly”); DeLong Equip. Co. v

Wash. Mills Abrasive Co., 887 F.2d 1499, 1507 (11th

Cir. 1989) (antitrust plaintiff in rule of reason case

bears the burden of showing that the challenged

agreement had a “significant anticompetitive effect”);

Phillip E. Areeda & Herbert Hovenkamp, Antitrust

Law 4 1507c (antitrust plaintiff must introduce

evidence that defendants “have restrained trade

significantly” and have “impair[ed] competition” in a

relevant market).

What Princo had to demonstrate was that there

was a “reasonable probability” that the Lagadec

technology, if available for licensing, would have

matured into a competitive force in the storage

technology market. See United States v. Penn-Olin

Chem. Co., 378 U.S. 158, 17576 (1964) (requiring a

finding that there was a reasonable probability that

the competing companies would have “entered the

market” or “remained a_=e significant potential

competitor’). It was not enough that there was some

speculative possibility that Lagadec could have

overcome the barriers to its technical feasibility and

commercial success and become the basis _ for

competing disc technology. The Commission found

that Princo failed to show that the Lagadec

technology had technical or commercial prospects

that could enable it to compete with the Orange Book

technology. Those findings wholly undermine

Princo’s contention that this is a case in which the

patents in suit have been used as part of an overall

horizontal agreement with the effect of keeping a

viable competitor out of the relevant market

44a

The dissenting opinion seeks to sidestep the

Commission’s adverse factual findings by arguing

that the burden of proof should have been placed on

Philips, not Princo. The dissent acknowledges that

un agreement among joint venturers who would

otherwise be competitors is judged by the rule of

reason. Within that framework, however, the dissent

advocates a “quick look” rule of reason analysis on

the ground that any agreement not to compete 1s

inherently suspect and that competitive harm

therefore should be presumed.

Quick-look analysis applies to “naked restraint|s]

on price and output” where a detailed market

analysis is unnecessary to conclude that the

arrangements in = question have anticompetitive

effects. Cal. Dental, 526 U.S. at 769-70. In those

circumstances, only a quick look 1s necessary because

the arrangement is “so plainly anticompetitive that

courts need undertake only a cursory examination

before imposing antitrust liability.” Dagher, 547 U.S.

at 7 n.3; see also Cal. Dental, 526 U.S. at 781 (“The

object is to see whether the experience of the market

has been so clear, or necessarily will be, that a

confident conclusion ... will follow from a quick (or at

least quicker) look, in place of a more sedulous one.”).

However, the Supreme Court has cautioned that

presumptions of anticompetitiveness should not be

lightly invoked. Broad. Music, 441 U.S. at 8-9.

Rather, the Court has stated:

sonably

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patent lice

; technology,

from the

and Lagadec pat

ing the Lagadec

taaymaker:

agreement

licensee

iymakers

ents barring them

[rol

patent to develop an alternativ

chnology that would compete with the Raaymaker

echnology The mayjoritvty lds that ther

itent misuse ecau

ause the Lagadec patent ha

proceeding, see 1

rreement

[In the

esolution

. Philips

'T'C”) and

inel. Whi

ps no!

nfringem¢:

yroceeding

leading tri

pinion

) agree

nding

re ni I n Mit)

Wetermination manutactu

D-R or CD-RW dis iil in the United

thout taking a heer tO 1 Philip pat {

Philip ha Lhe p ! exclud , ny

») entering thn CD-R r CD-RW market te

Philiy ha market : rj the United

irket for licensing « nth | patent

inufacture of CD-R/RW radinge to Orange 5

indard becal there re no clos iostitu

r CD-R/RW

if) ré Certain Reco

yy Pé at W

if On|

ritabl Compact Dis in [ {"]

I | lip op il ae (Intl Ty cle (commn M

| Determinatio!l [ competi

ne} Cl)-! COUD-KRYV

ici

nnolo | he | . | ’ :

hnolo a ,

naa i 1Ke] i

ted ft OlVv) Vv

(i lat Q] ((D) | l ii] ] rit | |

eloping e C)D-] indard. Phili

rincers realize need i

ode

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ment

ianag

sociation hel

exchans

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apply ar

demonstrating that th

Lagadec technology coul

justified f the

Philips/Sony joi

e Majority Op. at 30-34,

theory procompetitive benefits from

could justify certain

circumstances,

nture agreement. se

ancillary re

at. eee pete

ne puraen remMmalns

ty seeking to justify the restraint to

nN fact. ‘)

recompetitive benefits

| ventures hav

antitrust laws.” NCAA, 4¢€

immunity from the

me Court has recently mad

anticompetitive

» | property Al

acreement

e not iustifie

a joint agreement

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tfootpall Os

Lajority

yalifornia Den

pete. bu

Lal |

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technology

iccording

mpetito1

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Internation

‘xample, CEMT

Orp 34 oq 1333. 1338 iv. 2OO03). we note

| ivention

neverthel

ind mont!

nvento.

mplement

uance ol]

POW LY Wu

uppre Cad ft nNnolos

sufficient: on the

chnology

ulficient

ietermin¢

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propriate

onsideration in the

,TY)

7 ~~

—

na am

j —

eo wm

_ aed

technologie that ba

Ve}

2 (citing U

Vetermination

Antitrust Guidelines for th

Property § 5.1 (1995))

(Commission concluded

not he en

patent

Comm!

und

1°)

the Lagades pat

mpetitor ior Philip

Ci { upstitute rit

Dept of Justice . |

Licensing of Intellectu

Xe) hat reasol

mint package lice

T the joint marketin

id mphasis in origin

r not bee nown

LO! rul ] tt DO

il »- licen

n competing enti

Ll | duct I

}

it) '

NO « P

Princ .

a e] uJ Dn]

itent I

lied n

t mu have | pot

Ural B

1 not j } :

I ( ! itl

n b }

| pet

1 ]

ho ( COOPC!

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id ( | nari tnat

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itribute Osta

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n i{ “VP hily

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(

mn tt

avreement is that it had engage

agreement with Philips to fix price

Significantly, the Commission finding

regarding the potential for the Lagadec technology to

senerate a competing system was not limited to th

state of the technology at the time the patent pool

was put into place. The Commission found that no

evidence had been introduced suggesting that there

was any prospect of competition between — the

Lagadec patent and other patents in the pool. As the

Commission put it, “there has been no showing that

the Lagadee ‘565 patent competes with another

patent in the pool, no showing that the pool licensor

would have competed in the technology heensing

market absent the pooling arrangement, and no

showing of anti-competitive effect” from the inclusion

of the Lagadec patent in the patent pool Minal

Determination 23; see also id. at 26 (Princo has “not

pointed to evidence that establishes that, absent th

pooling arrangements, the pool licenses would hav

competed in the technology licensing market’). The

Commission noted that the administrative law judge

had credited testimony that the Lagadee approach

“is prone to errors and ‘did not provide a scheme that

would work and was. reltrable ld it 24 n.19

The majority assert that. the Commission “did not cd

that Lagade« win fundamentally —incapabl of bein

commercialized as part of an alternative standard, but merely

that it was not workable within the context of existing Orange

Book technology.” [ do not interpret the Commission

statements to be so limited. The expert who testified that thi

Lagadec approach was “prone to errors” (and whose testimon

was credited by the administrative law judge) identified sever

problems with Lagadec ipproach that were not restricted

TS 3°

Because “there has been no showing that the patent

in the pool are substitutable,” the Commission

concluded, “the agreement between the licensors to

set a fixed royalty for the joint licenses under the

pool is not price fixing per se in the market for

licensing CD-R/RW patents.” Final Determination 26

Although the majority supgyests that Philips

contended that the Lagadec technology “must

already have been developed to the point of

commercial viability before misuse could be found,” I

read) the Commission’s observations about — the

absence of evidence of substitutability to apply not

only to the present but to the future as well. To the

extent that the Commission did not deal in detail

with the question whether there was a_ realistic

possibility that the Lagadec technology could) have

been developed into a viable competing system, the

the viability of Lagadee as a component of the Orange Book

platform. For example, the expert noted that “from bas

physics, you can just see that [Lagadec’s approach] 1s not a rood

solution, and it really wouldn't work well.” Thus, while the

Commission noted that Lagadec “does not work well according

to the Orange Book standards,” it added, separately, that

Princo had “pointed to no evidence that the Lagadec approach is

a commercially viable technological alternative — to the

technology of Philips’s ‘825 or ‘856 patents,” and that “the

commercial viability of a method that is prone to errors,

unrchable, and anworkable is doubtful.” Final Determination

24 n.20. Moreover, the burden was on Princo to show that pool

licensors would have competed in the technology heensing

market, and the Commission found that Princo did not point to

any evidence that Lapadec represented a commercially viable

approach, either inside or outside the context of the Orange

Book standard

fault for any hortia ith Pri whi

did not. offer any evidence even argument, to tl

tie

Princo was free to offer evidence that Lagad

vas substitutable technolopy and that there was a

realistic prospect that the invention of Lagadec could

be refined in the future to the point that it could be

used as a platform for technology that would compete

with the technology used in the Orange Book

ompliant discs. But Princo did not offer any such

evidence. The Commission did not require a showing

that Lagadec could have been used without further

development. to create a commercially successful

technology. To the contrary, even though Princo did

not point to any evidence of a realistic possibility

that the Lagadee invention could be developed into

competing technology in the foresceable future, the

Commission's analysis encompassed the possibility of

future developments metheless, the Commission

found no evidence that Lagadec would have been

likely to lead to competing technology but for th

pooling arrangements Princo failed to show

likelihood that the digital method of encoding

position data recited in the Lagadec patent would

lead to the development of discs that would use that

technology instead of the Orange Book analog

method of encoding position data, and that the

digital encoding technology would be used in disc

and dise readers that would compete with Orang:

Book compatible systems \s the Commission

explained, unless the competing technology would

have entered the market “to become a_ significant

competitive force,” it could not have augmented

ruture ¢ petit 1m ri | ae Yet tl

mpetitor to the Orange Book, it 1s not clear t

’rinco SQUATeLY 2. ented tnt arvument {

ommission. In its briefing before the Commi

] | » }

Princo argued that Orange Book heensi were 1

} ] ,

ermitted tf use the package patents for produ

} a | 4 > } }

it if me CO} f the Orange K, DU it did

vent, Princo weeded 1

oes as nit | “* | i(]

] > ! .

utsiae th ()) rier Bo r VOUILG [ nad {

4 }

nticompetitiy etfect in order for tn Pp Teel

mstitute tory of horizonta ep. I

{ } [>

mm On rnain that we bale

emonstrate that ab nt the } tent p iyreenn

} t , + } r } }

OnY WoOulda AVE mpete WIth (oranyee

echn yv—eilther lirectly = on eNnsIn

Lagadec patent . it ad pot

ublic Vet

ATES INTERNATIO?

COMMISSION

')}

ington, D.(

KR'TAIN

RECORDABLE

COMPACT DISCS

AND REWRITABI

COMPACT DIS¢t

Appe i } (1) t

} ? 4 (*] T | t ] { \ [ii OD

term iwwi0on oO { I { I I

tt Aet tr 1930 | LJ .e3.% = Cion

Certain Recordable Cor XD) 1 Rewrit

mpact Discs, Inv. No. 337-TA-474, and re mands

e for fur r proceedin with tl

Opin P} il ( ( i

mandate issued on December 27, 2005, returning

jurisdiction over this investigation to the

Commission. On remand, the Commission has

determined that complainant has’ shown the

existence of a violation of section 337. The

Commission has also determined to issue a general

exclusion order and cease and desist orders

PROCEDURAL BACKGROUND

The Commission instituted this investigation

on July 26, 2002, based on a complaint filed by U.S

Philips Corporation of Tarrytown, New York

(“Philips”). 67 Fed. Reg. 48,948 (2002). The complaint,

as supplemented, alleged violations of section 337 in

the importation into the United States, the sale for

importation, and the sale within the United States

after importation of certain recordable compact discs

and rewritable compact dises by reason of

infringement of certain claims of six U.S. patents,

viz., claims 1 and 5-6 of U.S. Patent No. 4,807,209

(“the ‘209 patent”); claim 11 of U.S. Patent

No. 4,962,493 (“the ‘493 patent”); claims 1—3 of U.S.

Patent No. 4,972,401 (‘the “401 patent”); claims 1

and 34 of U.S. Patent No. 5,023,856 (“the ‘85

patent’); claims 1-6 of U.S. Patent No. 4,999,825

(“the ‘825 patent”): and claims 20 and 23-34 of U.S

Patent No. 5,418,764 (“the ‘764 patent’). /d

The notice of investigation named 19

respondents, including Gigastorage Corporation

Taiwan of Hsinchu, Taiwan; Gigastorage

Corporation USA of Livermore, California

(collectively, “Gigastorage”); Linberg Enerprise Inc

(‘Linberg”) of West Orange, New Jersey; and

DiscsDirect.Com of Campbell, California. 67 Fed. Reg

—

- bun

; my T ryt ’ . +

mM a UNnenLlrorcCceaDl Or pate

misuse pet

ut on the ground that Philips’ practice of mandatory

package licensing constituted patent misuse per

1. tying arrangement between (1) licenses t

patents that are essential to manufacture CD-Rs o1

CD-RWs according to Orange Book standards? and (2)

icenses to four other patents that are not essential

o that activity, viz., U.S. Patent No. 5,001,692 (“th

Farla ‘692 patent”), U.S. Patent No. 5,060,219 (th

Lockhoff ‘219 patent”), U.S. Patent No. 5,740,149

“the [wasaki ‘149 patent”), and U.S. Patent No. Re

54.719 (“the Yamamoto ‘719 patent”). 69 Fed. Re;

11, 12712 (March 17, 2004); Comm'n op. at 23

ued March 25, 2004). The Commission took n

sition on the ALJ’s conclusion that the asserted

ert Ll nior ¢ Tall ror patent ¢ T ?

trecnl tandara ror tne manutacture f CD-K Qa

D-RWs are set out in two publications that are jointly issued

Philip and Sony Corporation (“Sony’). “Compact Di

ecordable System Description” (RX-407C), which is commonly

ferred to as Part II of the Orange Book, pertains to CD-Rs

Compact Disc ReWritable System Description” (RX-408C)

ynicn ommonly referred to as Part III of the Orange Bool

to CD-RV [Da ;

L.J identified twelve patent ncluded in the CD-]

D-RW package licenses as non-essential to manufacture CD

Rs or CD-RWs according to Orange Book standards. ID at 19

The Commission took no position on the ALJ's analysi f

13. TI

ight of those patents, viz., U.S. Patent Nos. 4,962,493 (“th

ramer “493 patent’); 4,807,209 (“the Kramer ‘209 patent )

942,565 (“the Lagadec ‘565 patent”); 5,126,994 (“the Ogawa

94 patent”); 5,978,351 (“the Spruit “351 patent”); 5,835,462

the Mimnagh ‘462 patent”); 4,990,388 (“the Hamada ‘388

nt”); and 5,090,009 (“the Hamad 009 patent’). C

based on theorie

discrimination. 69 Fed. Reg

The Commission also adopted at

conclusion that the asserted patents

unenforceable for patent misuse under a rule ol

reason standard based on the ALJ’s analysis of and

findings as to the tying arrangement. 69 Fed. Reg. at

12712; Comm'n op. at 50-52. The Commission took

no position on the ALJ’s conclusion that the royalty

rate structure of the CD-R/RW patent pools is an

unreasonable restraint of trade. 69 Fed. Reg. at

12712 n.2; Comm'n op. at 5, 51. The Commission al]

affirmed the ALJ’s conclusion that the patent misuse

has not been shown to have been purged. 69 Fed. Re;

at 12712; Comm’n op. at 63. Based on the

determinations, the Commission found no violati

of section 337 in this investigation. Id

Philips appealed the Commaissio

determination to the Federal Circuit, = and

respondents intervened. On September 21, 2005, the

Federal Circuit issued its decision in the appeal

reversing the Commission’s final determination. Ths

Court also stated that “|b]ecause the Commission did

not address all of the issues presented by thi

administrative law judge’s decision under both the

per se and rule of reason analysis, furthe

proceedings before the Commission may be necessa)

with respect to whether Philips’s patents are

enforceable and, if so, whether Philips is entitled t

any relief from the Commission.” Philips, 424 F.3d at

1198. On December 19, 2005, the Court denied

respondents’ petition for rehearing en ban TI

king

nm rem;

ted comms

portion 6)

(ommM) ion

ry." On

in} ut

ind

trom t

The ©

«> how

ne partie

OMI

] ;

SLOT)

qairecting

omments of the

Ageia:

‘The Comm)

{

March 10

‘ ion

PITIITIG

igia’

’

ply, v

11ed

ty t ht | (

the yt Philip a

Commission des

led

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ne mm n

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, } {

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npia |

mined to grant Philip

and to deny respondent

mm) on pr

ed products infringe tt

Livatiol

requirremen

ma (9) nol

(~Lomm1) ( no violation ol ction

tigation 7 if concluded, as did

tine patent in 1 ue are unenforceable to

nisuse on the part of Philips. The Commission foun

Tic i

nti |

tandard ynd

ential to thi:

: ;} !

