Appendix — Princo Corp. Corp. v. U.S. Philips Corp. (No. 05-1341)

lla

significant competition among computer data storage devices

and thus Philips lacked market power in the market for

computer data storage discs. However, Philips first created

the package licenses long before GigaStorage and Princo

entered into their agreements. According to the

administrative law judge, the patent package arrangements

were instituted in the early 1990s. Yet Princo did not enter

into its agreement until June of 1997, and GigaStorage did

not enter into its licensing agreement until October of 1999.

Thus, any lack of market power that Philips and _ its

colicensors may have had in the early 1990s is irrelevant to

the situation in the late 1990s, when the parties entered into

the agreements at issue in this case. At that time, according

to the administrative law judge's well-supported finding,

compact discs had become "unique products [with] no close

practice substitutes." Philips's argument about lack of market

power is therefore unpersuasive, and for that reason section

271(d)(5) does not provide Philips a statutory safe haven

from the judicially created defense of patent misuse. '

*1187 [6] 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

‘Before the Commission, Philips argued that section 271(d)(5)

abolished the doctrine of per se patent misuse as applied to tying

arrangements. In making that argument, Philips relied heavily on the

legislative history of the 1988 Act that adopted section 271(d)(5).

Because Philips has not renewed that argument in this court, we do not

address it, although we note that the legislative history cited by Philips

before the Commission indicates congressional skepticism about treating

tying arrangements in the context of patent licensing as per se patent

misuse, rather than analyzing such arrangements under the rule of reason.

See 134 Cong. Rec. 32,294-95 (1988) (statement of Rep. Kastenmeier);

id. at 32,471 (statement of Sen. DeConcini);id. at 32,471-72 (statement

of Sen. Leahy).

12a

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.

A

In its brief, the Commission argues that it is

"horbook 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 Emest 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 is 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 cases: United States

v. Paramount Pictures, Inc., 334 U.S. 131, 156-59, 68 S.Ct.

13a

915, 92 L.Ed. 1260 (1948), and United States v. Loew's, Inc..,

371 US. 38, 44-51, 83 S.Ct. 97, 9 L.Ed.2d 11 (1962). Those

cases condemned the practice of "block-booking" movies to

theaters (in the Paramount case) and to television 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

Ccurt'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 govem this case. In

Paramount, the district court held that the defendant movie

distributor had engaged in unlawful *1188 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

Court 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, 68 S.Ct. 915. The result, the Court explained, "is to

add to the monopoly of the copyright in violation of the

principle of the patent cases involving tying clauses." /d. at

l4a

158, 68 S.Ct. 915.

Because the block-booking arrangement at issue in

Paramount required the licensee to exhibit all of the films in

the group for which a license was taken, the Paramount

bleck-booking was more akin to a tying arrangement in

which a patent license is tied to the purchase of a separate

product, rather than to an arrangement in which a patent

license is tied to another patent license. Indeed, all of the

patent tying cases to which the Supreme Court referred in

Paramount involved tying arrangements in which, as the

Court described them, "the owner of a patent [conditioned]

its use on the purchase or use of patented or unpatented

materials." 334 U.S. at 157, 68 S.Ct. 915. Because the

arrangement in the Paramount case was equivalent in

substance to a patent-to-product tying arrangement,

Paramount does not stand for the proposition that a pure

patent-to-patent tying arrangement, such as Philips's package

licensing agreement, is per se unlawful.’

Philips gives its licensees the option of using any of

the patents in the package, at the licensee's option. Philips

charges a uniform licensing fee to manufacture discovered

by its patented technology, regardless of which, or how

many, of the patents in the package the licensee chooses to

use in its manufacturing process. In particular, Philips's

*The Commission argues that the Supreme Court's later decision

in Automatic Radio Co. v. Hazeltine, 339 U.S. 827, 70 S.Ct. 894, 94

L.Ed. 1312 (1950), supports its broad interpretation of the Paramount

case because the Supreme Court in Automatic Radio characterized

Paramount as having "condemned" an arrangement "conditioning the

granting of a license under one patent upon the acceptance of another and

different license." /d. at 830-31, 70 S.Ct. 894. We de not, however,

interpret that shorthand characterization of Paramuunt as effecting a

broadening of the holding of the earlier case and an extension of its

rationale to a class of cases far beyond Paramount's facts.

lSa

package licenses do not require that licensees actually use

the technology covered by any of the patents that the

Commission characterized as nonessential. In that respect,

Philips's licensing agreements are different from the

agreements at issue in Paramount, which imposed an

obligation on the purchasers of package licenses to exhibit

films they did not wish to license. That obligation not only

extended the exclusive right in one product to products in

which the distributor did not have 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 licensing arrangements at issue in

this case constitute patent misuse per se.

In the Loew's case, the district court determined that

the licensee television stations were required to pay fees not

only *1189 for the feature films they wanted, but also for

additional, inferior films. As in 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." Loew's, 371 U.S. at 49, 83 S.Ct. 97. 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.

l6a

In this case, unlike in Loew's, there is no evidence

that a portion of the royalty was attributable to the patents

that the Commission characterized as nonessential. While the

administrative law judge found that GigaStorage "inquired

into obtaining a license to less than all of the patents on

Philips's patent list," the administrative law judge noted that

GigaStorage did so because it "hoped that by eliminating

some patents the royalty rate would be lower." There is no

evidence that GigaStorage had any basis for its expectation

that a smaller patent package might result in a lower royalty

rate. In fact, the administrative law judge found that Philips

had responded to that overture from GigaStorage by

explaining that “the royalty is the same regardless of the

number of patents used." Moreover, the administrative law

judge found that the royalty rate for licensing Philips's

patents "remains the same regardless of which option(s) in

the agreement one selects," and that the royalty rate "does

not increase or decrease if more or fewer patents are used."

Thus, it is clear that the royalty charged by Philips was not

increased because of the inclusion of the Farla, Iwasaki,

Yamamoto, and Lokhoff patents. There is therefore no basis

for conjecture that a hypothetical licensing fee would have

been lower if Philips had offered to license the patents on an

individual basis or in smaller packages.

Aside from Paramount and Loew's, the Commission

relies on cases involving tying arrangements in which the

patent owner conditions the availability of a patent license on

the patentee's agreement to purchase a staple item of

commerce from the patentee. See Va. Panel, 133 F.3d at 869;

Senza-Gel Corp. v. Seiffhart, 803 F.2d 661 (Fed.Cir.1986).

Those cases, however, are readily distinguishable because of

the fundamental difference between an obligation to

purchase a product and the extension of a nonexclusive

license to practice a patent.

17a

[7] A nonexclusive patent license is simply a promise

not to sue for infringement. See Rite-Hite Corp. v. Kelley

Co., 56 F.3d 1538, 1552 (Fed.Cir.1995) (en banc);

Spindelfabrik_ Suessen-Schurr Stahlecker & Grill GmbH _v.

Schubert _& Salzer Maschinenfabrik Aktiengesellschaft, 829

F.2d 1075, 1081 (Fed.Cir.1987). The conveyance of such a

license does not obligate the licensee to do anything; it

simply provides the licensee with a guarantee that it will not

be sued for engaging in conduct that would infringe the

patent in question.

[8] In the case of patent-to-product tying, the patent

owner uses the market power conferred by the patent to

compel customers to purchase a product in a separate market

that the customer might otherwise purchase from a

competitor. United States v. US. Gypsum Co., 333 U.S. 364,

400, 68 S.Ct. 525, 92 L.Ed. 746 (1948); Intl Salt Co. v.

United States, 332 U.S. 392, 395, 68 S.Ct. 12, 92 L.Ed. 20

(1947):*1190 Morton Salt Co. v. G.S. Suppiger Co., 314

U.S. 488, 493, 62. S.Ct. 402, 86 L.Ed. 363 (1942). The

patent owner is thus able to use the market power conferred

by the patent to foreclose competition in the market for the

product.

[9] By contrast, a package licensing agreement that

includes both essential and nonessential patents does not

impose any requirement on the licensee. It does not bar the

licensee from using any alternative technology that may be

offered by a competitor of the licensor. Nor does it foreclose

the competitor from licensing his alternative technology; it

merely puts the competitor in the same position he would be

in if he were competing with unpatented technology.

A package license is in effect a promise by the

patentee not to sue his customer for infringing any patents on

18a

whatever technology the customer employs in making

commercial use of the licensed patent. That surrender of

rights might mean that the customer will choose not to

license the alternative technology offered by the patentee's

competition, but it does not compel the customer to use the

patentee’s technology. The package license is thus not

anticompetitive in the way that a compelled purchase of a

tied product would be.

Contrary to the Commission's characterization, the

intervenors were not "forced" to "take" anything from Philips

that they did not want, nor were they restricted from

obtaining licenses from other sources to produce the relevant

technology. Philips simply provided that for a fixed licensing

fee, it would not sue any licensee for engaging in any

conduct covered by the entire group of patents in the

package. By analogy, if Philips had decided to surrender its

"nonessential" patents or had simply announced that it did

not intend to enforce them, there would have been no way

for the manufacturers to decline or reject Philips's decision.

Yet the economic effect of the package licensing

arrangement for Philips's patents is not fundamentally

different from the effect that such decisions would have had

on third parties seeking to compete with the technology

covered by those "nonessential" patents. Thus, we conclude

that the Commission erred when it characterized the package

license agreements as a way of forcing the intervenors to

license technology that they did not want in order to obtain

patent rights that they did.’

*The effect of a nonexclusive license was different before the

Supreme Court, in Lear, Inc. v. Adkins, 395 U.S. 653, 89 S.Ct. 1902, 23

L.Ed.2d 610 (1969), abolished the patent doctrine of licensee estoppel.

Before Lear, a nonexclusive license had a legal effect that made it more

than a mere covenant by the licensee not to sue. Acceptance of the

license barred the licensee from challenging ‘he validity of the patent.

19a |

The Commission stated that it would not have found

the package licenses to constitute improper tying if Philips

had offered to license its patents on an individual basis, as an

alternative to licensing them in packages. The Commission's

position, however, must necessarily be based on an

assumption that, if the patents were offered on an individual

basis, individual patents would be offered for a lower price

than the patent packages as a whole. If that assumption were

not implicit in the Commission's conclusion, the

Commission would be saying in effect that it would be

unlawful for Philips to charge the same royalty for *1191 its

essential patents that it charges for its patent packages and to

offer the nonessential patents for free. Yet that sort of pricing

policy plainly would not be unlawful. See Directory Sales

Mgmt. Corp. v. Ohio Bell Tel. Co., 833 F.2d 606, 609-10

(6th Cir.1987).*

Some of the early decisions regarding patent-to-patent tying

arrangements appear to have been based, at least in part, on that feature

of pre-Lear patent licenses. See, e.g., Am. Securit Co. v. Shatterproof

Glass Corp., 268 F.2d 769, 777 (3d Cir.1959); Jnt'l Mfg. Co. v. Landon,

336 F.2d 723, 731 (9th Cir.1964); see also Duplan Corp. v. Deering

Milliken, Inc., 444 F.Supp. 648, 699 (D.S.C.1977), affd in pertinent part,

594 F.2d 979 (4th Cir.1979). In the post-Lear era, the "acceptance" of a

license has no such restrictive effect on the licensee's freedom.