; )

' ;

sackrY

uu i

nf ‘

(

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ae 4

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eopen = aduscover: rhnilips

proceeding “involved the law a

jurisdiction” and “was closed in its initial stage afte

;

nd process of a torelg

the [CD-R] manufacturers withdrew their complaint

‘subsequent to negotiations.” Philips

response comments at 35 (quoting EC press releas

dated February 9, 2006 (attached as Exhibit A 1

Philips notes that th

proceeding was filed

settlement

Respondents comments)

complaint leading to the EC

June 3, 2003, which is

evidentiary hearing in this investigation began

June 10, 2003. Philips asserts that “{r]Jespondents d

not explain what relevant ‘admissions or statement

' thos

+ }

one week before

Philips purportedly made during the course ol

foreign proceedings that respondents were not

liberty to elicit from Philips itself, when the record

1e CouUursé

this proceeding was still open or during tl

briefing before the Commission and the court

appeals, and that might shed new light on the issu

now before the Commission fe.

Respondents comments

4 |

\naly:

upport ol

CAST, respondents only Spe culate 1 Dt

ttatements that Philips might have made durin

the EC proceedings. Consequently h:

jetermined to deny respondents’ ui

record for further discover

¥er Se Theories of Patent Misi

earlier final determination

noted, in its

position on the conclusion

Ommission took no

TT) + hon +

LT | — we

Lt ot & shared

. =

i) i |

iffirmed the finding of the Commission and t!

LJ that Philips has market power in the relevan

narket for licensing U.S. patents that are essentia

r the manufacture of CD-Rs or CD-RWs according

Orange Book standards Philips, 424 F.3d at

186. They assert that “Phil

s controls entry int

ie United States product market for CD-R/RW dis

. T>

base >

r +h, 4 | sh PF ere + . eT m ge . *

pted the ALJ’s market definition and market power analy

th two exceptions. { m’n op. at 26-27 (finding the relevai

irket to be “the United States market for licensing th

ential U.S. patents for the manufacture of CD-R/RW discs

mpliance with Orange Book standards’). The Commiissi

1k no position on the statements in the final ID that

lips, Sony, Taiyo Yuden, and Ricoh are_ horizont

ympetitors in the patent licensing market” (ID at 173) and that

’ “the Philips CD-R and CD-RW patent pools

orizontal agreements among competitors” to control royalty

ites (ID at 175). Comm’n op. at 26 n.19. The ALJ did

constitute

[ n

xplain how he reached the conclusion that the licensors

orizontal competitors in the patent licensing market,” nor d

e offer any supporting citations to the record. The Commissio1

lopted the ALJJ’s finding that “[l]icenses to at least some of th

hilips patents are essential to the manufacture of CD-R/RW

are in technical and practical plial vith t Or

[compliant] CD-R/RWs without a patent licens

Philips.” Respondents’ comments at 49 (citing

370 (FF 97-99)).

In their discussion of applicable

standards, respondents argue that patent misuse pe}

se “may be shown by establishing that the patente:

made an agreement to set a fixed price, an

agreement to raise prices and/or an agreement to set

a price floor under the market.” Jd. at 45. They state

that in Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d

700 (Fed. Cir. 1992), the Federal Circuit discussed

three Supreme Court cases in which the Court “held

that a patent holder’s effort to set minimum price:

on products produced under a license agreement

between patent holders and licensees was patent

misuse.” Respondents’ comments at 43 (citing Baue?

& Cie. v. O'Donnell, U.S. 1 (1913); Straus 1

Victor Talking Mach. Co., 243 U.S. 490 (1917);

Boston Store of Chicago v. Am. Graphophone Co., 246

U.S. 8 (1918)). Relying on United States v. Neu

Wrinkle, Inc., 342 U.S. 371 (1952), they state that

the Court has found a Sherman Act violation when

patentees fixed minimum prices on_ product

produced under a patent license agreement. The:

note that in American Photocopy Equipment Co. |

Rovico, Inc., 359 F.2d 745 (7th Cir. 1966), th

Seventh Circuit concluded that the royalty |

license agreement had the effect of fixing

licensees’ minimum selling price

As pointed out by

The Rovico decision }

First, the decision

] VOCOTL\ Y(t Lin ( Jr/

they state that “| n an effort to rai

i price floor (as opposed to agreemen

rice) may violate the antit) t |

iments 1n Sil Ort i their conten

\LJ correctly found patent misuse per

According to respondents, Philips used 1 market

ower: ) to fix the price of licenses to patent

he manufacture of CD-R and CD-RV

discs at anti-competitive levels

price of CD-R discs in written

CD-R manufacturers; and (3) to

.D-R and CD-RW discs t

Respondents contend that Ph

ce of patent licenses in the market

sential CD-R and CD-RW patent

narket value. Respondents comment

| t] Philips wa le to ach

. / :

und that n fact the plaintill royaltie NV ere

<orbitant or oppressive, and the Seventh Cir

tfirmed, {3} F.2d 813 (7th Cir. 1967).] Second, th

uurt cited no authority directly on point and omitted

tation of cases in the Seventh Circuit genera

cognizing the d

ovalties. Third, the decisi

iscretion oO! j patente LO

ther] commentators a1

Cyd

mp Lib]

} I |

combining with its horizontal competitor

\fter the Taiwan Fair Tr:

CD-R patent pool illegal in 2001

manufacturers were

the patents of the three poo] licensors (Philip: ,

ind Taiyo Yuden) separately from ea

licensors. The ALJ found that hé

harged Sé parately by

Tet Commis

able to obtain patent

Sony and

much lower than the rovalties tho

able to obtain for

Philip

1t1-competit

hilip: sony

individual

‘

ime total }

varged higher royalty

» the royalties Philips obtained throu;

pondents assert that Philip

epitimat ication [

yalty f

be te) paten

I riled

n.120 (emphasis in the ID).'9 The ALJ concluded that

“Lagadec constitutes, at best, a substitute technology

for the ATIP standard, and at worst, an extraneous,

non-working add-on to the patent pool.” ID at 201.

Notably, even if Lagadec is a substitute technology

for the ATIP standard, it is not a_ substitute

technology that can be used to manufacture Orange

Book compliant CD-R/RW discs.*° Consequently, the

record in this investigation does not support a

finding that the Lagadec ‘565 patent competes with

the ‘825 or ‘856 patents.

In previous briefing to the Commission,

respondents argued that Philips and Sony were

potential horizontal competitors who “chose not to

compete,” but rather “effectively eliminated

competition in the industry by joining forces and

securing the cooperation of many other competitors

in following a single standard [the Orange Book]

based on their combined technologies.” Respondents’

. l , ‘ ec} POV r - ( WIC ¢ T9)

reply on Commission review of patent misuse at /Z-

added). Because the ID fails to provide a basis for that remark

we decline to adopt it

19 The ALJ credited testimony that the Lagadec approach is

prone to errors and “did not provide a scheme that would work

and was reliable.” ID at 200 (citing Trans. (Hesselink) at 2581,

2585; FF 94.

” “Respondents have pointed to no evidence that the Lagadec

approach is a commercially viable technological alternative to

the technology of Philips’ ‘825 or ‘856 patents. Moreover, the

commercial viability of a method that is prone to errors,

unreliable, and unworkable is doubtful. See Trans. (Hesselink)

at 2581, 2585

me ©

74 (filed January 16, 2004) (“the patent pools have

integrated competing implementations of at least one

aspect of recordable CD technology” (citing AL4J’s

findings of fact concerning Lagadec ‘565 patent, FF

157-470)). Respondents argued that “Philips and

Sony had been separately developing CD technology

prior to joining forces,” and “took their efforts a step

further by convincing many other competitors to

follow their standard rather than develop products

independently.” Id. at 73 n.41 (citing Dep. Trans.

(Heemskerk) at 134-37, 141-44).

However, the portions of the Heemskerk

deposition transcript (Dep. Trans. (Heemskerk) at

134-37) cited by respondents’ discuss’ the

development of the CD-DA disc format (Dep. Trans.

at 136:24—25) for the “conventional” CD (UD at 7).

The specifications for CD-DA discs and players are

contained in the “Red Book,” while the CD-R and

CD-RW system specifications are contained in the

Orange Book. FF 11-14, 18, 26. “One of the purposes

of the Orange Book is to ensure that CD-K discs are

backward compatible to CD digital audio systems,

which are covered by Red Book specifications.” FF 27.

The portions of the deposition transcript cited by

respondents discuss the presentation of a version of

the Red Book — not the Orange Book to a

consortium of Japanese companies (Dep. Trans

(Heemskerk) at 141-44). Although respondents

asserted that “Philips and Sony . . . convinc[ed] many

other competitors to follow their standard rather

than develop products independently,” the

specification under discussion in the portion of the

Heemskerk aeposition

respondents is the Red Book, not the Orange Bo

In their current briefing to the Commis:

respondents argue that Philips combined with it

“most likely’ horizontal competito) | rest.

competition:

[w]hen Philips decided to commercializ

recordable CD technology and patents, it coul

have — and should have licensed its patent

individually. Instead, Philips chose to coml

with its most likely competitor

21 The ALJ found that “[t]he development of recordablk

disc technology was initially spurred by the interest expresses

to Philips in creating a user-recordable optical disc compatibl

with existing CD hardware.” FF 3 (citing Trans. (Mons) at 36

(discussing CD-PROM development “write-once recordabl

disc”)). He further found that “Philips’ and Sony’s join

development of CD-R and CD-RW technology was an outgrowtl

of their earlier joint development work on compact di

technology and the work of others.” FF 2 (citing inter alia Tra

(Mons) at 371). Mons testified that after about a year of Philip

working by itself on the CD-PROM project, “we contacted Son

and asked them whether they would be interested in joining |

in this development.” Trans. (Mons) at 371. When asked w!

Sony was contacted, Mons replied that “we again liked to h

that combination of two groups of e1

that

[w]e were used to Sony }

done CD audio tog ther w

ROM together with them

work together with thi

worked wel]

Philips’ intent to control the CD-R/RW

markets and restrain competition

established by its history and actions. When M)

Heemskerk, Philips’ 30(b)(6) corporate

representative, was asked = why Philips

combined with Sony, he referred back to th

unwanted competition Philips endured in

trying to commercialize an earler storage

device, the audio cassette tape. (Heemskerk

Dep. Tr. at 127:22-130:09.) The adoption of

Philips’ audio cassette tape, and resulting

profits, was slowed due to the availability of

alternatives such as the 8-track tape. Id. Thus

to avoid such competition, Philips invited the

competition to work with Philips on CD-R/RWs

and combine their patents into one pool that

would successfully eliminate competition

Philips and Sony joined forces to develo}

recordable CD _ technology, rather’ than

competing with each other by developing

separate, competing technologies. (ID at 356-57

(FF 1-8).) Philips and Sony developed CD

R/RW formats around their patented

technologies, and codified mandatory us¢t

their patents in the Orange Book

Respondents’ comments a 9-50. Respondent:

argument is not persuasive because respondent:

have not pointed to evidence that establishes that

absent the pooling arrangements, the pool licensor

would have competed in the technology licensing

market. Respondents again rely on deposition

testimony (Heemskerk) relating to discussion

between Philips and jSon regarding the CD-D/

speciiication, not the Orange

Dep. Trans. at 126: 4-127:20

In sum, because there has been no showin:

that the patents in the pool are substitutable, the

agreement between the licensors to set a fixed

royalty for joint licenses under the pool is not price

fixing per se in the market for licensing CD-R/RW

patents. “An agreement among persons who are not

actual or potential competitors in a relevant market

is for Sherman Act purposes brutum fulmen |an

empty threat].” United States v. Sargent Elec. Co.,

785 F.2d 1123, 1127 (3d Cir O86) (bid riggin:

conspiracy)

Respondents’ allegations of per se price fixing

in the product market are also not persuasive

Respondents’ first argument is that Philips imposed

a price floor (i.e., a minimum price for CD-R and CD

RW discs) through the “anti-competitive minimum

royalty” charged for the joint lcense to the CD

R/RW patents of Philips and co-licensors. See

Respondents comments at 60-67. Respondent

argue that “Philips committed per se price-fixing

under Standard Oil because: (1) the royalty rat

imposed is a significant production cost; and (2) thi

combining patent owners dominate the industry.” /d

at 60 (citing Standard Oil, 283 U.S. at 174 (Th

rate of royalties may, of course, be a decisive facto)

in the cost of production. If combining patent owner

effectively dominate an industry; the power to fi»

and maintain royalties is tantamount to the powe1

to fix prices”)). However, Standard Oil doe:

compel a finding of per se price fixing in th

investigation becau nlik iwreemen

rnomen Le} |

Cain nNatent ich

rackin | produ ral

nerman ihe pat DOOLL} reeme

Lit il CLILa ql ; qdiqd mpo

eStriclion Upon Line qguantlty year

yrroduced, ot upon the pri ondit

ile, or upon the territory 1

bade landara (Ji |

rreement pro led { th ’

tent owne? ft thre ie rity ly

uld pa na minimum iit

cracked | lice.

if int langu

1 divi

prop

pre

, é4¢

Cril if) j

1din I }

en Ul }

(ir 1975)

Philips cor

manufacture!

manutacture

Supreme ‘

mere_fiwit

manutacture}

‘Restraints

ompetito1

horizontal]

isreement

distributi

Electrontu

therefore

row

General Electr

manufacturing

(concurring opinio

We decline to rely o

Ninth Circuit in Roy

to distinguish th

Neu burgh A if rere

(;reneral Electr

the Supreme Court

Circuit held that

applied only t

with price

patentee’s

,oryrs |

¥ct OUT

criticism. See,

‘>

31.2c (“[lJicensing )

tiple Lice

be thought pro-competitive,

antl competitive than

in [General Electric]

Intellectual Properl

Consequently, we d

ind instead

ppl

~~ - _

=~ = -

~ 2

— <

-— — ~ _

aca —

— ~ "

- ~,

- _~ =

I —. i

: erea i |

J ; | wpe

i | ¥

5 A ) |

ri f 4 4 , | | |

iotdéi | | |

S| q

OY oti

\ 4 at? ees: |

ty {I A ( | |

ado] niTeren

arguments

As noted, the Federal Circuit has indicated that th

standard developed in antitrust law is to be applied

in analyzing patent misuse allegations under the

rule of reason. Thus, for a restriction that 1s not

“reasonably within the patent grant” (Virginia Panel

133 F.3d at 869), the Federal Circuit would likely not

require a greater showing of anti-competitive effect

than is required to support an antitrust violation

under the rule of reason.36 Consequently, while the

proponent of the rule of reason patent misust

defense bears the initial burden of demonstrating an

adverse effect on competition as a whole in th

relevant market, the requisite adverse effect may b

shown directly (through evidence of an actual

idverse effect on competition) or indirectly (through

evidence of market power and market structure). See

e.g.. K.M.B. Warehouse Distribs., Inc. v. Walker Mfg

Co.. 61 F.3d 123, 127-30 (2d Cir. 1995). As discussed

below, respondents have failed to carry their burde1

of demonstrating the requisite adverse eltfect

B. Anti-Competitive Effects Philips

Licensing Practices

Introduct 1O

The Federal Circuit has stated that jpjatent

broader wrong than antitrust violation” and “may arise when tl

nditions of antitrust violation are not met.” C.R. Bard

- I IRTP QA Ath 1279 (Rad Cir 10°

SYS., dre I i i £340, is (red. Ul LYYS

mmMming

outweigh

their market share

ntractually obligating licensee

itents after the pate

“nreventling| lice

peting with the

itents ow

_EK/RW yp

i . ¥Y¥ /

pay royalties to Sony” for the Lagadec patent

which cannot be used to create an Orange book

compliant disc. IA’s response at 2. He argues that

“(t]his practice has the anti-competitive effects of

raising prices, reducing output, and foreclosing

competition.” Jd. He does not support the othe:

theories of competitive harm advanced b

respondents.