“Of course, in a tying case if the evidence shows that the price

of a bundled product reflects any of the cost of the tied product,

“customers are purchasing the tied product, even if it is touted as being

free." Multistate Legal Studies, Inc. v. Harcourt Brace Jovanovich Legal

& Prof’l Publ'ns, Inc., 63 F.3d 1540, 1548 (10th Cir.1995), citing 3

Phillip E. Areeda & Donald F. Turner, Antitrust Law § 733a (1978)

(tying may exist "when a machine is sold or leased at a price that covers

‘free’ servicing"); see also United States v. Microsoft Corp., 253 F.3d 34,

68 (D.C.Cir.2001) ("the antitrust laws do not condemn even a monopolist

for offering its product at an attractive price, and we therefore have no

warrant to condemn Microsoft for offering either IE or the IEAK free of

charge"). The evidence in this case, however, does not indicate that there

20a

To the extent that the Commission's decision is based

on an assumption that individual licenses would necessarily

be available for a lower price than package licenses, that

assumption is directly contrary to the evidence and even to

the administrative law judge's findings of fact. As noted

above, the administrative law judge found that the royalty

rate under Philips's package licenses depended on the

number of discs the manufacturer produced under the

authority of the license, not the number of individual patents

the manufacturer used to produce those discs. That is, the

royalty rate did not vary depending on whether the licensees

used only the essential patents or used all of the patents in

the package. Thus, it seems evident that if Philips were

forced to offer licenses on an individual basis, it would

continue to charge the same per unit royalty regardless of the

number of patents the manufacturer chose to license. That

alteration in Philips's practice would have absolutely no

effect on the would-be competitors who wished to offer

alternatives to the technology represented by Philips's so-

called nonessential patents, since those patents would

effectively be offered for free, and the competitors would

thercfore still have to face exactly the same barriers--the

availability of a free alternative to the technology that they

were trying to license for a fee.

More generally, the Commission's assumption that a

license to fewer than all the patents in a package would

presumably carry a lower fee than the package itself ignores

the reality that the value of any patent package is largely, if

not entirely, based on the patents that are essential to the

technology in question. A patent that is nonessential because -

it covers technology that can be fully replaced by alternative

is a hidden charge for the so-called nonessential patents in the Philips

patent packages. —

2la

technology that is available for free is essentially valueless.

A patent that is nonessential because it covers technology

that can be fully replaced by alternative technology that is

available through a license from another patent owner has

value, but its value is limited by the price of the alternative

technology. Short of imposing an obligation on the licensor

to make some sort of allocation of fees across a group of

licenses, there is no basis for the Commission to conclude

thai a smaller group of the licenses--the so-called "essential"

licenses--would have been available for a lower fee if they

had not been "tied to" the so-called nonessential patents.

It is entirely rational for a patentee who has a patent -

that is essential to particular technology, as well as other

patents that are not essential, to charge what the market -will

bear for the essential patent and to offer the others for free.

Because a *1192 license to the essential patent is, by

definition, a prerequisite to practice the technology in

question, the patentee can charge whatever maximum

amount a willing licensee is able to pay to practice the

technology in question. If the patentee allocates royalty fees

between its essential and nonessential patents, it runs the risk

that licensees will take a license to the essential patent but

not to the nonessential patents. The effect of that choice will

be that the patentee will not be able to obtain the full royalty

value of the essential patent. For the patentee in this situation

to offer its nonessential patents as part of a package with the

essential patent at no additional charge is no more

anticompetitive than if it had surrendered the nonessential

patents or had simply announced a policy that it would not

enforce them against persons who licensed the essential

patent. In either case, those offering technology that

competed with the nonessential patents would be unhappy,

because they would be competing against free technology.

But the patentee would not be using his essential patent to

obtain power in the market for the technology covered by the

22a

nonessential patents. This package licensing arrangement

cannot fairly be characterized as an exploitation of power in

one market to obtain a competitive advantage in another.”

Aside from the absence of evidence that the package

licensing arrangements in this case had the effect of

impermissibly broadening the scope of the "essential"

patents with anticompetitive effect, Philips argues that the

Commission failed to acknowledge the unique

procompetitive benefits associated with package licensing.

Philips points to the federal government's guidelines for

licensing intellectual property, which recognize that patent

packages "may provide procompetitive benefits by

integrating complementary _ technologies, reducing

transaction costs, clearing blocking positions, and avoiding

costly infringement litigation. By promoting _ the

dissemination of technology, cross-licensing and pooling

arrangements are often procompetitive." U.S. Department of

Justice and Federal Trade Commission, Antitrust Guidelines

for the Licensing of Intellectual Property § 5.5 (1995); see

also Herbert Hovenkamp, /P and Antitrust § 34.2c, at 34-7

(2004).

‘The implication of the Commission's decision is that a party

with both an essential patent and a nonessential patent is not allowed to

package the two together and only offer the package for a single price.

That would have the perverse effect of potentially putting a party owning

both an essential patent and a nonessential but related patent in a-worse

position than a party owning only the essential patent. The party owning

only the essential patent would be free to charge any licensing fee up to

the maximum that a manufacturer would be willing to pay to practice the

patented technology, while a party owning both the essential patent and a

nonessential patent would be barred from extracting that maximum

licensing fee for its essential patent and assuring the manufacturer that it

would not be subject to suit on the nonessential patent.

23a

Philips introduced evidence that package 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 licensee infringed the unlicensed *1193

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

24a

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, 99 S.Ct. 1551. While

"{i]ndividual sales transactions [would be] quite expensive,

as would be individual monitoring and enforcement," a

package licensing agreement would ensure access and save

costs. /d. Hence, the Supreme Court determined that such

conduct should fall under "a more discriminating

examination under the rule of reason." /d. at 24, 99 S.Ct.

1551.

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 tie business excuse for

their use." N. Pac. fly. Co. v. United States, 356 U.S. 1, 5, 78

S.Ct. 514, 2 L.Ed.2d 545 (1958). We therefore hold that the

analysis that led the Commission to apply the rule of per se

illegality to Philips's package licensing agreements was

legally flawed.°

B

*The Supreme Court recently granted certiorari in Independent

Ink, Inc. v. Illinois Tool Works, Inc., 396 F.3d 1342 (Fed.Cir.), cert.

granted, --- U.S. ----, 125 S.Ct. 2937, 162 L.Ed.2d 865 (2005), a case

involving a tying arrangement involving a patent and an unpatented

product. It is possible that the Supreme Court's decision in that case will

offer some guidance with respect to the patent misuse issue presented by

this case, but because the circumstances of the two cases are quite

different, we have determined that the proper course is to resolve this

appeal without waiting for the Supreme Court's decision in /ndependent

Ink.