;

In sections B.2 through B.6, unfra,

discuss respondents’ theories of anti-competit1

harm, and in section B.7, we discuss the IA

argument concerning the Lagadec patent

Price Fixing

a. Respondents’ Position

Respondents argue that Philips harmed

competition by combining with its horizontal!

competitors to set royalty rates under the CD

R/RW pool licenses that “were substantially

higher than industry norms (ID at 401-402 (FI

337, 343)), and higher than the total rate that

could have been charged for separate licenses to

the respective CD-R/RW patents of the pool

members ID at 372, 443-444 (FF 111, 578, 58]

582).” Respondents’ comments at 77

They assert that “Philips further harmed

competition by burdening manufacturers with

those high royalty rates, and effectively setting a

price floor for sales of CD-R/RW discs.” Jd. They

argue that the minimum royalty “fixed prices at

higher levels than if the pool had not been formed

and licenses were originally available individually

trom) each patentes¢ /

79). Respondents characterize the

licenses as “lackling) any mechanism to adjust

the royalty rates given the precipitous drop 1n the

selling price of CD-R and CD-RW dis ’ Id. The

. decline from [| | cents in 1997 te

cents in 2003 (LD at 394 (FF 260)) an

epeated requests from licensees t

enegotiate the royalty rate, Philip

imply refused and allowed the

competitive consequences of it:

practices to continue. Philips’ arrogancs

born from the confidence of a market

ayer with both power and leverag

btained from coliusio1 vith }

Pililp a ert

m to competition ni isadvantage to parti ul

ompetitors, that must e shown to mak

ule-of-reason violation.” Philips response

> } : 1]

RBRrooke (,;TOILT) | re) ) \ VW}

i LA ;

/ ; ‘

orp U Pueblo Bou l () Mat. [ru

(1977); Intergraph Corp. |

1346, 1356 (Fed. Cir. 1999)

i Te. 11 Vv)

negotiated

Storage would

heaper in aggregate than

licenses (Princo and Gigasto

‘tually took individual hcenses

ree patent holders), that

most that two

woul

participant

WeTe WOTrSe

r joint licen

anything about

of the joint

whole il

nses on competit

arket with

pondent

‘

anutfacturt

unde I

tantiall

Philips furthe) irerue it hmigner roya

roa joint package would not establish harm te

competition because higher royalties “could reflect

the benefits of the package, such as reduced

transaction costs and freedom to operate.” fd. at 19

Philips asserts that “there is no legal basis for

condemning packages of patents that are not

economic substitutes for one another on the ground

that the package price is too high.” /d. (citing

Verizon. Comme’ns Inc. v. Law Offices of Curtis \

['rinko, LLP., 540 U.S. 398, 407 (2004) (“Phe mere

possession of monopoly power, and the concomitant

charging of monopoly prices Is an immportan

clement of the free-market sy

Philips contends that respondents = bh

failed to offer any evidence of anti-competitiv

effects in the product market. Philips’ response at

1. Philips states that from 1997 to 2002, thie

worldwide supply of CD-R discs increased and

prices fell, with a similar pattern for CD-RW di

ld. at 21-22 (citing IF 598, 211)

Analysis

yr «Line reasons discu ed below, we nik

determined to reverse the Al.J's determination

that the fixed royalty rate set by Philips and its co

licensors for the joint licenses constitutes patent

misuse under the rule of reason based on a theory

of price fixing because the record does not e staublish

the requisite anti-competitive effect in

irket

7 ]

d j i ,

y ]

° f

: +

rn 4

, ae

pe wl ) >

~~ has

—

f b dnd

> J 4 ad

rG bane r

° r

ar oo -

f w f

+—~

—

(Brat yed

market sha

‘

i7 1s based on

Yr. McCarthy's report

1762:15-1763:19

companies

drawn from

(CX-330). Trans

“ |

»e>

| CX-33i Brat

y that five companies gained market share

tablish the

xpense of other firms does not es

market-wide anti-competitive effect.

vous Ass'n, 448 |

requisite

Gregory v. Fort Bridger Rendez

1195, 12

Healthtrust

(10th Cir 2006): Coffey

IQR 1393 (10th

The \LJ found that the number

manufacturers of CD-R discs 2000. ID

172. However. he also found that “worldwid

demand, supply and |

CD-R dises grew rapidly during the

2002 to the point where, in 2002, there was

worldwide demand for nearly six billion CD-R dix

and an available supply of nearly 8 billion discs out

manufacturing

years al y(

fa total manufacturing capacity of over 10 billion

discs.” FF 210. As pointed out by complainant's

et f }

onomics expert, “when prices fall and ther

ta T1117

xcess capacity In a market, we see manul

OVC

exiting the market. That's what you'd predict a

competitive market would do.” Trans. (McCarthy)

at 1965:8-11. Moreover, even if the manufacturing

licensees are subject to different average royalty

rates depending on their customer mix (1.e., the

percentage of sales to Philips and its cross-

licensees), no “invidious discrimination” can arise

where there is a rational basis for any difference.

See Bela Seating Co. v. Poloron Prods., Inc., 438

F.2d 733, 738 (7th Cir. 1971).

Bela Seating involved a patent misuse

claim premised on a_licensee’s (Poloron’s)

allegation that the patentee offered a licence

under its patent requiring a royalty of $ 0.75 per

chair produced under the license although

another licensee (Hampden) paid a royalty of

only $ 0.175 per chair. 438 F.2d at 738. The

Seventh Circuit rejected the claim, stating that

where “there were rational bases upon which

[the patentee] could refuse to grant Poloron a

license on the same terms as it granted

Hampden’s license, there is no_ invidious

discrimination so as to offend the anti-trust law.”

438 F.2d at 738. The Seventh Circuit stated that

[t]he district court ... found that [the

patentee] Bela had sought a higher

royalty rate from Poloron because it

had determined that the earlher

license rate [to Hampden] was

“unreasonably low;” there is no

showing that Bela intended to deter

90c

competition with Poloron’s

competitors.

438 F.2d at 739. Under the standard of Bela

Seating, Philips has articulated a rational basis for

the effective average royalty rate differences

alleged by respondents. For this reason as well, we

believe that respondents have not established the

harm to competition required to prove patent

misuse under the rule of reason based on a theory

of price discrimination.

4. Expired Patents

a. Respondents’ Position

Relying on Brulotte v. Thys Co., 379 U.S.

29 (1964), respondents assert that it is misuse per

se to collect royalties for an expired patent.

Respondents’ comments at 81. However,

respondents state that

[s]ince Judge Harris did not find such a

per se violation, [rJespondents only

include this Philips licensing practice

here in the rule of reason test. Philips

has expanded the temporal scope of the

patent grant with lasting anti-

competitive effect—that tips the

balance even further in favor of patent

misuse.

Id. at 81-82.

Respondents state that the last essential

patent in the CD-R joint license that is owned by

Philips expires in 2014, while the last essential!

patent owned by co-licensors Sony or Taiyo Yuden

expire in 2009. They also state that the last

essential patent in the CD-RW joint license that 1:

owned by Philips expires in 2017, while the last

essential patent owned by co-licensor Sony expires

in 2009. Thus, they contend that from 2009 until the

last patent in each package expires, licensees are

obligated under the joint licenses to pay royalties

that will be given to Sony (CD-R/RW) and Taiyo

Yuden (CD-R) even though those companies n¢

longer have essential patents in the joint license:

Respondents argue that requiring licensees to pay

Sony's share of the joint license royalty rate after

Sony’s essential patents have expired imposes “a

significant financial burden” on license

manufacturers that would ultimately be paid by

consumers. Respondents’ comments at 82. They

contend that “[cJharging for expired patent

disadvantages manufacturers and consumers and

‘negatively impacts the market place.” /d

b. Responses

Philips asserts that this argument “was Iirst

raised by an amicus curiae before the Federal!

Circuit.”44 Philips’ response at 29. Philips furthe

ates Philips assertion 1S inconsistent with ani ¢ ariel tatement

LT own response Se Philips’ response at 5 n.1 (noting in a

parenthetical stating that patent expiration issues wert

addressed on pages 40-41 of its post-hearing brief on patent

misuse (filed July 14, 2003), and on pages 23-24 of its po

hearing reply brief on patent misuse (filed July 21, 2003))

Furthermore, respondents raised this issue before the ALJ (

;

Respondents’ post-hearing brief on patent miusus¢

argues that, even if the issue 1s properly presented,

respondents’ reliance on Brulotte is misplaced

because the Supreme Court “expressly allowed

patentees to continue to require royalties on

package licenses until the last patent in the package

expires.” Id at 29 (citing Brulotte, 379 U.S. at 30, 33

34). Philips identifies several lower court decisions

as recognizing that royalties may be due until the

last patent in a package expires. /d. at 30 (citing

Hull v. Brunswick Corp., 704 F.2d 1195, 1202-03

(10th Cir. 1983); Beckman Instruments, Inc. v

Technical Dev. Corp., 433 F.2d 55, 61 (7th Cir. 1970)

McCullough Tool Co. v. Well Surveys, Inc., 343 F.2d

381, 409-10 (10th Cir. 1965); Bayer AG v. House)

Pharms., Inc., 228 F. Supp. 2d 467, 472 (D. Del

2002); GAF Corp. v. Eastman Kodak Co., 519 F

Supp. 1203, 1236 (S.D.N.Y. 1981)). Philips also

notes two cases to the contrary. /d. (citing Scheiber t

Dolby Labs., Inc., 293 F.3d 1014, 1017 (7th Cir

2002); Rocform Corp. v. Acitelli-Standard Concreté

Wall, Inc., 367 F.2d 678, 680-81 (6th Cir. 1966))

Philips argues that, “even if respondent;

complaints otherwise had substance, they are not

ripe now, when all of the patents remain valid and

binding.” Jd. at 31. They assert that “it is not clear

from the record that Philips will continue to divide

the royalties from the pool licenses with Sony and

Taiyo Yuden after their patents expire.” /d

(arguing that because Sony's patents in the CD-R pool expire

before Philips’ patents in the pool, “the pool has the ant

competitive effect of enabling Philips to collect royalti

behalf of Sony even after its patents have expired

93¢

The IA notes that respondents’ theory that

“under the rule of reason, the patent pools are anti

competitive because they require the payment of

royalties after patents expire .. . may arguably be

meritorious.” LA’s response at 25 n.14 (citing Philips,

424 F.3d at 1195 n.8). Nonetheless, he argues that

respondents’ theory is not within the scope of the

remand because this theory was not addressed by

the ALJ or the Commission, and respondents did not

petition for review on this issue,

c. Analysis

We disagree with the IA’s_ position that

respondents have waived their argument that

Philips’ charging royalties for expired patents in its

CD-R/RW pool licenses has an anti-competitive

effect. The Commission determined to review the

patent misuse analysis in the final 1D in its entirety,

Respondents preserved this argument by raising it

before the Commission on review. See Respondents’

submission on review at 34, 49 (Jan. 9, 2004).

Respondents contend that requiring

manufacturers to pay royalties for Sony’s or Taiyo

Yuden’s expired patents “disadvantages

manufacturers and consumers” and “negatively

impacts the market place.” Respondents’ comments

at 82. However, in this case, respondents concede

that the joint licenses at issue all include Sony and

Taiyo Yuden patents that do not expire until 2009.

We also agree with Philips that the record does not

demonstrate that “Philips will continue to divide the

royalties from the pool licenses with Sony and Taiyo

Yuden after their patents expire.” See Philips’

response at 31. Consequently, respondents have not

established the actual antli-cOMpetlsLtlve ellect

required for finding a patent misuse violation und

the rule of reason.4”

Restrictive Use

b. Respondents’ Position

Respondents state that the jot CD-R/RW

and the Philips-only CD-R/RW licenses only allow

the hceensees to use the patents to practice the

Orange Book standard. Respondents’ comments at

83 (citing RX-1908C, RX-1904C, RX-992C, RX

843C). They argue that by restricting licensees to

making Orange Book comphant discs, licensee:

are prevented from developing “competitive

products that are based on, or derived from the

Orange Book.” /d. Thus, heensees are unable to

improve the product and are “lockf{ed]” into the

Orange Book technology. /d

b Responses

Philips states that the “ALJ correctly found

that Philips’ CD-R/RW licenses contain a Pproviston

that limits the licensees’ use of the patents to

manufacturing CD-R or CD-RW discs that comply

with the Orange Book standard.” Philips’ response

at 31 (citing ID at 370). Philips) characterize:

respondents’ “attack on the field-of-use restriction’

as “frivolous” because such restrictions have “long

noted, re pondent > have clearly pre ented th roarevum

is a rule of reason, rather than a per se, patent misuse cla

See Respondents’ comments at

been uncontroversial.” (dd. at 38.1 (citing Gen. Talking

Pictures Corp. v. W. klec. Co., 304 U.S. 175, 181

(1938); In re Indep. Serv. Orgs. Antitrust Litig., 203

M8d 13822, 1827 (Fed. Cir. 2000); Mallinckrodt, Inc. t

Medipart, Ine., 976 F.2d 700, 706 (Fed. Cir. 1992))

The TA notes that, while respondents’

limited license grant theory may have merit, that

theory is not within the scope of the remand

because it was not addressed by the ALJ or the

Commission and respondents did not petition for

review

c. Analysis

We have determined to reject’ respondents

argument that the field-of-use restriction in

Philips’ licenses are anti-competitive under the

rule of reason. While respondents did raise this

issue before the ALJ (see Respondents’ post

hearing brief on misuse at 45), they subsequently

waived this argument by failing to present it to the

Commission on review. Even if the issue were

properly before us, restrictions on use are within

the scope of the patent grant and thus cannot

constitute patent misuse. Gen. Talking Pictures,

304 US at 181; Mallinckrodt, 976 F.2d at 706, 708

6 Respondents’ Tying Arguments

2. Respondents’ Position

Respondents argue that Philips tied non

essential patents of Sony and Tatyo Yuden into

the joint CD-R licenses and tied non-essential

patents of Sony and Ricoh into the joint CD-RW

heenses. Respondents’ comments at 78-79. They

ssert that including the non-essential patents of

Sony, ‘Taryo Yuden, and Ricoh in the joint licenses

had the anti-competitive effect of eliminating the

“economic incentive” of the co-lcensors to compete

with Philips. /d. Respondents’ arguments with

respect to two Sony patents and two Tatryo Yuden

patents are discussed below However,

respondents’ discussion does not include any

substantive argument with respect to Ricoh’s

patents. See Respondents’ comments at 88-101

Respondents contend that, at the time of

the hearing, the jotnt CD-R license included only

two so-called “essential” Sony patents (Ogawa ‘*994

and Lagadee ‘565) and two so-called “essential”

Taryo Yuden patents (Hamada ‘OO9 and Hamada

388). 4° "Phey argue that, even using the “new

standard of ‘commercially feasible alternative’

developed by the Federal Circuit “to determine

essentiality,” none of the four patents is essential

to practice the Orange Book. /d. at 89, 91-101

According. to respondents, by including the four

non-essentral patents in the joint CD-R licenses,

“Philips ensured that Sony and ‘Taiyo Yuden

would not. develop alternative or competing

technologies.” /d at 89. Respondents further argue,

that at the time of the hearing, the CD-RW joint

license included only one so-called “essential” Sony

6 The Al.) found each of these four patents to be non-essential

but the Commrssion took no position on those findings tn

earber final determination. ID at 197-201, 209-13: Comm'n op

essential to practice the Orange Book. Thus, t

‘ a

ontend that | including the non entia

Lagade parte ni in the [ce RW pont license

Philip again ensured that Sony would on

compete with Philips. /d. According to respondent

Philips used this tying arrangement to “lock[{] uy

ts horizontal competitors, Sony and T

it OL. Re pondent ontend

bar mar } nT | an bare I l

iden patents was patent musi (11)

Q O9 12.) By including non-essent.

Vent

i \

I 1c Yuden i} th COTpe Lil

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ith fact { 10). predicted

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Respondents contend that the Sony Lagade:

965 illustrates Philips’ tying of non-essential

patents of its co-leensors into the joint lcense:

Which has the anti-competitive effect of preventing

the co-licensor patentee (here, Sony) from

competing with Philips. Thus, respondents contend

that

ijn the course of developing — tl

recordable CD standards, representative

from Sony and Philips met and considered

competing approaches to encoding control

information into the recording track on

the optical dise. The alternatives they

were selecting from were Sony’s Lagadc«

‘665 ( digital modulation of the track) and

Philips’ ‘825 and ‘856 patents (analog

frequency modulation). (ID at 198 (FE

164); Mons Tr. at 394:19-409:2.) Despite

oncluding that the Orange Book should

be written to use the approach of

Philips’ *825 and ‘856 patents, Philip

included Sony's . Lagadeec patent in the

pool. (11) at 198-199: Mons Tr. at 4108:33

109:2.) Accordingly, Philips improperly

included both the Lagadec ‘565 patent

long with Philips ‘825 and ‘856 patent

in the CD-R and CD-RW pool lcenses

even though Sony's approach had been

rejected. Because Philips and Sony were

choosing between alternative technologi

to perform the same function, both the

Sony Lagadec ‘565 patent and the Philip:

825 and ‘856 patent ‘ould not |

Sential

In tact, Philips witness, Dr. Hessel

proved that the Lagadec ‘565 patent is

essential. Dr. Hesselink testified

that the Philips ‘825

anticipated by the

because “the Lagadec ‘565

at tnial

patent Was nn

Lagadec ‘565 patent

patent

constitutes completely different

py that does not work well

according to the Orange Book standards.”

(empahsis

technok

in the original) (ID at 2OO

Judge Harris found that Dr. Hesselink’s

testimony “renders Lagadec extraneous

the Orange Book,

finding that it

{

and necessitates

non-essential

poo] mitts. ‘2OU

Respondents’ comments at 89-90

92-94. Respondents go on to argue that, under th

“commercially feasible alternative test

irticulated by the Federal Circuit, the Sony

Lagadec ‘565 patent is non-essential because “th

commercially feasible alternative is the Philip:

technology (t he 825 and ‘S56 patents

incorporated into the Orange Book and 1

worldwide by licen a

fry d)/

PMnSse rt / f i(

)

;

Respondents further argue that the Hamad

O9 patent, the Hamada ‘388 patent, and the

Orvawa ‘994 patent are non-essential to manufacture

Orange Book compliant CD-R discs. With respect t

the Hamada ‘009 patent, respondents rely

on the

testimony of Philips’ witness (Rubenstein) t

support their argument that the Mitsubishi

Verbatim” CD-R di

tested fe TA-Optil

LOO

evidences a “commercially feasible alternative

recording layer technology for CD-R discs that does

not practice the Hamada ‘009 patent. Jd. at 95

Respondents note that Philips relied on

Rubenstein’s testimony (Trans. at 2268) to argue

that “the Verbatim dise would not work with thi

Orange Book comphant systems because one of the

disc parameters, reflectivity, was not sufficient to

meet the Orange Book standards.” Jd. at 96. They

contend that Philips’ argument is contrary to the

evidence, reasoning as follows:

[Philips] argument, however, is directly

refuted by the evidence that the Verbatim

disc: (1) was commercially available (Dr

Rubenstein purchased this disc at a New

York-area retail outlet (Rubenstein Tr. at

2251) and (2) represented, according to Dr

Rubenstein, approximately 1.8°%o of the CD

R market at the time he performed his

analysis (Rubenstein Tr. at 2268). In 2001,

when Dr. Rubenstein tested the Verbatim

disc, there were approximately 6. billion

CD-R discs manufactured (ID at 214);

therefore 1.8°o of this market represented

roughly 100 mullion discs. It strains

credibility (and common sense), to argue

that Mitsubishi would capture 1.8°%o of the

market and manufacture roughly 100

million CD-R discs that would not work

with existing CD players and recorders. Dr

Rubenstein’s analysis clearly demonstrates

that a “commercially viable alternative.”

and Orange Book compliant alternativ

recording layer technology existed

patent 1) ' ential mani

()y { B mpliant { )_W 1)

ponaent OoOmment f i pona

issert that the anti-competitive elifect ol tying Ut!

non-essential Hamada patents to the CD-R p

liuminated’ ‘Taiyo Yuden

mpetitor to Philip

Responden

}

rmamada Oo patent tial

manufacture Orange Book comphant CD-R disk

because the record discloses several commercially

} ,

feasible alternatives to the claimed invention: tl

}

Mitsui Toatsu. Chemical (MTC) phthaloevanin

recording layer technology, the Bayer AG phot

iiddressable polymer (PAP) material, the tellurium

based material disclosed by Philips in an IEEE

Spectrum article from 1979, and Matsushita’:

rewritable phase change technology (PD disc:

Respondents assert that “[t]hese commerci

ilternatives were competitively disadvantaged |

the improper inclusion of the *388 patent in the CD

R Pool License.”*' Jd at 99. Respondents also assert

that including the two Hamada patents in the CD-R

oint hcense “provided Taiyo Yuden with a lucrat:

}

ish tlow, thereby inducin

. ’ +} Phil ’ f

npete ‘\ | ) enn |

Respondents argue that Sony's Ogawa ‘994

patent is not essential to the manufacture of

Orange Book comphant CD-R discs. Respondent

characterize the Ogawa ‘994 patent as “directed t

a method of setting the correct power of a laser

beam to write information on an optical disc.” /d at

99. They state that, although the Ogawa ‘994

patent relates to optimum power control (OPC)

methods, the OPC methods described in the

Orange Book are recommended, rather than

mandatory. /d at 99 (citing ID at 212; RX-407C

(Orange Book) section 1.4 remark 3 (stating that

OPC can be freely chosen), section B.14 (stating

that OPC disclosed is a possible implementation

Trans. (McLaughlin) at 1516-19)

Respondents argue that another company

] developed an alternative method for

determining optimum writing power that does not

practice the Ogawa ‘994 patent and that is fully

compatible with Orange Book discs. /d. at 100

(citing FF 484, FF 485, ID at 203, Trans

(McLaughlin) at 1518-20).48 Respondents assert

that the AL.J correctly found | | OPC and

write strategy method” to be “an economically viable

alternative for performing write strategy that does

not infringe” the Ogawa patent. Jd. at 101 (citing ID

at 212-213, FF 449). Respondents note tha

licensing of its technology to

Respondents appear to cite portion { th ALS tindins

i t t

fact and final ID that pertain to the Farla patent, rather than

the Ogawa patent. C/. [ID at 438 (FF 537-539, FF 541-545), FI

4. ID at 21:

| (FF 450, 451,

Trans. (McLaughlin) at 1568-67) “is proof that the

technology was viable.” Jd at 101

r of the

Respondents argue that Philips’ tyin

Sony Ogawa ‘994 patent into the CD-R pool license

harmed competition in two ways. First, by

providing royalties to Sony for this non-essential

patent (and the non-essential Sony Lagadec ‘565

patent), Philips “ensurfed] that Sony would not

develop an alternative, competing product with its

non-essential patents.” /d at 101. Second, as found

by the ALJ, | | alternative technology was

disadvantaged because “when | | tried to

license its technology, the target companies would

not consider the | | technology, even though

superior, because they already had a license under

the Philips patent pool.” Jd. at 101 (citing FF 455,

156, Trans. (McLaughlin) at 1572:4-15, 1574:6-20,

57 5:15-1576: 2)

Respondents also argue, more broadly, that

Philips unreasonably foreclosed competition by

including non-essential and essential patents in

the same package license and “forcing licensees to

accept both essential and non-essential patents as

part of a license to practice CD-R and CD-RW

technology.” Jd. at 84, 83-88. Respondents contend

that

(llicensors of alternative technology have

a significantly more _ difficult time

competing with the technology covered by

the non-essential CD-R and CD-RW

patents in the Philips licenses. (CX-355

[MPEG-LA U.S. Dep’t of Justice business

LOA

review letter]; CX-357 I8CDVD US Dep't

of Justice business review letter]; Brati

Tr. at 1630:5-18, 1804:11-19.) The

economics are against’ licensors of

alternative technology because potential

licensees have already received licenses

to competing technology from Philips

Licensees’ receive the non-essential

patents with their Philips’ license and use

that technology (which they have been

forced to pay for) as opposed to alternate

non-licensed technology that is also

available to them. (Bratic Tr. at 1693:14

1694:5; 1804:11-19.) The financial

incentive created by Philips’ licensing

practices to use the non-essential patents

unreasonably forecloses competition with

alternative technology and_ unfairl

disadvantages such competitors

Id. at 84-85 Respondents argue that the ALJ found

that the inclusion of non-essential patents in the

CD-R/RW pools suppressed emerging alternative

technologies. Jd. at 86 (citing ID at 185, 190, 191)

Thus, they contend that including non-essentia

patents in the pools

adds leverage to the licensing value

both the patent and the _ pool by

permitting the patent holder and it

fellow pool members to demand fron

licensees the high pool royalty rate that

the subject patent might not be able t

achieve on its own. This result 1

inherently anti-competitive becauss

above

tends tO ralst royalty rates

competitive levels [T]he ant

competitive pressure that the pool exert:

on outside competitors is strong because

licensees are wedded to _ the _ pool

technology and are reluctant to add to

their royalty costs by using the

competitor's non-pool innovation in plac

of what 1s licensed through the poo!

it S86 (quoting If) at 191)

Relying on Hazeltine Research, In

Zenith Radio Corp., 388 F.2d 25, 33 (7th Cir. 1967)

and Grid Systems Corp. v. Texas Instruments, In«

771 F. Supp. 1033, 1038 (N.D. Cal. 1991), they

argue that “the offer of non-essential patents a:

part of a single-price package of mandatory patents

leaves licensees little or no incentive to spend

additional money to purchase licenses to or develop

alternative technologies.” Jd. at 86. They contend

that the ALJ found that the financial incentive

created by Philips tying “unfairly disadvantaged

alternative technologies.” /d. at 87 (citing ID at 185

(“Adding [non-essential] patents to the pools add:

leverage to the patent’s bargaining position in

licensing negotiations with manufacturers, and

unfairly competes with existing or emerging

alternate technologvies’))

Respondents argue that the ALJ correctly

found that technically and economically viabl«

alternative technologies exist that do not infringe

the non-essential patents (ID at 422 (FF 449-454),

129 (FF 482-485, 499, 500, 502), and _ that

“competitors have been harmed with respect t

licensing their alternative technologies (ID at 4:

(FF 455, 456)) ld at 487. They further conte

la} Philip witni even testified tha

Philips was aware that its non-essentia

patents might be competing with othe

companies patents. (1D at 422 (FF 448).)

l'estimony was also presented that ther

was no incentive to pay extra money fo:

licenses to alternative technolomes whe

they were already paying exorbitant

royalties to Philips. (ID at 447 (FF 600

Rratic Tr. at 1693-94 )

hey also contend that wet \lud corre

found that including non-essential patents in th

Philips-only package license for no _ addition

royalty is also patent misus«s i ‘+t 87-88 (citine T]

it 219-20)

Respondents assert that th commerce}

feasible” technologies identified as alternatives t

the Sony and Taiyo Yuden patents “were improper!

restrained by Philips’ tying,” viz., | | (OPC)

technology (alternative technology ) n Ovawa

994 patent); | | the

tellurium material of Philips described in an IEEE

Spectrum article, and | | dise

(alternative technology to ‘1 Yuden Hamada

‘388 patent); and the | | technology

(alternative technology to Taiyo Yuden Hamad

O09 patent). /d. at 88 (citing [ID at 423-436 (IF 4

156, 482-85. 493-94, 498-502, 520. 526-3

LOS

finally, respondents assert that the tying of

non-essential patents ultimately harms competitio1

in the CD-R/RW) product market because the

“stiflfing|” of innovation in alternative technologie

prevent consumers from benefitting from bette

technology Id. at 88 (citing Trans. (Bratic) at

1693:14-1694:5)

D Responses

Philips characterizes respondent Lying

irgument as based on the Taiyo Yuden and Sony

patents previously unaddressed by the Commussio1

(viz., the Hamada’388 and ‘O09 patents, the Ogawa

994 patent, and the Lagadec ‘565 patent) and

suggest that respondents “apparently concedef{]”

that the four other patents previously unaddressed

by the Commission (viz., the Philips’ U.S. Patent

Nos. 4,962,493; 4,807,209; 5,978,351; 5,835,462 (“th

Kramer ‘493 and ‘209 patents,” “the Spruit ‘351

patent,” and “the Mimnagh ‘462 — patent

respectively)) “are essential or otherwise have no

bearing on alleged misuse.” Philips’ response at 23

\s to respondents’ argument that Philip

harmed competition by tying the four non-essential

patents of Sony and Taiyo Yuden into the pool

heenses, Philips responds that the four patents ars

essential, rather than non-essential as found by the

\LJ Philips states that it previously argued to the

Commission that the ALJ erred in finding thos

patents to be non-essential. It asserts that under

the standards “for assessing commercial viability

and market demand in determining essentiality’

adopted by the Federal Circuit, no basis exists for

finding any of the four patents to be non-essential

~ a

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;

6C DVD Business Review Letter (June 10, 1999

(CX-358)), 94. The passage in the Business Review

Letter quoted by respondents reads as follows

If the Licensors owned patent rights that

could be licensed and used in competition

with each other, they might have an

economic incentive to utilize a patent pool

to eliminate competition among them. A

pool that served that purpose “would rais¢

serious competitive concerns.” In

combining such substitute patents, the

pool could serve as a_ price-fixing

mechanism, ultimately raising the price of

products and services that utilize th

pooled patents

6C DVD Business Review Letter (CX-358) at

accord 3C DVD Business Review Letter (CX-357) at

(“Inclusion in the pool of two or more of thos

[substitute] patents would risk turning the pool into

a price-fixing mechanism”). We discussed

respondents’ price-fixing theories concerning the

Lagadec patent in section ILA supra of this opinion

royalties, thereby ensuring that Sony would not develop

alternative, competing product with its non-essential patent:

Respondents’ comments at 101. However, respondents have not

identified any patents included in the licenses at issue as

allegedly competing with the Ogawa ‘994 patent. Respondents

assertion of anti-competitive effect 1s not persuasive because

they have not identified evidence establishing that, if Sony’s

Ogawa ‘994 and Lagadec ‘565 patents were not included in the

licenses, Sony lhkely would have developed technologies that

competed against the Orange Book standard in a relevant

market

As stated above, we are not persuaded by these

theories because the record does not support a

finding that the Lagadec ‘565 patent competes with

the ‘825 or ‘856 patents. Respondents also failed to

identify evidence demonstrating that, absent the

pooling arrangements, the pool licensors would

have competed in the technology licensing market.

In subsection IILB.7 infra of this opinion, we

discuss the IA’s closely related argument, which we

also do not find persuasive

The Ogawa ‘994 Patent

The ALJ found that the Calimetrics OPC and

write strategy method is a commercially viable

substitute that does not infringe the Ogawa ‘994

patent. ID at 212; FF 449, 450, 453, 454, 542, 551.

He found that the Philips patent pool adversely

affected the ability of Calimetrics to license its

alternative OPC and write strategy technology. FF

455, 456. Under the standard articulated by the

Federal Circuit in its opinion remanding this

investigation, the evidence is insufficient to prove the

anti-competitive effect of foreclosing competition in

the alternative technology that competes with the

technology covered by the Ogawa ‘994 patent As

noted above, the Federal Circuit found the evidence

of record did not support the Commission’s finding

that the inclusion of the Farla ‘692 and Iwasaki ‘149

patents had the anti-competitive effect of foreclosing

an alternative technology developed by Calimetrics.