25a

[10] In the alternative, Philips argues that the

Commission's finding of per se patent misuse was not

justified by the facts of this case. In particular, Philips

contends that the evidence did not show that there were

commercially viable alternatives to the technology covered

by the so-called "nonessential" patents in the Philips

licensing packages that any of its licensees would have

preferred to use.

[11] In order to show that a tying arrangement is per

se unlawful, a complaining party must demonstrate that it

links *1194 two separate products and has an

anticompetitive effect in the market for the second product.

The Supreme Court explained that the "essential

characteristic" of an invalid tying arrangement

lies in the seller's exploitation of its control over the

tying product to force the buyer in to the purchase of

a tied product that the buyer either did not want at all,

or might have preferred to purchase elsewhere on

different terms. When such "“forcing" is present,

competition on the merits in the market for the tied

item is restrained ....

Jefferson Parish, 466 U.S. at 12, 104 §.Ct. 1551; id at 20-

21, 104 §.Ct. 1551 ("[A] tying arrangement cannot exist

unless two separate markets have been linked."); B. Braun

Med., Inc. v. Abbott Labs., 124 F.3d 1419, 1426

(Fed.Cir.1997) (impermissible tying in the context of patent

misuse if patentee uses a patent "which enjoys market power

in the relevant market ... to restrain competition in an

unpatented product"). The Commission found that the

"nonessential" patents, i.e., the Farla, Iwasaki, Yamamoto,

and Lokhoff patents, constituted separate products from the

"essential" patents in the package and that the package

licensing agreements adversely affected competition in the

26a

market for the nonessential technology.’ The Commission's

analysis of that factual issue was flawed, however.

[12] Patents within a patent package can be regarded

as "nonessential" only if there are "commercially feasible"

alternatives to those patents. See /nt'l M. Co. v. Landon, 336

F.2d 723, 729 (9th Cir.1964). If there are no commercially

practicable alternatives to the allegedly nonessential patents,

packaging those patents together with so-called essential

patents can have no anticompetitive effect in the

marketplace, because no competition for a viable alternative

product is foreclosed. In such a case, the only effect of

finding per se patent misuse is to give licensees a way of

avoiding their obligations under the licensing agreements,

with no corresponding benefit to competition in any real-

world market.

[13] The Department of Justice has recognized that

the availability of commercially viable alternative

technology is relevant to the analysis of package licensing

agreements. In particular, the Department has stated that

patent packages do not have the undesirable effects of tying

if they include patents to technology for which there is no

practical or realistic alternative. See, e.g., Business Review

Letter, U.S. Department of Justice, Antitrust Division (Dec.

16, 1998). That principle is consistent with the main purpose

of the separate-products inquiry in tying cases generally,

which is to ensure that conduct is not condemned as

"The intervenors note that “there existed a number of

commercially-available CD-R discs utilizing alternative technology that

did not infringe these supposedly essential patents." For support,

intervenors cite the opinion of the administrative law judge, who

determined that two patents held by Taiyo Yuden were not essential.

Because the Commission did not address those patents, however, they are

not relevant to this appeal.

27a

anticompetitive "unless there is sufficient demand for the

purchase of [the tied product] separate from the [tying

product] to identify a distinct product market in which it is

efficient to offer [the tied product]." Jefferson Parish, 466

U.S. at 21-22, 104 S.Ct. 1551; see Mallinckrodt, 976 F.2d at

704 (tying is misuse only when the patentee uses its patent to

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 Farla, Iwasaki,

Yamamoto, and Lokhoff patents that disc manufacturers

wished to use in making compact discs *1195 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 discs, i.e., a "write strategy,"

including an “optimum power control procedure."® The

‘In its amicus curiae brief, the New York-intellectual Property

Association notes that, unlike the other three allegedly nonessential

patents, the Iwasaki patent would expire after all of the undisputedly

essential patents. As a result, the presence of the Iwasaki patent in a

patent licensing package could have the effect of extending the obligation

to pay royalties beyond the expiration date of the "essential" patents. A

provision requiring that royalties be paid beyond the life of a patent has

been held to be unenforceable. See Brulotte v. Thys Co., 379 U.S. 29, 30,

85_ S.Ct. 176, 13 L.Ed.2d 99 (1964). However, because neither the

Commission nor the administrative law judge addressed the impact of

that potential temporal extension of the royalty obligation, and none of

the parties addressed that issue on appeal in their briefs, we do not

28a

Commission found that another company, Calimetrics, Inc.,

had developed a commercially viable, alternative method of

performing the write strategy and the opti:aum 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 McLaughlin, Calimetrics's

principal scientist, who had helped to create the technology

in 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 Commission'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 licensees wished to use in place of the

technology covered by the Farla and Iwasaki 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 obtaining 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. McLaughlin testified, regarding a hypothetical

Situation, that "[wJhen we go and try to license this

technology, the companies say we have technology that

performs a function of this type, and ... I presume they would

address the issue here.

29a

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 Farla 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. *1196 The evidence thus did not 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.

[14] 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 easy 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 available is not sufficient to support a

finding that at the time the Philips licenses were executed,

there was actually a commercially available alternative to the

technology claimed in the Yamamoto patent.

[15] Finally, the Commission found that the Lokhoff

patent was not "technically essential" to manufacturing discs

30a

compliant 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

determining 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. McLaugilin, 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 in 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.

[16] 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 issue in this case. If a

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

3la

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 L.J. 611, 616 (1985)

("the line between competitive patents and blocking or

complementary patents is frequently very *1197 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 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 invalidated on the ground that they constitute per se

patent misuse.

Il

{17} 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,

32a

the fulcrum 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 Farla, Iwasaki, Yamamoto,

and Lokhoff patents, but it took no position with respect to

other patents that the administrative law judge found to be

nonessential.

Focusing particularly on the Farla and Iwasaki

patents, the Commission found that those patents were not

essential to manufacturing CD-Rs and CD-RWs compliant

with the Orange Book standards and that including those

patents in the patent packages foreclosed competition by

Calimetrics. 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."