Comm'n op. at 50-52, 61-62 (citing FF 454-456). The

evidence of foreclosure from the inclusion of the

L18c

Ogawa ‘994 patent is the same as that previously

found insufficient by the Federal Circuit

The Hamada ‘388 and ‘009 Patents

The ALJ found that the Verbatim CD-R disc

manufactured by Mitsubishi is a commercially

viable substitute that is not covered by the ‘009

patent.°? ID at 209-11. He found that including the

Hamada ‘009 patent had the anti-competitive

effect of foreclosing competition from such

substitute technologies. ID at 211. In support of his

finding of foreclosure of competition, the ALJ relied

only upon a statement in a business review letter.

Id. (3C DVD Business Review Letter (CX-357) at

10 (‘the inclusion of patent rights for which there

were viable substitutes . . . could injure

competition by foreclosing such substitutes’).

Under the standard articulated by the

Federal Circuit in its opinion remanding thi:

52 For the same reason, the record does not support finding a1

anti-competitive effect on competition from the foreclosure of

commercially available alternatives to the Spruit ‘351 patent

See ID at 212. It is unnecessary for us to determine whether the

ALJ correctly found that the Calimetrics OPC and write

strategy method is a commercially viable alternative technology

that does not infringe the Ogawa ‘994 or Spruit ‘351 patents,

because the Federal Circuit has found the evidence of

foreclosure of the Calimetrics technology to be insufficient

3 As noted, Philips argues that the Verbatim disc is not

commercially viable, Orange Book compliant alternative. The

ALJ made no express finding that the Verbatim disc wa

Orange Book compliant

119¥¢

investigation, even assuming arguendo that the

ALJ’s finding that the Verbatim disc is a

commercially viable substitute is correct, *4 the

evidence is insufficient to prove the _ anti-

competitive effect of foreclosing competition in the

alternative technology (the Verbatim CD-R disc)

that competes with the technology covered by the

Hamada ‘009 patent. There is testimony in the

record that the market share of the Mitsubishi disc

was “approximately 1.7 to 1.8 percent.” Trans.

(Rubenstein) at 2268. Although Rubenstein also

testified that the disc “was an old design that was

phased out” (Trans. (Rubenstein) at 2268), we are

unaware of any evidence that would link that

phasing out (and associated decline in market share)

to the inclusion of the Hamada ‘O09 patent in the

CD-R pool.

The ALJ also found that three alternative

technologies existed that are not covered by the

Hamada ‘388 patent, viz., technologies by |

|, and Philips’ tellurium-based

material. °° FF 527-530. Although the ALJ

' We find it unnecessary to decide this contested is

“In their briefing to the Commission, respondents also argue

that certain technology developed by |

alternative technology that does not practice the ‘388 patent

Respondents’ comments at 98-99. Respondents’ argument is

defective because (1) the ALJ made no findings concerning this

alternative and (2) respondents failed to provide any citations

to the record in support of their argument. Respondents also

waived this argument by failing timely to present it to the ALJ

See Respondents’ post-hearing brief on patent misuse at 18-19

(mentioning alternative technologies of |

and Philips, but not discussing Matsushita technology)

L201

specifically found that the Hamada ‘388 patent has

“commercially viable substitutes” (FF 523), his

findings of fact concerning those _ alternative

technologies do not identify any evidence that those

technologies are commercially viable. See FF 523

530; Trans. (McLaughlin) at 1539:9-1545:1; RX

1418.4C; RX-1418.5C. Moreover, respondents have

not identified any additional evidence that would

support their contention that those technologies are

commercially viable. See Respondents’ comments at

97-99 (citing RX-1418.4C, RX-1418.5C, RX-1418.6,

RX-181). As Philips correctly notes, respondents

have not offered evidence that the Mitsui Toatsu

alternative was ever marketed. Philips correctly

characterizes its own tellurium-based material and

the Bayer AG technology as “theoretical possibilities

described in research articles.” See Philips’ response

at 28 (referring to RX-181 (article from [EKE

Spectrum) and RX-1418.6 (article from Japanese

Journal of Applied Physics)). The ALJ’s finding of

fact that “commercially viable substitutes” exist (FF

523) is clearly erroneous because it lacks evidentiary

support. Under the standard articulated by thi

Federal Circuit in its opinion remanding thi:

investigation, the evidence is insufficient to prove

the anti-competitive effect of foreclosing competition

because it does not show a negative effect on

commercially available technology that compete:

with the technology covered by the Hamada ‘388

patent. See Philips, 424 F.3d at 1197-98

[In their current briefing, respondents assert

that by including the Hamada ‘388 and ‘009 patents,

Philips eliminated Taiyo Yuden as a_ potential

competitor by “locking” Taiyo Yuden into the CD-R

We find respondent

argument unpersuasive because respondents failed

to identify evidence establishing that, if the Hamad

patents were not included in the licenses, Philip

and Taiyo Yuden likely would have competed in

relevant market. Moreover, respondents have 1

attempted to identify any patent in the CD-R |

that competes with either of the Hamada pat

in it previou

ymmission adopted t

conclusions as to the lwas:

found patent misuse under

tandard. Comm'n op. at

Circuit reversed. Philips

The Federal Circuit found the Commission's rt

f reason analysis flawed because the evidence

the record did not support the Commussio1

Onding of anti-competitive effect on competit

ffering alternative technolog |

19 patent. /d. at

\ithoug!

cluding Ricoh’ non-essential patent

joint licenses had the anti-competitive

cliiminating Ricoh economu

compete with Philip:

upport that assertion with

irvument S¢ Responden

}

effect are insufficient to support a finding of

patent misuse under the rule of reason.*®

The Kramer ‘493 and ‘209 Patents, and the Mimnagh

‘462 Patent

In his final ID, the ALJ did not identify any

commercially available alternative technology to

that covered by either of the Kramer patents or the

Mimnagh ‘462 patent. See ID at 207-09, 212-13.

Consequently, under the standard articulated by the

Federal Circuit in its opinion remanding this

investigation, the evidence is insufficient to prove an

anti-competitive effect of foreclosing competition in

alternative technology that competes with the

technology covered by any of these, three patents.

See Philips, 424 F.3d at 1197-98.

i The IA’s Argument Regarding the

Lagadec ‘565 Patent

a. LA’s Position

The IA asserts that the Federal Circuit

affirmed the Commission’s previous determination

that Philips has market power in the relevant

market, viz., the United States market for licensing

the essential U.S. patents for the manufacture of

CD-R/RW discs in compliance with Orange Book

standards. He states that the ALJ correctly found

As respondents make no mention of the Farla ‘692 patent in

their tying argument, they apparently concede that the Federal

Circuit remand opimon «s conclusive as to any such claim

+ ¢

concerning the Farla ‘6!

patent

ny s Lagadec 565 patent to be non-essential

manufacture of Orange Book-complhant dises. Th

[A argues that the Lagadec patent is an alternative

technology to the Philips ‘856 patent, which

essential to practice the Orange Book standard, and

that the Lagadec patent “cannot be used to create an

Orange Book-compliant CD.” LA’s response at 19: se

id. at 19-24. The IA contends that because thi

Lagadec ‘565 is the only U.S. patent owned by Sony

that is listed as “essential” in the CD-RW patent

pool, “Sony receives royalties for the Lagades

patent ... despite the fact that the licensees cannot

use the patent for Orange Book-Complhiant CD

RW ld. at PF

i I ne? “07 / al (

] mH TI '

e [TA chat { rf

he CD-R pool.” LA’s response at 26 n.15. Although he cones

hat “Sony does have an essential patent in the CD-R |

irgues that “this patent has relatively little economic va

ind certainly does not explain why Sony receives | rf th

ital royalty).” /d. In earlier briefing to the Commi t

tated that Sony owned three patents in the list of essent

yatents in the CD-R pool: the Lagadec ‘565 patent, the Ogaw

94 patent, and the Tezuka ‘850 patent. Response of the Offi

f Unfair Import Investigations to Philips’ Petition for Revi

it 40-41. The IA took the position that the ALJ correct

termined that the Lagadec ‘565 and Ogawa ‘994 patents

yn-essential. /d at 31-36, 3-40. He noted that respondent

xpert McLaughlin did not express an opinion as to whether t

zuka ‘850 patent is essential to practice the Orange Bo

tandard patent. /d at 41 n.27. In 2001, Dr. Rubenstein opin

it the Tezuka patent was essential for CD-R discs. CX-3

etter from Kenneth Rubenstein to Mr. Fumihiko M

Pn" ~_

+ p—

anno

aed

ponte

——

at f

fil,

asked to have the Lagadec ‘565 removed

from any of the pools, or from any Sony

only hceense. No more is required to

justify inclusion of the ‘565 patent in the

CD-R/RW pool licenses

Philips argues that including the Lagadec “565

patent did not result in a higher royalty for the CD-

RW joint license. It contends that the [A’s argument

lacks factual support and makes no economic sense.

Philips contends that the division of royalties among

the licensors “has never been tied to particular

patents or jurisdictions. /d. at 4 (citing Trans

(Beune) at 2356-60). It asserts that the pool licenses

“grant licensees worldwide rights” and the lhcenses

include rights to Sony’s patents in jurisdictions

other than the U.S. 7d. at 4-5 (citing Trans. (Beune)

at 2356-60 and chart attached to respondents

response). Thus, Philips argues that there is n

factual basis for attributing Sony’s share of the CD-

RW joint license royalty to the Lagadec ‘565 patent

Although the IA relies on the ALJ's finding that the

royalty Sony obtained for its patents was lower than

Sony's share of the royalty for the joint lcense,

Philips contends that “the record evidence about thi

price effects of splitting the joint licenses is at best

inconclusive.” /d (cross-referencing Philips’ respon

it 19-20). Philips also argues that

even if combined prices did decline whe

single-company licenses were offered

there would be no basis to conclude that

inclusion of the Lagadec ‘565 increased

price f the pool. The Sonv-on!]

licenses (as shown by the half dozen or so

Sony- only CD-R licenses included in the

record, see RX-1464 -70, 1872) also

included the Lagadec' patent. A

comparison of the prices of a pool license

and individual- company licenses can

demonstrate nothing about the price

effect of a patent that is included in both

(except, perhaps, that any difference

could not be attributable to that patent).

Philips contends that the IA’s theory

“makes no economic sense” because “[i]t has been

understood for decades that tying two products

together ‘does not alter the price paid by buyers,

the profit earned by the seller, or the volume

produced and used.” Jd. at 5 (citing [IX P. Areeda

& H. Hovenkamp, Antitrust Law, An Analysis of

Antitrust Principles and Their Application

11706b at 63 (2d ed. 2004) and W. Bowman.

Tying Arrangements and the Leverage Problem, 67

Yale L.J. 19, 21-23 (1957)). Philips asserts that

“It]here are exceptions to this principle

where the two [tied] products are used in varying

although

proportions . . . [t]hose exceptions do not apply

where, as here, the royalty charged for a package

does not vary based on the frequency with which

particular patents are actually used.” Jd. at 6 n.§

(citing [IX Areeda & Hovenkamp at 63-64)

Philips notes that the IA’s argument

based on his contention that the Lagadec patent

cannot be used to manufacture CD-R/RWs

According to Philips, “[i]nclusion of [a useless]

license would not increase the amount [licensees]

are willing to pay for the pool (an amount that is

set, as the Federal Circuit recognized, by the value

to them of the right to make Orange Book discs);

and Philips would not be able to increase the

legitimate royalty attributable to the pool’s

essential patents by including the Lagadec patent

in the pool.” Jd. at 6-7. Philips reasons as follows:

If a seller has a monopoly in one product—

as the [LA] alleges Philips has with respect

to essential CD-R/RW patents—then

buyers will have a certain demand for that

product, and the seller will set the

monopoly profit-maximizing price

accordingly. If there is some_ second

product over which the seller does not have

market power (here, nonessential patents),

a buyer will be willing to pay no more for

that product than it would have to pay for

an acceptable alternative—even if the

seller will only sell the two products

together. In other words, the buyer will be

willing to pay for both products no more

than the sum of the monopoly price for the

first product and the competitive price for

the second. Even if the seller ties the two

together, if he seeks to charge more than

that total price for the package, buyers will

see the addition as an increase in the price

for the tying product, and the seller will

accordingly be charging — irrationally

more than the profit-maximizing price for

that product. This is why, as the Federal

Circuit put it, “it is entirely rational for

patentee who has a patent that is essentz:

to particular technology, as well as othe

patents that are not essential, to charg

what the market will bear for the essential

patent and to offer the others for free.” U

Philips, 424 F3d at 1191

Here, the premise of the [IA’s] ni

argument is that the Lagadec ‘565 is not

just nonessential, but actually useless. If

that were correct, then rights under the

Lagadec patent would be of no value at all

to licensees. In that event, by definition

Philips could not use its own patents t

force licensees to pay any more for

package that includes the Lagadec than

they would be willing to pay for a packags

that did not

Philips’ reply at 5-

Philips dismisses the IA theory

competitive harm, viz, that Philips “secured Sony

adherence to the CD-R/RW system” by “forcfing]

consumers to pay supra-competitive royalties t

Sony’ (IA’s response at 31), as “based on nothing but

speculation” that makes no economic sense. /d. at 6

8. Philips contends that the argument

“economically incoherent” because the royalties f

the package can be no more than the value

manufacturers of the right to make Orange Bo

discs rt.¢.. the vah f th é ent i natent

manutacturers) (cross-referencl

previous argument, id. at 5 Philips asserts tl

the [LA’s theory

makes no sense because (i) Philips could

have “co-opted” Sony just as effectively

by paying it a share of royalties for it

other patents (including the 19 other

Sony patents in the CD-RW pools or the

Ogawa ‘994 patent in the CD-R pool)

and thus had no need to include thi

Lagadec ‘565 in the pools for that

purpose; (i1) receiving a moderate share

of Orange Book pool royalties would not

likely dissuade Sony from developing

any otherwise’ viable alternative

technology from which it could get all

the royalties; and (i11) it would be foolish

for Philips to pay a portion of the

Orange Book royalties in order to “co

ypt” Sony while ignoring all the ot

technology companies that might be

compete against 11

[A argument tl Philiy pa y licens)

reduced output, Philips contends that even if the output

l'aiwanese manufacturers rose when Philips’ co-licensors bs

offering separate licenses to their patents, “it plainly ha

nothing to do with the Layadec ‘565 because that patent wa

ncluded in the Sony-only licenses, as well as the joint licens:

ld. at 8 n.6. Moreover, Philips characterizes the evidence

lecreased output cited by the IA as inconclusive becau

gleneral swings in worldwide market share o

ilt from any number of variable /

Philips characts

potential-competition merge! joint-venture

theory—that two firms that were otherwiss

potential competitors in the future instead

improperly joined forces in a common enterpris«

ld. at 9. Philips states that to establish harm

competition the proponent of such a theory mu

prove “(1) that, but for the collaboration, the

‘outside’ firm—here, Sony— would have entered the

market within a reasonable period of time’ t

compete against the Orange Book, and (2) that

there are no more than three or four firma equally

likely to compete against the Orange Book.” Jd. at 9

(citing V P. Areeda & H. Hovenkamp, Antitru

Law, An Analysis of Antitrust Principles and Their

Application 4| 1121a at 53 (2d ed. 2004)). Moreover:

the first requirement “requires proof both that th

firm would likely have competed and that it would

have ‘survived to become a significant competitiv:

force.” Id. (citing VP. Areeda & H. Hovenkamp

intitrust Law, An Analysis of Antitrust Principle:

and Their Application 4 1128a at 94). Philip

asserts that neither requirement can be met in thi

case because “there is no evidence that anyon:

could have competed successfully against the

Orange Book standard; that Sony would have tried

to do so; or that, if it had, it would have succeeded

ind there is no evidence that “other firms were n

equally able to compete against the Orange B

yrsy

Analysis

We have determined to reject the IA’:

argument that Philips’ inclusion of Sony’s Lagadec

‘565 patent in the CD-R/RW pool is a_ tying

arrangement that constitutes patent misuse under

the rule of reason for failure to establish the

required anti-competitive effect. Below, we address

each of the IA’s three theories of anti-competitive

effect, beginning with higher prices

Relying on a leading antitrust law treatise,

Philips asserts that the IA’s theory that including

the Lagadec patent in the joint licenses leads to

higher prices “makes no economic sense.” Philips’

reply at 5. As Philips notes (Philips’ reply at 6 n.5),

the portion of the treatise *’ quoted by Philips

describes the effect of a fixed proportion tie in which

“the tied product [is] used in fixed proportion with

the tying product.” Areeda, {| 1706b1 (emphasis

added). However, in this case, although a licensee

must (by definition) use the essential patents to

manufacture an Orange Book comphant CD-R/RW,

a licensee may or may not use the non

‘ssential patents.©° Because this is not a situation

! Kven if a fixed proportion tic leads to the monopolist of thi

tying product obtaining a monopoly of the tied product, “that

second monopoly does not alter the price paid by buyers, thi

profit earned by the seller, or the volume produced and used

where “the second monopoly of a tied product [is| used in fixed

proportion with the tying product.” Areeda, 4) 1706b1

" A patent is essential af aft is mecessanly infringed by

compliance with Orange Book standard or if there 1s no realisty

ilternative to it in implementing th tundard (i.

4 f +

4 f 4 ;

= os ~ = > 1 =

a = | | — — ad oo oy

- ee

: ~ pense

aad - 4 Pe

their CD-Rs and CD-RWs are licensed by Philips”

order to facilitate enforcement. IA’s remedy brief at

9 n.3. Although the IA does not expressly oppose

inclusion of such a provision, his proposed general

exclusion order omits it. Without such a provision,

the burden on Customs to identify infringing CD-Rs

and CD-RWs is” hkely to be — substantial

Consequently, we have included such a certification

provision in the exclusion order

The proposed general exclusion order attached

as an addendum to Philips’ current briefing to the

Commission includes a personal use exemption for

“up to 200” CD-R or CD-RW discs that “accompany a

person arriving in the United States and are for the

arriving person’s personal use.” Philips’ comments,

Addendum A (proposed general exclusion order) 4[3

No party has previously suggested that a personal

use exemption be included in the gencral exclusion

order in this investigation, and there has been no

briefing on this issue. The numerical limit (up to 200)

proposed by complainant may prove impracticable

for Customs to administer. Although we do not

object to a personal use exemption in this case, we

see no reason to depart from the form used recently

by the Commission in another investigation. The

genera! exclusion order issued by the Commission in

Certain Lens-Fitted Film Packages, Inv. No. 337-TA

106, includes the following personal use exemption

[t]he aforesaid lens-fitted film packages

are entitled to entry for consumption

into the United States, without payment

of bond, if upon importation they

accompany a person arriving in_ the

ommissl101

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irrangements were instituted in the early

Yet Princo did not enter into its agreement

June of 1997, and GigaStorage did not enter

licensing agreement until October of 1999

ny lack of rket power that Philips and

olicensors may have had in the early 1990s

irrelevant to the situation in the late 1990s. whe

the parties entered into the agreements at iss

\t that time, according to tl

law judge's well-supported finding

ompact discs had become “unique products [with] 1

lose practice substitutes.” Philips’s argument about

lack of market power is therefore unpersuasive, an

hat reason section 271(d)({5) does

statutory

loft,

irgument

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that the legmslative

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mmission indicates

tying arrangements 1n

Apart from its specific challenge to the

Commission's ruling on the market power issue,

Philips launches a more broad-based attack on the

Commission’s conclusion that Philips’s patent

licensing policies constitute per se patent misuse. In

so doing, Philips makes essentially two arguments:

first, that the Commission was wrong as a legal

matter in ruling that the package licensing

arrangements at issue in this case are among those

few practices that the courts have identified as so

clearly anticompetitive as to warrant being

condemned as per se illegal; and second, that the

Commission erred as a factual matter in concluding

that Philips’s package licensing arrangements reflect

the use of market power in one market to foreclose

competition in a separate market. We address the

two arguments separately

In its brief, the Commission argues that it is

“hornbook law” that mandatory package licensing

has been held to be patent misuse. While that broad

characterization can be found in some treatises, see 6

Donald S. Chisum, Chisum on Patents § 19.04{3]

(2003), cited in C.R. Bard, Inc., 157 F.3d at 1373; 8

Ernest B: Lipscomb III, Lipscomb’s Walter on

Patents § 28:27 (3d ed. 1989 & Supp. 2003), Philips

invites us to consider whether that broad proposition

is sound. Upon consideration, we conclude that the

proposition as applied to the circumstances of this

case 1s not supported by precedent or reason.

In its opinion, the Commission acknowledged

that the Virginia Panel case and many other patent

tying cases “involve a tying patent and a tied product,

rather than a tying patent and a tied patent.”

(emphasis in original). The Commission nonetheless

concluded that “finding patent misuse based on a

tying arrangement between patents in a mandatory

package license is a reasonable application of

Supreme Court precedent.” In so ruling, the

Commission relied primarily on two Supreme Court

vases: United States v. Paramount Pictures, Inc., 334

U.S. 131, 156-59 (1948), and United States v. Loew’s,

Inc., 371 U.S. 38, 44-51 (1962).

condemned the practice of “block-booking” movies to

theaters (in the Paramount case) and to television

Those cases

stations (in the Loew’s case) as antitrust violations.

Block-booking is the practice in which a

distributor licenses one feature or group of features

to exhibitors on the condition that the exhibitors

agree to license another (presumably inferior)

feature or group of features released by the

distributor during a given period. In Paramount and

Loew's, the Court held that block-booking, as

practiced in those cases, was per se illegal. The

Commission reasoned that the practice of block

booking that was the focus of the Court’s

condemnation in Paramount and Loew’s is similar to

the package licensing agreements at issue in this

case and that under the analysis employed in

Paramount and Loew’s, Philips’s package licensing

agreements must be condemned as per se patent

misuse.

We do not agree with the Commission that the

decisions in Paramount and Loew’s govern this case

In Paramount, the district court held that the

defendant movie distributor had engaged in unlawful

conduct because it offered to permit exhibitors to

show the films they wished to license only if they

agreed to license and exhibit other films that they

were not interested in licensing. The Supreme Coun

affirmed that ruling. The Court held that block

booking was illegal because it “prevents competitors

from bidding for single features on their individual

merits,” and because it “adds to the monopoly of a

single copyrighted picture that of another

copyrighted picture which must be taken and

exhibited in order to secure the first.” 334 U.S. at

156-57. The result, the Court explained, “is to add t

the monopoly of the copyright in violation of the

principle of the patent cases involving tying clause;

Id. at 158.

Because the block-booking arrangement

ssue in Paramount required the licensee to exhibit

all of the films in the group for which a license wa:

taken, the Paramount block-booking was more akin

to a tying arrangement in which a patent license i:

tied to the purchase of a separate product, rathei

than to an arrangement in which a patent license i

tied to another patent license. Indeed, all of th

patent tying cases to which the Supreme Court

referred in Paramount involved tying arrangement

in which, as the Court described them, “the owner of

a patent [conditioned] its use on the purchase or uss

of patented or unpatented materials.” 334 U.S. at

157 Because the arrangement in the Paramount

ise was equivalent in substance to a _ patent-t

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exclusive rights, but it also precluded exhibitors, as a

practical matter, from exhibiting other films. that

they may have preferred over the tied films they

were required to exhibit. Because Philips’s package

licensing agreements do not compel the licensees to

use any particular technology covered by any of the

licensed patents, the Paramount case is not a sound

basis from which to conclude that the package

heensing arrangements at issue in- this” case

constitute patent misuse per se,

In the Loew's case, the district court

determined that the heensce television stations were

required to pay fees not only for the feature films

they wanted, but also for additional, inferior films

As im Paramount, the fact that the package

arrangement required the television stations — to

purchase exhibition rights for the package at a price

that was greater than the price attributable to the

desired films made the tying arrangement very much

like a tying arrangement involving products. ‘Thus,

the Supreme Court explained that a “substantial

portion of the licensing fees represented the cost of

the inferior films which the stations were required to

accept.” Lowe’s, 371 U.S. at 49. Following the

approach employed in Paramount, the Supreme

Court applied the principles of cases involving tying

arrangements between patents and unpatented

products and concluded that the tying arrangements

in the case before it had all the anticompetitive

features of the block-booking arrangements — in

Paramount and no redeeming procompetitive

features.

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see also Herbert Hovenkamp, IP and Antitrust

o4.2c, at 34-7 (2004).

Philips introduced evidence that packag:

licensing reduces transaction costs by eliminating

the need for multiple contracts and _ reducing

licensors administrative and monitoring costs. See

Tex. Instruments, Inc. v. Hyundai Elecs., 49 F. Supp.

2d 893, 901 (E.D. Tex. 1999) (describing how

“extremely expensive and time-consuming” it is for

parties to license and manage the licensing of

technology by using individual patents and how it is

preferable to employ a patent portfolio). Package

licensing can also obviate any potential patent

disputes between a licensor and a licensee and thus

reduce the likelihood that a licensee will find itself

involved in costly litigation over unlicensed patents

with potentially adverse consequences for both

parties, such as a finding that the lceensee infringed

the unlicensed patents or that the unlicensed patents

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

parties a way of ensuring that a single licensing fee

will cover all the patents needed to practice a

particular technology and protecting against the

unpleasant surprise for a licensee who learns, after

making a substantial investment, that he needed a

license to more patents than he originally obtained.

Finally, grouping licenses in a package allows the

parties to price the package based on their estimate

of what it is worth to practice a particular technology,

which is typically much easier to calculate than

determining the marginal benefit provided by a

license to each individual patent. In short, package

licensing has the procompetitive effect of reducing

the degree of uncertainty associated with investment

decisions.

The package licenses in this case have some of

the same advantages as the package licenses at issue

in the Broadcast Music case. The Supreme Court

determined in that case that the blanket copyright

package licenses at issue had useful, procompetitive

purposes because they gave the licensees “unplanned,

rapid, and indemnified access to any and all of the

repertory of [musical] compositions, and [they gave

the owners] a reliable method of collecting for the use

of the their copyrights.” 441 U.S. at 20. While

“liJndividual sales transactions [would be] quite

expensive, as would be individual monitoring and

enforcement,” a package licensing agreement would

ensure access and save costs. Id. Hence, the

Supreme Court determined that such conduct should

fall under “a more discriminating examination under

the rule of reason.” Id. at 24.

In light of the efficiencies of package patent

licensing and the important differences between

product-to-patent tying arrangements and

arrangements involving group licensing of patents,

we reject the Commission’s conclusion that Philips's

conduct shows a “lack of any redeeming virtue” and

should be “conclusively presumed to be unreasonable

and therefore illegal without elaborate inquiry as to

the precise harm they have caused or the business

excuse for their use.” N. Pac. Ry. Co. v. United

States, 356 U.S. 1, 5 (1958). We therefore hold that

the analysis that led the Commission to apply the

it justified b'

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21d

obtain “market benefit” beyond that conferred by the

patent)

In this case, the evidence did not show that

there were commercially viable substitutes for the

Karla, Iwasaki, Yamamoto, and Lokhoff patents that

disc manufacturers wished to use in making compact

discs compliant with the Orange Book standards

There was thus insufficient evidence that including

the four “nonessential” patents in the Philips patent

packages had an actual anticompetitive effect. That

is, the evidence did not show that there were

commercially viable substitutes for those four

“nonessential” patents that disc manufacturers

wished to use in making compact discs compliant

with the Orange Book standards.

Two of those four patents, the Farla and

Iwasaki patents, cover a method of controlling the

recording of information onto compact dises, L.e., a

“write strategy,” including an “optimum power

control procedure,” ’ The Commission found that

In its amicu uriae brief, the New York Intellectua

Property Association note that. unlike the other § thre

ilegedly nonessential patents, the Iwasaki patent would expire

after all of the undisputedly essential patents. As a result, the

presence of the [wasaki patent in a patent licensing packag

could have the effect of extending the obligation to pay royaltie

beyond the expiration date of the “essential” patents \

provision requiring that royalties be paid beyond the life of a

patent has been held to be unenforceable. See Brulotte v. ‘Thy

Co., 379 U.S. 29, 30 (1964). However, because neither the

Commission nor the administrative law judge addressed the

impact of that potential temporal extension of the royalt

obligation, and none of the parts addressed that ue

ippeal in their briefs, we do not iddre the issue here

22d

another company, Calimetrics, Inc., had developed a

commercially viable, — alternative = method — of

performing the write strategy and the optimum

power control procedure that is not covered by the

Farla and Iwasaki patents. In making that finding,

the Commission relied solely on the testimony of Dr.

Stephen MeLaughlin, = Calimetrics’s — principal

scientist, who had helped to create the technology m

question. Dr. McLaughlin testified that Calimetrics

had created a general write strategy; that “in the

development of [that] technology | [Calimetrics]

determined that this write strategy was applicable to

CD-R and CD-RW systems”; and that the company

has “spent an enormous amount of effort: promoting

[its] idea... .” While that testimony was sufficient

to support the Commiussion’s finding that there was

an alternative technology to the Farla and Iwasaki

patents, it did not show that the Calimetrics

technology was an alternative that Philips’s licensces

wished to use in place of the technology covered by

the Farla and Lwasaki patents. The Commission did

not point to any evidence that any licensee or

potential licensee asked to have any of the four

“nonessential” patents removed from the package

license and that Philips refused to do so. Although,

as noted, GigaStorage asked about obtaiming = a

license to only certain patents, in the hope that by

eliminating some patents the royalty rate would be

lower, the evidence did not show that GigaStorage’s

request related to the four “nonessential” patents or

that GigaStorage had any interest in_ licensing

Calimetrics’s technology.

Dr. MeLaughlin — testified, regarding a

hypothetical situation, that “[w]hen we go and try to

23d

license this technology, the companies say we have

technology that) performs a function of this type,

and... | presume they would be referring to [the

nonessential CD-R/CD-RW] | patents.” That

testimony, however, falls short of showing that any

of Philips’s licensees were forced by the package

license agreements to license the Parla and Iwasaki

patents when they would have preferred to use

Calimetrics’s technology. Dr. McLaughlin did not

testify as to even a single specific instance on which

a disc manufacturer expressed a preference for the

Calimetrics technology but was dissuaded from

licensing it by Philips’s insistence on licensing the

Farla and Iwasaki patents as part of its package

license arrangements. The evidence thus didnot

show that there was a demand for the Calimetrics

technology that went unmet because of the coercive

effect. of Philips’s inclusion of the Farla and Iwasaki

patents in its package licensing agreements.

As for the Yamamoto patent, which covers a

method of creating master discs by using one laser

beam, the Commission again relied on the testimony

of Dr. McLaughlin. The Commission found that

Calimetrics had developed a commercially viable

alternative method of creating master discs by using

two laser beams. Dr. McLaughlin's’ testimony,

however, does not support the Commission’s finding.

Dr. McLaughlin stated that it was “fairly casy to

conceive of alternative methods for implementing the

functionality of the intention of . . . what [the

Yamamoto] patent is directed towards” and that it

would “certainly [be] possible to do this using two

beams ... .”. Yet the mere possibility that

alternative technology might at some point become

2dad

available ts not sufficient to support a finding that at

the time the Philips leenses were executed, there

was actually a commercially available alternative to

the technology claimed in the Yamamoto patent.

Finally, the Commission found that the

Lokhoff patent was not “technically essential” to

manufacturing discs comphant with the Orange

Book standard. The Lokhoff patent covers a system

for providing copy protection by placing a “copy bit”

into a compact disc for the purpose of determiming

the type of information that may be received for

recording. The Commission found that an

alternative exists to the Lokhoff patent. In so doing,

the Commission again relied on testimony by Dr.

McLaughlin, who stated that copy protection could

be achieved by “embedding copy protection and user

data,” instead of by using a copy bit. Dr.

McLaughlin’s testimony, however, does not establish

that the alternative technology was commercially

available to be substituted for the technology of the

Lokhoff patent. He stated that the alternative

embedding method was a “very wide area of research.

There's a lot of activity going on these days 1n using

this general approach "That testimony

indicates research interest in a possible approach to

solving the problem of embedding, but it does not

establish the existence of an available, commercially

practicable alternative to Philips’s technology.