[18][19] Under the rule of reason, the finder of fact

must determine if the practice at issue is "reasonably within

the patent grant, i.e., 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 is

not chargeable with patent misuse. Va. Panel, 133 F.3d at

869. More specifically, "the finder of fact must decide

33a

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 *1198:State Oil Co. v. Khan,

$22 U.S. 3, 10, 118 S.Ct. 275, 139 L.Ed.2d 199 (1997): see

also Monsanto Co., 363 F.3d at 1341.

The Commission's rule of reason analysis is flawed

for two reasons. Most importantly, its conclusion was largely

predicated on the anticompetitive effect on competitors

offering 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

licenses 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 for manufacturing compact discs could

render some patents that were indisputably essential at the

34a

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 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 nghts 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 patents are

unenforceable because of patent misuse under the rule of

reason.

35a

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 *1199 misuse for the reasons stated, and we

remand this case to the Commission for further proceedings

consistent with this opinion.

REVERSED AND REMANDED.

424 F.3d 1179, 76 U.S.P.Q.2d 1545

36a

PUBLIC VERSION

UNITED STATES INTERNATIONAL TRADE

COMMISSION

Washington, D.C. 20436

CONFIDENTIAL INFORMATION DELETED

In the Matter of CERTAIN RECORDABLE COMPACT

DISCS AND REWRITABLE COMPACT DISCS

Inv.No. 337-TA-474

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

37a

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 US. 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. '

‘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 LD

terminating one respondent on the basis of a consent order and settlément

agreement); and ALT Order No. 21 (an unreviewed ID finding four

respondents in default).

38a

| The ALJ issued his final ID on October 24, 2093.

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 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 ID. 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

39a

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 reyiew 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 ‘ali 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 ALJ'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

40a

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 ALJ's

conclusion that the asserted patents are unenforceable for

patent misuse under a rule of reason standard based on the

ALJ's analysis of and findings as to the tying arrangement."

I. Analysis of Patent Misuse Per se

Complainant argues that patent misuse per se

premised on tying arrangements was eliminated by 35 U.S.C.

§ 271(d)(5). Respondents and the IA oppose this argument.

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

RWs ére set out in two publications that are jointly issued by Philips and

Sony Corporation ("Sony"). “Compact Disc Recordable System

Description" (RX-407C), which is commonly referred to as Part II of the

Orange Book, pertains to CD-Rs. "Compact Disc ReWritable System

Description" (RX-408C), which is commonly referred to as Part III of the

Orange Book, pertains to CD-RWs. ID at 139-40.

*We take no position on the ALJ'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

issue of whether the anticompetitive effects of including nonessential

patents in the list of so-called essential patents outweigh the

procompetitive effects.

4\a

Complainant also contends 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 (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 légal

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 nght 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).

42a

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

271(d)(5) eliminated 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 LA 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 ALJ that under section

271(d)(S) 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 license 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:

43a

The courts have identified certain specific

practices as constituting per se patent misuse

including so-called "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

earlier version of § 271(d)). A 1988 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. 100-703, § 201, 102

Stat. 4676 (1988)).

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, ie., 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. /d. If, on the other hand, the practice

has the effect of extending the patenteec'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

44a

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 restraints

history, nature, and effect." State Oil Co. v. Kahn;

118 S. Ct. 275, 279 (1997) (citing Arizona y.

Maricopa County Med. Soc., 457 U.S. 332, 343 &

n.13 (1982)).

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

*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 U.S.C. §

271(d)(S5) (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 outlined supra that could lead to a rule of

reason inquiry: "Furthermore, because [the patentee], on the advice of

counsel, voluntarily 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.

45a

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 case, Jexas 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

historically 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. 2949,- 2557, $3 LEd2d 368 (1977)

(emphasis added); accord National Soc'y of

Professional Engineers v. United States, 435 USS.

679, 690, 98 S.Ct. 1355, 55 L.Ed.2d 637 (1978).

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

remarks by Rep. Kastenmeier and. Senators DeConcini and

46a

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 "[njo contrary statement appears in the

legislative history of Section 271(d)(5)." 49 F.Supp.2d at

912.

The Federal Circuit recently stated in /nternational

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)(S) 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 in a

statute are deemed to "have their ordinary meaning, for

which [one] may consult a dictionary." JBM, 201 F.3d at

1372. The American College Dictionary defines "in view of”

as "in consideration of."° The same dictionary defines

*'The American College Dictionary 1356 (Random House 1970)

("view ... 17. in view of, a. in sight of. b. in prospect or anticipation of. c.

47a

"circumstance" as "a condition, with respect to time, place,

manner, agent, etc., which accompanies, determines, or

modifies a fact or event." Jd at 219; accord Black's Law

Dictionary 243 (6" 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

meaning).° 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.

in consideration of. d. on account of").

"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 rt the case here.

*We also do not rely on the ALJ's discussion of the legislative

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

48a

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 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

49a

argument because “direct negotiation with individual

copyright owners is available and feasible." 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 U.S. 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 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 US. 1 (1913); Straus v. Victor Talking

Machine Co., 243 U.S. 490 (1917); Boston Store of Chicago

v. 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

"Complainant's submission -at 47 (relying on Windsurfing

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

("[t}o 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)).

50a

arrangement between patents in a mandatory package license

is a reasonable application of Supreme Court precedent.

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]e 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 [d]istrict [c]ourt 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 IA 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 is conditioned upon the acceptance

of a license of another, separate product.” U.S. Dep't of

'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),

Sla

Justice & FTC, Antitrust Guidelines for the Licensing of

Intellectual Property § 5.3 (1995) ("DOJ/FTC Antitrust

Guidelines"). The DOJ/FTC Antitrust Guidelines state that

"{i]f a package license constitutes a tying arrangement, the

[DOJ and FTC] will evaluate its competitive effects under

the same principles they apply to other tying arrangements.”