Beyond the absence of factual support for the

Commission's findings, the Commission's analysis of

the four “nonessential” patents demonstrates a more

fundamental problem with applying the per se rule

of illegality to patent packages such as the ones at.

25d

issue in this case. [fa patentholder has a package of

patents, all of which are necessary to enable a

licensee to practice particular technology, it is well

established that the patentee may lawfully insist on

licensing the patents as a package and may refuse to

license them individually, since the group of patents

could not reasonably be viewed as distinct products.

See Landon, 336 F.2d at 729. Yet over time, the

development of alternative technology may raise

questions whether some of the patents in the

package are essential or whether, as in this case,

there are alternatives available for the technology

covered by some of the patents. Indeed, in a fast-

developing field such as the one at issue in this case,

it seems quite likely that questions will arise over

time, such as what constitutes an “essential” patent

for purposes of manufacturing compact — discs

compliant with the Orange Book standard. Roger B.

Andewelt, Analyzing Patent Pools Under _ the

Antitrust Laws, 53 Antitrust Ld. 611, 616 (1985)

(‘the line between competitive patents and blocking

or complementary patents is frequently very difficult

to draw”). Under the Commission’s approach, an

agreement that was perfectly lawful when executed

could be challenged as per se patent misuse due to

developments in the technology of which the

patentees are unaware, or which have just become

commercially viable. Such a rule would) make

patents subject to being declared unenforceable due

to developments that occurred after execution of the

license or were unknown to the parties at the time of

licensing. Not only would such a rule render licenses

subject to invalidation on grounds unknown at the

time of licensing, but it would also provide a strong

incentive to litigation by any licensee, since the

26d

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 that

reason as well, we reject the Commission's ruling

that package agreements of the sort entered into by

Philips and the intervenors must be invahdated on

the ground that they constitute per se patent misuse.

ITI

In the alternative, the Commission held that

Philips’s package licensing agreements constituted

patent. misuse under the rule of reason. — The

Commission's analysis under the rule of reason

largely tracked the analysis that led it to conclude

that the package licensing agreements constituted

per se patent misuse.

As in the case of its ruling on per se patent

misuse, the fulerum of the Commission's conclusion

that Philips was guilty of patent misuse under the

rule of reason was its conclusion that the package

licenses at issue in this case had “the anticompetitive

effect of foreclosing competition in the alternative

technology that competes with the technology

covered by a nonessential patent that was included

as a so-called ‘essential’ patent.” On that issue, the

Commission adopted the administrative law judge's

analysis and conclusions with respect to the Faria,

Iwasaki, Yamamoto, and Lokhoff patents, but it took

no position with respect to other patents that the

administrative law judge found to be nonessentual.

Focusing particularly on the’ Farla and

Iwasaki patents, the Commission found that those

patents were not essential to manufacturing CD-Rs

27d

and CD-RWs compliant with the Orange Book

standards and that including those patents in the

patent packages foreclosed competition — by

Calimetries. The Commission briefly addressed the

assertedly procompetitive effects of the package

licensing arrangements but upheld the

administrative law judge's conclusion that those

arrangements had a net anticompetitive effect

because “the convenience to manufacturers of a

broad package of patents was outweighed by the

anticompetitive effect on alternative technologies of

packaging nonessential patents with essential

patents.”

Under the rule of reason, the finder of fact

must determine if the practice at issue is “reasonably

within the patent grant, ie., that it relates to subject

matter within the scope of the patent claims.” Va.

Panel, 133 F.3d at 869, quoting Mallinckrodt, 976

F.2d at 708. If the practice does not “broaden the

scope of the patent, either in terms of covered subject

matter 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 the questioned practice imposes an

unreasonable restraint on competition, taking into

account a variety of factors, including specific

information about the relevant business, _ its

condition before and after the restraint was imposed,

and the restraint’s history, nature and effect.” Va.

Panel, 133 F.3d at 869, quoting State Oil Co. v. Khan,

522 U.S. 3, 10 (1997); see_also Monsanto Co., 363

F.3d at 1341.

28d

The Commission’s rule of reason analysis 1s

flawed for two reasons. Most importantly, its

conclusion was largely predicated on the

anticompetitive effect on competitors offerimg

alternatives to the four so-called nonessential

patents in the Philips patent packages. Yet, as we

have already held, the evidence did not show that

including those patents in the patent packages had a

negative effect on commercially available technology.

The Commission assumed that there was a

foreclosure of competition because compact disc

manufacturers would be induced to accept hcenses to

the technology covered by the Farla and Iwasaki

patents and therefore would be unwilling to consider

alternatives. As noted, however, there was no

evidence before the Commission that = any

manufacturer had actually refused to consider

alternatives to the technology covered by those

patents or for that matter that any commercially

viable alternative actually existed.

In addition, as in its per se analysis, the

Commission did not acknowledge the problems with

licensing patents individually, such as_ the

transaction costs associated with making individual

patent-by-patent royalty determinations and

monitoring possible infringement of patents that

particular licensees chose not to license. The

Commission also did not address the problem, noted

above, that changes in the technology — tor

manufacturing compact discs could render some

patents that were indisputably essential at the time

of licensing arguably nonessential at some later

point in the life of the license. To hold that a

licensing agreement that satisfied the rule of reason

29d

when executed became unreasonable at some later

point because of technological development would

introduce substantial uncertainty into the market

and displace settled commercial arrangements in

favor of uncertainty that could only be resolved

through expensive litigation.

Finally, the Commission failed to consider the

efficiencies that package licensing may produce

because of the innovative character of the technology

at hand. Given that the technology surrounding the

Orange Book standard was still evolving, there were

many uncertainties regarding what patents might be

needed to produce the compact discs. As _ noted,

package license agreements in which the royalty was

based on the number of units produced, not the

number of patents used to produce them, can resolve

in advance all potential patent disputes between the

licensor and the licensee, whereas licensing patent

rights on a patent-by-patent basis can result in

continuing disputes over whether the licensee's

technology infringes certain ancillary patents owned

by the licensor that are not part of the group elected

by the licensee.

We therefore conclude that the line of analysis

that the Commission employed in reaching its

conclusion that Philips’s package licensing

agreements are more anticompetitive than

procompetitive, and thus are unlawful under the rule

of reason, was predicated on legal errors and on

factual findings that were not supported by

substantial evidence. For these reasons, we cannot

uphold the Commission’s decision that Philips’s

30d

patents are unenforceable because of patent misuse

under the rule of reason.

Because the Commission did not address all of

the issues presented by the administrative law

judge’s decision under both the per se and rule of

reason analysis, further proceedings before the

Commission may be necessary with respect to

whether Philips’s patents are enforceable and, if so,

whether Philips is entitled to any relief from the

Commission. Accordingly, we reverse’ the

Commission’s ruling on patent misuse for the

reasons stated, and we remand this case to the

Commission for further proceedings consistent with

this opinion.

REVERSED AND REMANDED.

APPENDIX E

PUBLIC VERSION

UNITED STATES INTERNATIONAL TRADE

COMMISSION

Washington, D.C. 20436

)

In the Matter of )

)

CERTAIN INV. NO. 337-TA-474

RECORDABLE

COMPACT DISCS )

AND REWRITABLE

COMPACT DISCS )

)

COMMISSION OPINION

This section 337 investigation is before the

Commission for final disposition of the issues under

review and, if necessary, for determinations on

remedy, the public interest, and bonding. We have

determined to affirm the presiding administrative

law judge’s (“ALJ’s”) conclusion that the asserted

patents in this investigation are unenforceable for

patent misuse, and consequently find no violation of

section 337 of the Tariff Act of 1930.

PROCEDURAL HISTORY

The Commission instituted this investigation

on July 26, 2002, based on a complaint filed by U.S.

Philips Corporation of Tarrytown, NY (“Philips” or

“complainant”). 67 Fed. Reg. 48,948 (2002). The

complaint, as supplemented, alleged violations of

section 337 in the importation into the United States,

the sale for importation, and the sale within the

United States after importation of certain recordable

compact discs (“CD-Rs”) and rewritable compact

discs (“CD-RWs’”) by reason of infringement of claims

of six U.S. patents (collectively, “the asserted

patents”): claims 1, 5, and 6 of U.S. Patent No.

4,807,209 (issued February 21, 1989) (“the ‘209

patent”); claim 11 of U.S. Patent No. 4,962,493

(issued October 9, 1990) (“the ‘493 patent”); claims 1,

2, and 3 of U.S. Patent No. 4,972,401 (issued

November 20, 1990) (“the ‘401 patent”); claims 1, 3,

and 4 of U.S. Patent No. 5,023,856 (issued June 11,

1991) (“the ‘856 patent”); claims 1-5, and 6 of U.S.

Patent No. 4,999,825 (issued March 12, 1991) (“the

‘825 patent”); and claims 20, 23-33, and 34 of U.S.

Patent No. 5,418,764 (issued May 23, 1995) (“the ‘764

patent”). 67 Fed. Reg. 48,948 (2002).

The notice of investigation identified 19

respondents, including GigaStorage Corporation

Taiwan of Hsinchu, Taiwan; GigaStorage

Corporation USA of Livermore, California

(collectively, “GigaStorage”); and Linberg Enterprise

Inc. of West Orange, New Jersey (“Linberg”). 67 Fed.

Reg. 48,948 (2002). On August 14, 2002, the ALJ

issued an initial determination (“ID”) (Order No. 2)

granting a motion to intervene as respondents by

Princo Corporation of Hsinchu, Taiwan, and Princo

America Corporation of Fremont, California

(collectively, “Princo”). That ID was not reviewed by

the Commission and_ thereby became _ the

Commission’s determination. GigaStorage, Linberg,

and Princo (“respondents”) are the only remaining

active respondents in this investigation. !

The ALJ issued his final ID on October 24,

2003. Although the ALJ found that the domestic

industry requirement of section 337 is satisfied in

this investigation, that the asserted patent claims

are infringed by the accused products, and that the

asserted claims are not invalid, he found no violation

of section 337 because he concluded that all of the

asserted patents are unenforceable by reason of

patent misuse on the part of complainant Philips. ID

at 139-220.

On November 5, 2003, complainant Philips

petitioned for review of the subject ID in part.

Respondents and the Commission investigative

attorney (“IA”) opposed the petition. On December 8,

2003, the ALJ issued his recommended

determination on remedy and bonding. On December

| See ALJ Order No. 6 (an unreviewed ID terminating eight

respondents on the basis of a consent order); ALJ Order No. 17

(an unreviewed ID terminating three respondents on the basis

of a consent order and settlement agreement); ALJ Order No.

18 (an unreviewed ID terminating one respondent on the basis

of a consent order and settlement agreement); and ALJ Order

No. 21 (an unreviewed ID finding four respondents in default).

10, 2003, the Commission determined to review all of

the ID’s findings of fact and conclusions of law

concerning patent misuse. The Commission

determined not to review the remainder of the [D. In

its review notice, the Commission invited the parties

to file written submissions on the issues under

review, and it invited interested persons to file

written submissions on the issues of remedy, the

public interest, and bonding. The Commission also

requested briefing from the parties on four questions.

[Initial submissions were filed on January 9, 2004,

and replies were filed on January 16, 2004, and

January 20. 2004.

STANDARD ON REVIEW

This investigation is before us on review of the

ALJ’s final ID on violation, which issued on October

24, 2003. Commission review of an ID is limited to

the issues set forth in the notice of review and all

subsidiary issues therein. Certain Bar Clamps, Bar

Clamp Pads, and Related Packaging Display and

Other Materials, Inv. No. 337-TA-429, Commission

Opinion at 3 (January 1, 2001). “On review, the

Commission may affirm, reverse, modify, set aside or

remand for further proceedings, in whole or in part,

the initial determination of the administrative law

judge. The Commission may also make any findings

or conclusions that in its judgment are proper based

on the record in the proceeding.” 19 C.F.R. §

210.45(c).

Once the Commission determines to review an

initial determination, its review is conducted under a

de novo standard. Certain Polyethylene Terephthalate

Yarn and Products Containing Same, Inv. No. 337-

TA-457, Commission Opinion at 9 (June 18, 2002).

Upon review the “Commission has ‘all the powers

which it would have in = making the = initial

determination,’ except where the issues are limited

on notice or by rule.” Certain Flash Memory Circuits

and Products Containing Same, Inv. No. 337-TA-382,

Commission Opinion on the Issues Under Review

and on Remedy, the Public Interest, and Bonding at

9-10 (June 2, 1997), USITC Pub. 3046 (July 1997)

(quoting Certain Acid-Washed Denim Garments and

Accessories, Inv. No. 337-TA-324, Commission

Opinion at 5 (Nov. 1992)).

As stated in our review notice, we determined

to review in part the ALJ’s final ID. We thereby

adopted as our own the unreviewed portions of the

ID. With respect to the portions of the ID that are

under review, the ALJ’s findings, conclusions, and

supporting analysis that are not inconsistent with

this opinion are hereby adopted. The AlI.J's findings,

conclusions, and supporting analysis that are

inconsistent with this opinion are not adopted.

ISSUES UNDER REVIEW

The ALJ found that the asserted patents are

unenforceable for patent misuse by complainant

Philips. he found patent misuse per se and also found

patent misuse under a “rule of reason” standard. We

affirm the ALJ’s conclusion that the asserted patents

are unenforceable for patent misuse per se, but on

the ground, discussed below, that complainant's

practice of mandatory package licensing constitutes

patent misuse per se as a tying arrangement between

(1) licenses to patents that are essential to

manufacture CD-Rs or CD-RWs according to Orange

Book standards? and (2) licenses to other patents

that are not essential to that activity.. We also adopt

the Al.J’s conclusion that the asserted patents are

unenforceable for patent misuse under a rule of

reason standard based on the Al.J’s analysis of and

findings as to the tying arrangement.’

Complainant argues that patent misuse per se

premised on tying arrangements was climinated by

35 U.S.C. § 271(d)(5). Respondents and the [A oppose

this argument. Complainant also contends that, even

apart from section 271(d)(5), Federal Circuit case law

prohibits finding patent misuse per se based on a

2 The technical standards for the manufacture of CD-Rs and

CD-RWs are set out in two publications that are jointly tssued

by Philips and Sony Corporation (“Sony”). “Compact Disc

Recordable System Description” (RX-407C), which is commonly

referred to as Part Il of the Orange Book, pertains to CD-Rs

“Compact Disc ReWritable System Deseription” (RX-408C),

which is commonly referred to as Part ill of the Orange Book,

pertains to CD-RWs. [TD at 139-40.

3 We take no position on the Al.J’s conclusion that the asserted

patents are unenforceable for patent) misuse per se based on

theories of price fixing and price discrimination.

‘We take no position on the ALJ's conclusion that the royalty

rate structure of the CD-R/RW patent pools is an unreasonable

restraint of trade, but adopt those portions of the ALJ's analysis

of the royalty rate mechanism under the rule of reason (ID at

213-19) that are relevant to the tissue of whether the

anticompetitive effects of including nonessential patents in the

list of so-called essential patents outweigh the procompetitive

effects.

tying arrangement between two patent lcenses (as

opposed to between a patent license and a product).

The IA takes the position that tying arrangements

between two patent licenses should not be patent

misuse per se, but should be analyzed under the rule

of reason. Respondents oppose these arguments. For

the reasons discussed in part A, infra, we conclude

that section 271(d)(5) did not eliminate patent

misuse per se premised on tying arrangements, and

in part. B, infra, we conclude that patent misuse per

se may be based on a tying arrangement between two

patent licenses. In part C, infra, we discuss the legal

standard for demonstrating a tying arrangement

between two patent. licenses, and in part D, we apply

that standard to the licensing arrangements at issue

in this investigation.

A. Tying Arrangements as Per Se Patent

Misuse

Section 271(d)(5) reads in relevant part

as follows:

No patent owner otherwise entitled to

relief for infringement or contributory

infringement of a patent shall be denied

relief or deemed guilty of misuse or

illegal extension of the patent right. by

reason of his having . . . conditioned the

license of any rights to the patent or the

sale of the patented product on the

acquisition of a license to rights in

another patent or purchase of a

separate product, unless, in view of the

circumstances, the patent owner has

market power in the relevant market

for the patent or patented product on

which the license or sale is conditioned.