DOJ/FTC Antitrust Guidelines § 5.3. The DOJ/FTC

Antitrust Guidelines also state that the DOJ will apply the

rule of reason standard in deciding whether to challenge a

tying arrangement:

In the exercise of their prosecutorial discretion, the

Agencies will consider both the anticompetitive

effects and the efficiencies attributable to a tie-in.

The Agencies would be likely to challenge a tying

arrangement if: (1) the seller has market power in

the tying product, (2) the arrangement has an

adverse effect on competition in the relevant market

for the tied product, and (3) efficiency justifications

forthe arrangement do not outweigh _ the

anticompetitive effects. The Agencies will not

presume that a patent, copyright, or trade secret

necessarily confers market power upon its owner.

DOJ/FTC Antitrust Guidelines § 5.3 (footnotes omitted) -

(emphasis added). Given the DOJ's acknowledgment that its

standard is a matter of prosecutorial discretion, the DOJ's

choice of the rule of reason standard for its antitrust

investigations provides little guidance on the standard that

we should apply in this investigation; however, it indicates

that a per se approach is valid.

Complainant argues that "it would be poor public

policy to adopt a per se approach that condemns all package

licenses if market power is found.” Complainant's

submission at 47, It asserts that a mandatory package license

52a

of all patents in a pool may have no anticompetitive effects

at all, while offering the well-recognized benefits of reduced

transaction costs and reduced uncertainty concerning the

rights needed to manufacture a product. Complainant is

correct that a per se approach condemning all mandatory

patent license packages is unwarranted because licensing

blocking patents as a package is pro-competitive. The

application of the per se patent misuse doctrine to tying

arrangements in a mandatory package license would not,

however, encompass blocking patent complexes so long as

the traditional separate product requirement, discussed in

part C, infra, is retained. /nternational Manufacturing Co. v.

Landon, 336 F.2d 723 (9th Cir. 1964).

The LA opposes even such a narrowly crafted per se

rule. He suggests that, in the hypothetical situation "where 20

patentees, some of which refuse to license their blocking

patents separately, have properly pooled into a mandatory

package license 200 essential patents but have errantly

included a single nonessential patent along with the essential

ones," it would be improper to find patent misuse per se

because "the anticompetitive effects of wrongly adding the

one nonessential patent to the pool may be outweighed by

the procompetitive effects of the arrangement, e.g., reducing

the transaction costs that would result if a licensee had to

negotiate contracts with each licensee and avoiding a ‘hold-

out’ situation where certain patent holders refuse to license

their patents alone.” IA's submission at 15-16. We do not

find the IA's hypothetical persuasive, however, because it is

not necessary to eliminate the package license in his

hypothetical altogether in order to avoid patent misuse. All

that is necessary is to provide potential licensees with a

backstop - the choice of individually licensing the patents;

$3a

there is nothing wrong with offering the package license as

an option, rather than as a requirement. ||

Relying on Jefferson Parish, complainant urges us to

examine the competitive consequences of the challenged

conduct. The character of the potential harm flowing from

including, in a mandatory package license of blocking

patents, an extra patent license that is not necessary to use

the blocking patents is widely recognized, viz., the

suppression of emerging technologies that compete with the

technology covered by the extra patent license. CX-358 at

''Complainant cites no authority for the proposition that tying is

"inherent" in a pool license (Complainant's submission at 47). The DOJ

Antitrust Division MPEG-2 business review letter states that -

{[ajlthough it offers the Portfolio patents [viz., the patents

identified as essential to compliance with the video and/or

systems parts of the MPEG-2 standard] only as a package, the

Portfolio license does not appear to be an illegal tying

agreement. The conditioning of a license for one intellectual

property right on the license of a second such right could be a

concern where its effect was to foreclose competition from

technological alternatives to the second. In this instance,

-however, the essentiality of the patents - determined by the

independent expert - means that there is no technological

alternative to any of them and that the Portfolio license will

not require licensees to accept or use any patent that is merely

one way of implementing the MPEG-2 standard, to the

detriment of competition. Moreover, although a_ licensee

cannot obtain fewer than all the Portfolio patents from MPEG

LA, the Portfolio license informs potential licensees that

licenses on all the Portfolio patents are available individually

from their owners or assignees. While the independent expert

mechanism should ensure that the Portfolio will never contain

any unnecessary patents, the independent availability of each

Portfolio patent is a valuable failsafe.

CX-355 at 11 (emphasis added).

54a

10; CX-357 at 9; CX-355 at 11. As the Supreme Court noted

in Jefferson Parish:

There is general agreement in the cases and among

commentators that the fundamental restraint against

which the tying proscription is meant to guard is the

use of power over one product to attain power over

another, or otherwise to distort freedom of trade and

competition in the second product. This distortion

injures the buyers of the second product, who

because of their preference for the seller's brand of

the first are artificially forced to make a less than

optimal choice in the second. And even if the

customer is indifferent among brands of the second

_ product and therefore loses nothing by agreeing to

use the seller's brand of the second in order to get

his brand of the first, such tying agreements may

work significant restraints on competition in the tied

product.

Jefferson Parish, n.19 (quoting Fortner Enterprises vy.

United States Steel Corp., 394 U.S. 495, 512-514 (1969)

(dissenting opinion)). The inclusion of the extra, unneeded

patent in the package with the blocking patents could

foreclose competing technologies from use by manufacturers

licensed under the package; because the manufacturers

would obtain the unneeded patent with the package they

might choose not to license any of the competing

technologies. CX-358 at 10; CX-357 at 9; CX-355 at 11."

"The principal objective of the U.S. patent system is the

promotion of the progress of science and the useful arts. U.S. Const. art.

L, § 8, U.S. v. Masonite Corp., 316 U.S. 265, 278 (1942). The

suppression of emerging technology is directly contrary to that purpose.