35 U.S.C. § 271(d)(5).

As noted, complainant contends that 35 U.S.C.

§ 271(d)(5) climinated patent misuse per se premised

on tying arrangements. Respondents and the IA take

the position that section 271(d)(5) did not eliminate

patent misuse per se based on tying arrangements.

Complainant further argues that, even apart from

section 271(d)(5), Federal Circuit case law prohibits

finding patent misuse per se based on a_ tying

arrangement between two patent licenses. The IA

argues that, even if section 271(d)(5) does not

eliminate patent misuse per se based on tying

arrangements, a tying arrangement between two

patent. licenses (as opposed to a tying arrangement

between a patent license and a product) should not

be deemed patent misuse per se.

We conclude, as did the Al.J, that under

section 271(d)(5) an infringement action may be

precluded by a patent misuse defense based on a

patent tying arrangement that is found to be illegal

per se. Pursuant to section 271(d)(5), the defense

requires a finding of market power based on an

analysis that includes an inquiry into whether

substitutes for the patented product are available.

Section 271(d)(5) expressly refers — to

conditioning a patent lhceense on (1) the purchase of a

separate product or (2) the acquisition of another

patent license. Thus, it encompasses both patent-

product and patent-patent tie-ins with respect to a

defense of patent misuse based on_ tying

arrangements. In Virginia Panel Corp. v. MAC Panel

Co., the Federal Circuit reversed a district court's

conclusion that a proposed licensing agreement

conditioned on the prospective licensee’s purchase of

unpatented products constituted patent misuse. 133

F.3d 860, 868 (Fed. Cir. 1998). The Federal Circuit

outlined the approaches to the analysis of patent

misuse issues as follows:

The courts have identified certain

specific practices as constituting per se

“tying” arrangements in which a

patentee conditions a license under the

patent on the purchase of a separable,

staple good, see, e.g., Morton Salt Co. [v.

G.S. Suppiger Co.], 314 U.S. [488,] 491

((1942)], and arrangements in which a

patentee effectively extends the term of

its patent by requiring post-expiration

royalties, see, e.g., Brulotte v. Thys Co.,

379 U.S. 29, 33 (1964). Congress,

however, has established that other

specific practices may not support a

finding of patent misuse. See 35 U.S.C.

§ 271(d) (1994); Dawson Chem. Co. v.

Rohm & Haas Co., 448 U.S. 176, 202

(1980) (construing ecarher version of §

271(d)). A i988 amendment to § 271(d)

provides that, inter alia, in the absence

of market power, even = a_ tying

arrangement does not constitute patent

misuse. See 35 U.S.C. § 271(d)(5) (1994)

(added by Pub. L. No. 100-708, § 201,

102 Stat. 4676 (1988)).

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When a_ practice alleged — to

constitute patent misuse is neither per

se patent misuse nor — specifically

excluded from a misuse analysis by §

271(d), a court must determine if that

practice is “reasonably within the

patent grant, i.e. that it relates to

subject matter within the scope of the

patent claims. “Mallinckrodt, Inc. v.

Medipart, Inc., 976 F.2d 700, 708 (Fed.

Cir. 1992). If so, the practice does not

have the effect of broadening the scope

of the patent claims and thus cannot

constitute patent misuse. 7d. If, on the

other hand, the practice has the effect of

extending the patentee’s — statutory

rights and does so with an= anti-

competitive effect, that practice must

then be analyzed in accordance with the

“rule of reason.” /d. Under the rule of

reason, “the finder of fact must decide

whether the questioned — practice

imposes an unreasonable restraint on

competition, taking into account a

variety of factors, including specific

information about the relevant business,

its condition before and after the

restraint was imposed, and_ the

restraint’s history, nature, and effect.”

State Oil Co. v. Kahn, 118 8S. Ct. 2785,

279 (1997) (citing Arizona v. Maricopa

County Med. Soc., 457 U.S. 332, 348 &

n.13 (1982)).

lle

133 F.3d 860, 869 (Fed. Cir. 1997) (parallel citations

omitted). In the above-quoted passage, the Federal

Circuit recognized that the conditioning of a patent

license on the purchase of a separable, staple good

was a tying arrangement that constituted per se

patent misuse, and that section 271(d) added a

market power requirement. ° Thus, the Federal

Circuit has concluded that section 271(d) did not

eliminate per se patent misuse.

In support of its argument that the per se rule

for patent misuse based on tying was eliminated by

section 271(d)(5), complainant relies on_ the

legislative history of the statute and a district court

> As to the proposed licensing arrangement that was alleged to

constitute patent misuse in Virginia Panel, the court stated

that the patentee’s “proposal to the [prospective licensee] was

not a consummated tying arrangement and for that reason was

not per se patent misuse.” 133 F.3d at 871. The Federal Circuit

explained that, unlike the tying cases on which defendant-

appellant relied, the patentee and prospective licensee “never

entered into any” license agreement that required = [the

prospective licensee] to purchase unpatented, staple goods. See

35 US.C. § 271(d)5) (by implication, limiting tying

arrangements to the conditioning of an actual license or sale of

the patented product).” 133 F.3d at 871. Having determined

that the license proposal at issue was not per se patent misuse

as a tying arrangement, the court went on to that portion of the

misuse analysis outhned supra that could lead to a rule of

reason inquiry: “Furthermore, because [the patentee], on the

advice of counsel. voluntaruy and unilaterally revoked the

proposal to link the license to the purchase of unpatented items,

[the patentee’s] activities did not extend the scope of its patent

rights. Accordingly, we conclude that [the patentee’s] truncated

negotiations with [the prospective licensee] did not constitute

patent misuse.” 133 F.3d 871.

12e

case, Texas Instruments Inc. v. Hyundai Electronics

Industries, Co., 49 F. Supp.2d 893 (E.D. Tex. 1999)).

Complainant submits that the statute adds not just a

market power test, but also a_ rule-of-reason

balancing of anticompetitive and pro-competitive

effects test. In Texas Instruments, the district court

dismissed Virginia Panel as “merely recogniz[ing]

that the courts have Aitstorically identified tying

practices as constituting per se patent misuse.” 49

F.Supp.2d at 910. (The district court did not address

the discussion in Virginia Panel of the licensing

proposal at issue.) The district court then discussed

the legislative history of section 271(d)(5) as follows:

[Section] 271(d)(5) specifically notes

that patent misuse tying analysis is to

be considered “in view of the

circumstances,” strongly suggesting

that rule-of-reason analysis — not per

se analysis — applies. According to the

Supreme Court, when conducting a

rule-of-reason analysis, “the factfinder

weighs all of the circumstances of a case

in deciding whether a_ restrictive

practice should be prohibited as

imposing an unreasonable restraint on

competition.” Continental T.V. v. GTE

Sylvania, 433 U.S. 36, 49, 97 S.Ct. 2549,

2557, 53 L.Ed.2d 568 (1977) (emphasis

added); accord National Socy of

Professional Engineers v. United States,

435 U.S. 679, 690, 98 S.Ct. 1355, 55

L.Ed.2d 637 (1978).

13e

49 F.Supp.2d 893 at 910-11. The district court quoted

from remarks by Rep. Kastenmeier and Senators

DeConcini and Leahy, including their discussions of

the phrase “in view of the circumstances.” 49

F.Supp.2d at 911-12. It found that the remarks

expressed an intent to eliminate per se rules due to

tying, and that “[n]o contrary statement appears in

the legislative history of Section 271(d)(5).” 49

F Supp.2d at 912.

The Federal Circuit recently stated in

International Business Machines Corp. v. United

States, 201 F.3d 1367 (Fed. Cir. 2000), that statutory

interpretation “begin[s] with the language of the

statute itself. If that language is clear and

unambiguous, then it controls, and we need not —

indeed we may not — go further.” 201 F.3d at 1372

(2000). In deciding whether the language is clear and

unambiguous, a court looks to “the language itself,

the specific context in which that language is used,

and the broader context of the statute as a whole.”

Robinson v. Shell Oil Co., 519 U.S. 337, 341 (1997).

Section 271(d)(5) states that “[n]o patent

owner otherwise entitled to relief for infringement .. .

of a patent shall be... deemed guilty of misuse .

by reason of his having . . . conditioned the license of

any rights to the patent . . . on the acquisition of a

license to rights in another patent or purchase of a

separate product, unless, in view of the circumstances,

the patent owner has market power in the relevant

market for the patent ...on which the license .. . is

conditioned.” 35 U.S.C. § 271(d)(5) (emphasis added).

The Federal Circuit has stated that undefined terms

l4e

in a statute are deemed to “have their ordinary

meaning, for which [one] may consult a dictionary.”

IBM, 201 F.3d at 1372. The American College

Dictionary defines “in view of’ as “in consideration

of.”6 The same dictionary defines “circumstance” as

“a condition, with respect to time, place, manner,

agent, etc., which accompanies, determines, or

modifies a fact or event.” Id. at 219; accord Black's

Law Dictionary 243 (6th ed. 1990) (‘Circumstances.

Attendant or accompanying facts, events. or

conditions. Subordinate or accessory facts; e.g.

evidence that indicates the probability or

improbability of an event”). Thus, in the context of

section 271(d)(5), the phrase “in view of the

circumstances” means “in consideration of the

accompanying facts or conditions that determine

whether” “the patent owner has market power in the

relevant market for the patent or patented product

on which the license or sale is conditioned.”’ Because

the language of section 271(d)(5) is not ambiguous

and the statutory scheme is coherent (see Virginia

Panel, 133 F.3d at 869), we decline to follow Texas

Instruments Inc. v. Hyundai Electronics Industries

Co., 49 F. Supp.2d 893, 912 (E.D. Tex. 1999)) (relying

on legislative history to adopt an interpretation of

section 271(d)(5) that is contrary to its plain

6 The American College Dictionary 1356 (Random House 1970)

(‘view ... 17. in view of, a. in sight of. b. in prospect or

anticipation of. c. in consideration of. d. on account of’).

7 As respondents note, where the intent of a statute is to

overrule prior common law, that statutory purpose must be

clear. United States v. Texas, 507 U.S. 529, 534 (1993). Such is

not the case here.

15e

meaning).8 We are guided instead by the Federal

Circuit’s analysis of patent misuse, as articulated in

Virginia Panel, 133 F.3d at 869, 871.

B. Applicability of Per Se Analysis _to

Package Licensing and Pooling

Arrangements

Relying on Standard Oil Co. v. United States,

283 U.S. 163, 171, 174, 175 (1931), and Broadcast

Music, Inc. v. Columbia Broadcasting System, Inc.,

441 U.S. 1, 24-25 (1979), complainant also argues

that a per se analysis is inapplicable because the

Supreme Court has instead used a rule of reason

analysis in evaluating patent pools and package

licenses. In Standard Oil, the Supreme Court

recognized that the cross-licensing and division of

royalties from blocking’ patents could _ be

procompetitive. 283 U.S. at 171. The Court also

“examine[d] the evidence to ascertain the operation

and effect” (283 U.S. at 175) of certain agreements

for cross-licensing and division of royalties between

patentees of “competing patented processes” (283 U.S.

at 175, 180-81). However, Standard Oil did not

discuss any tying allegations. Although complainant

asserts that Standard Oil involved “a license that

offered a package of patents and did not permit

licensees to select which patents they preferred”

(complainant’s submission at 45 (citing Standard Oil,

283 U.S. at 174)), its citation does not support that

8 We also do not rely on the ALsJ’s discussion of the legislative

history of section 271(d)(5) set forth in the ID at 150.

16e

statement. See also Standard Oil, 283 U.S. at 170

(“There is no provision in any of the agreements

which restricts the freedom of the _ primary

defendants individually to issue licenses under their

own patents alone or under the patents of all the

others; and no contract between any of them, and no

license agreement with a [manufacturer of the

product] executed pursuant thereto, now imposes

any restriction upon the quantity of gasoline to be

produced, or upon the price, terms, or conditions of

sale, or upon the territory in which sales may be

made. The only restraint thus charged is that

necessarily arising out of the making and effect of

the provisions for cross-licensing and for division of

royalties.”) Thus, Standard Oil does not preclude a

per se analysis for tying arrangements.

The Supreme Court opinion in Broadcast

Music also did not involve allegations of tying.

Although the licensee (CBS) argued below that the

blanket license at issue was an illegal tying

arrangement, the district court rejected the tie-in

argument because “direct negotiation with individual

Broadcast Music, 441 U.S. at 6 (citing 400 F.Supp.

737, 781-83 (S.D.N.Y. 1975)). The Second Circuit

affirmed the rejection of the tying argument. 562

F.2d 130, 135 (2d Cir. 1977). CBS did not petition for

a writ of certiorari on that issue. Broadcast Music,

441 US. at 6-7, 25 n.43.

Complainant asserts that “the Federal Circuit

has prohibited application of the per se misuse

doctrine unless the practice at issue has been held to

17e

be per se illegal by the [Supreme] Court.”® However,

the Supreme Court has recognized that tying

arrangements may be anticompetitive per se.

Jefferson Parish Hospital Dist. No. 2 v. Hyde, 466

U.S. 2 (1984); Morton Salt Co. v. G.S. Suppiger Co.,

314 U.S. 488, 491 (1942); see also Mallinckrodt v.

Medipart Inc., 976 F.2d 700, 706, 708 (Fed. Cir. 1992)

(holding that district court contravened Windsurfing

precedent, but stating that “this is not a price-fixing

or tying case, and the per se antitrust and misuse

violations found in [Bauer & Cie v. O'Donnell, 229

U.S. 1 (1913); Straus v. Victor Talking Machine Co.,

243 U.S. 490 (1917); Boston Store of Chicago uv.

American Graphophone Co., 246 U.S. 8 (1918)] and

Motion Picture Patents Co. [v. Universal Film Mfg.

Co., 243 U.S. 502 (1917)] are not here present”). We

recognize that the particular facts in the patent

misuse cases involve a tying patent and a tied

product, rather than-a tying patent and a tied patent.

However, finding patent misuse based on a tying

arrangement between patents in a mandatory

package license is a reasonable application of

Supreme Court precedent.

9 Complainant’s submission at 47 (relying on Windsurfing

International, Inc. v. AMF, Inc., 782 F.2d 995, 1001 (Fed. Cir.

1986) (“[t]lo sustain a misuse defense involving a licensing

arrangement not held to have been per se anticompetitive by

the Supreme Court, a factual determination must reveal that

the overall effect of the license tends to restrain competition

unlawfully in an appropriately defined relevant market”

(footnote omitted)).

18e

More than thirty years before Broadcast Music,

the Supreme Court held that the “block booking”!® of

copyrighted films was illegal per se. Thus, the

Supreme Court has held the practice of mandatory

package licensing of intellectual property illegal per

se. The Court stated that “[w]le do not suggest that

films may not be sold in blocks or groups, when there

is no requirement, express or implied, for the

purchase of more than one film. All we hold to be

illegal is a refusal to license one or more copyrights

unless another copyright is accepted.” United States

v. Paramount Pictures, Inc., 334 U.S. 131, 159 (1948).

In ‘Broadcast Music, in contrast, “[t]he [district

[cJourt found that there was no legal, practical, or

conspiratorial impediment to [the _ licensee's}

obtaining individual licenses; [the licensee], in short,

had a real choice.” 441 U.S. at 24.

The [A and complainant urge the Commission

to follow the lead of the DOJ Antitrust Division and

use the rule of reason approach to evaluating

package licenses that involve patent tying

arrangements. The Antitrust Guidelines for the

Licensing of Intellectual Property state that

[p]ackage licensing — the licensing of multiple items

of intellectual property in a single license or in a

group of related licenses — may be a form of tying

arrangement if the licensing of one product 1s

10 Block-booking is the practice of licensing, or offering for

license, one feature [film] or group of features on condition that

the exhibitor will also license another feature or group of

features released by the distributors during a given period.”

United States v. Paramount Pictures, Inc., 334 U.S. 131, 156

(1948).

19e

conditioned upon the acceptance of a_ license of

another, separate product.” U.S. Dep’t of Justice &

FTC, Antitrust Guidelines for the Licensing of

Intellectual Property § 5.8 (1995) (@DOdJ/ETC

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