5Sa

Thus, for the reasons discussed above, we conclude

that patent misuse per se may be based on a tying

arrangement between two patent licenses. -

A Legal Standard for Demonstrating Patent

Misuse Per se Based on a Tying

Arrangement Between Patent Licenses

As discussed supra, we have concluded that patent

misuse per se may be based on a tying arrangement between

two patent licenses. In Senza-Gel Corp. v. Seiffhart, 803 F.2d

661 (Fed. Cir. 1986), the Federal Circuit affirmed a grant of

summary judgment on a defense of patent misuse per se

premised on a patent-product tying arrangement. (Senza-Gel

pre-dates enactment of section 271(d)(5).) In finding patent

misuse, the Senza-Gel district court employed a three-step

analysis, viz, (1) whether two separable items are tied, (2)

whether the tied item is a staple in commerce, and (3)

whether the two items are tied in fact. The district court

certified as a question for interlocutory appeal whether its

three step analysis was proper for analyzing a patent misuse

claim in the tying context. The Federal Circuit found "no

impropriety in the district court's employment of the three-

step analysis," although the Federal Circuit "caution[ed] that

[it was] not ... explicating all of the analytical parameters that

may be applicable to patent misuse questions in future

cases." 803 F.2d at 665. Complainant argues that, in addition

to the market power requirement imposed by section

271(d)(5), to establish a tying arrangement in the patent

misuse context, a proponent must also establish each of the

three Senza-Gel elements.

Respondents assert that "[a] tying arrangement in

patent licensing constitutes per se patent misuse where (1)

the patentee has market power in a market for licensing

certain essential patents (which the licensee may want to

56a

license), and (2) conditions the licensing of those patents, on

the acceptance of a license to other nonessential patents

(which the licensee may not want to license)." Respondents'

submission at 9. Respondents contend that not all mandatory

package licenses are unlawfw! tying arrangements that would

~ be subject to the per se rule. Relying on Jefferson Parish,

respondents assert that "[t]ying only arises where the parties

include in the pool both an item in which they legitimately

have market power (e.g., essential patents), and an item for

which competition on the merits would otherwise occur (e.g.,

nonessential patents), and refuse to offer a legitimate choice

of obtaining each item separately." Respondents’ reply at 25-

26, 29 ("if only essential patents are ‘tied' together in a single

package, then the arrangement does not implicate the per se

rule"). Respondents assert that because "‘[n]onessential’

patents by definition are not necessary to practice the Orange

Book standard" "there could be competition among

nonessential technologies." Respondents’ reply at 5. Citing

Jefferson Parish, they assert that the per se prohibition

against tying protects competition by ensuring that it not be

suppressed by leveraging the market power in the essential

patents by tying the essential to nonessential patents.

We agree that establishing patent misuse per se based

on a tying arrangement between patent licenses requires

establishing both market power pursuant to section 271(d)(5)

and conditioning (i.e., the patent licenses are tied in fact).

We disagree with respondents’ position that the antitrust

market demand standard ‘should be used to determine

whether the "tying" and "tied" patents are separate items.

-The Federal Circuit stated in Senza-Gel that "[t]he law of

patent misuse in licensing need not look to consumer

demand (which may be non-existent) but need look only to

the nature of the claimed invention as the basis for

determining whether a product is a necessary concomitant of

the invention or an entirely separate product. The law of

57a

antitrust violation, tailored for situations that may or may not

involve a patent, looks to a consumer demand test for

determining product separability." 803 F.2d at 670 n.14.

We conclude that the second prong of the three-prong

Senza-Gel analysis, viz., whether the tied product is a staple

in commerce, is inapplicable to tying arrangements between

two patent licenses. In approving the three-prong standard

applied by the district court to the patent-product tying

arrangement at issue in Senza-Gel, the Federal Circuit cited

Dawson Chemical Co. v. Rohm & Haas Co., 448 U.S. 176

(1980). Dawson Chemical involved a process patent on a

method of using the chemical propanil as an herbicide. 448

U.S. 176,181-82 (1980). Before the Supreme Court, the

petitioners did not dispute that their manufacture and sale of

propanil with instructions for using it as an herbicide was

contributory infringement of the patent under 35 U.S.C. §

27\(c), but they raised the defense of patent misuse. 448

U.S. at 185-86. Section 271(c) defines contributory

infringement, as follows:

Whoever offers to sell or sells within the United

States or imports into the United States a component

of a patented machine, manufacture, combination: or

composition, or°a material or apparatus for use in

practicing a patented process, constituting a material

part of the invention, knowing the same to be

especially made or especially adapted for use in an

infringement of such patent, and not a staple article

or commodity of commerce suitable for substantial

noninfringing use, shall be liable as a contributory

infringer.

35 U.S.C. § 271(c) (emphasis added). It was undisputed that

propanil was a nonstaple article, i.e, "one that has no

commercial use except in connection with respondent's

58a

patented invention." 448 U.S. at 184, 186-87. The conduct at

issue was the patentee's practice of licensing its patented

method (the tying patent) only to purchasers of propanil (the

tied product).'> 448 U.S. at 186, 214. The question was

whether the patentee's activities were not patent misuse

because they fell within the safe havens of section 271(d)(1)-

(3).'* The Supreme Court focused on the relationship

between 35 U.S.C. § 271(c) and (d), and held that “the

provisions of 271(d) effectively confer upon the patentee, as

a lawful adjunct of his patent rights, a limited power to

exclude others from competition in nonstaple goods." 448

U.S. at 201.

The IA argues that the three-prong test articulated in

Senza-Gel in reliance on Dawson -

is structured to ensure that a patentee accused of an

illegal tie has not engaged in conduct that falls

within the safe haven of section 271(d)(5).

However, the test is inapplicable here because the

tying of two patents can never fall within the safe

haven. This follows from the unquestionable fact

that a third party under 271(c) - the section that

defines the breadth of the safe haven - can never be

found liable for contributory infringement for

licensing a patent that it owns.

IA's reply at 13. We agree with the IA that the act of

licensing a patent does not implicate contributory

‘This was accomplished through an implied license. 448 U.S. at

186, 202.

'* Dawson was decided prior to the Patent Misuse Reform Act of

1988, which enacted 35 U.S.C. §§ 271(d)(4),(5).

59a

infringement under section 271(c). Thus, the staple/nonstaple

distinction analyzed in Dawson would not be applicable to a

patent-patent tying analysis, and that prong of the Senza-Gel

analysis is not applicable here.

International Manufacturing Co. v. Landon, Inc., 336

F.2d 723 (9th Cir. 1964), while not binding precedent, is both

on point and persuasive on the issue of applying the

traditional separate product test (the first prong of the Senza-

Gel analysis) in the context of patent-patent tie-ins is In that

case, the Ninth Circuit held that the mandatory package

licensing of blocking patents’? was not patent misuse,

Tn discussing the first prong of the Senza-Gel analysis, viz.,

"whether [the tied] product is a necessary concomitant of the invention or

an entirely separate product" (803 F.2d at 670 n.14), complainant cites an

unpublished Federal Circuit opinion (Ricoh Co. v. Nashua Corp., 1999

WL 88969); Broadcast Music Inc. v. Columbia Broadcasting System,

Inc., 441 US. 1, 21 (1979); Texas Instruments, Inc. v. Hyundai

Electronics Industries Co., 49 F. Supp.2d 893, 913, 915 (E.D. Tex.

1999); and Milliken Research Corp. v. Dan River, Inc., 739 F.2d 587,

594 (Fed. Cir. 1984). Broadcast Music is inapposite because, not only is

it an antitrust case, it is not even an antitrust tying case. The district court

opinion in Texas Instruments is not binding precedent on the

Commission. As discussed in Part A, supra, we disagree with the district

court's conclusion that the enactment of 35 U.S.C. § 271(d)(5) in the

Patent Misuse Reform Act of 1988 eliminated the per se approach to

patent tie-ins. We also disagree with the district court's conclusion that

Senza-Gel has "limited, if any, significance after the Patent Misuse

Reform Act of 1988." 49 F.Supp.2d at 915. The district court perceived

an inconsistency between the language of section 271(d)(5), which refers

to "condition[ing] the license of any rights to the patent or the sale of the

patented product on the acquisition of a license to nghts in another patent

or purchase of a separate product," 49 F.Supp.2d at 914 (quoting 35

U.S.C. § 271(d)(5) (emphasis added by district court)), and the reference

to "separable or inseparable items" in Senza-Gel, 803 F.2d at 664. The

district court's reliance on this difference in language is problematic

given the statement in Senza-Gel that “{t]he law of patent misuse in

licensing .. . need look only to the nature of the claimed invention as the

basis for determining whether a product is a necessary concomitant of the

60a

distinguishing American Securit Co. v. Shatterproof Glass

Corp., 268 F.2d 769 (3d Cir. 1959), on the ground that the

patents at issue in that case "could possibly be used

independently without infringing one another.”'° 336 F.2d at

729. The Ninth Circuit reasoned that —

it is not an unlawful tying arrangement for a seller to

include several items in a single mandatory package

when the items may be reasonably considered to

constitute parts of a single distinct product. A

license package containing blocking patents may be

considered a single distinct product. By definition,

blocking patents disclose interdependent parts of

the same product. The product . . . is no less a

single product because its novel aspects are disclosed

by two interlocking patents. In such a case, not only

is it not unreasonable to treat both paténts as

constituting a single product, but also licensing them

in a package deal appears to be the most practical

way of making them available for public use... .

* * *

Appellants argue that mandatory package licensing

of blocking patents should not be condoned because

it may result in a prospective licensee being

invention or an entirely separate product." 803 F.2d at 670 n.14

(emphasis added).

‘The Ninth Circuit went on to state that "[t]he evil of

mandatory package licensing in /Shatterproof Glass] was that the

prospective licensee, in order to obtain a license under one patent, would

be compelled to accept licenses under patents that were not necessarily

needed. The same evil does not arise in mandatory package licensing of

blocking patents. In such a case, the prospective licensee is being

compelled to accept no more than he would, in any event, have to obtain

in order to make worthwhile a license under any of the patents.” 336 F.2d

at 729-30.

6la

compelled to accept an entire license package -

thought by its owner to contain only interlocking

patents - even though the licensee believes that he

can produce a commercially feasible product under

only part of the license package.

This argument is premised on a hypothetical

set of facts not involved in our case. Jf we had a

case where the licensee could produce a

commercially acceptable product utilizing one

patent but not infringing the others in the package,

then clearly we would not have a_ case

involving blocking patents. That we do not have

such a hypothetical case is confirmed by the fact

that appellants have not attempted to show what

kind of device could be made under one of the

patents in this case without violating the other. It is

further confirmed by the fact that the product that

the appellants did in fact manufacture infringed

both patents.

336 F.2d at 730-31 (emphasis added) (footnoie omitted). The

Ninth Circuit noted that there was testimony that "possibly a

structure can be made" that would infringe one patent

without infringing the other, but found that the testimony

"dealt with hypothetical possibilities insofar as physical

structure is concerned, and not with any practical use which

could be made of the structure." 336 F.2d at 731 n.5.

Thus we conclude that, in addition to the market

power requirement imposed by section 271(d)(5), to

establish a tying arrangement between patent licenses in the

patent misuse context, a proponent must prove the first and

third requirements of the Senza-Gel analysis, viz., that the

"tying" and "tied" patent licenses are "separate" and tied in

fact.

62a

D. The Licensing Arrangements Are Patent

Misuse Per se as a Tying Arrangement

The "tying" patent licenses are licenses for U.S.

patents that are actually essential for the manufacture of CD-

R/RWs in accordance with Orange Book standards, and the

"tied" patent licenses are licenses for U.S. patents that the

licensors have identified as "essential" but that are actually

nonessential for the manufacture of CD-R/RWs. For the

reasons discussed below, we conclude that each of the

patents asserted in this invectigation is unenforceable for

patent misuse. In section 1, infra, we discuss the market

power requirement of section 271(d)(5). The first and third

prongs of the three-prong Senza-Gel test, viz., the

requirements that the "tying" and "tied" patent licenses be

tied in fact and separate, are discussed in sections 2 and 3,

infra.

We conclude that in the Philips-only CD-RW license

(e.g., CX-469C; FF 71, 72), licenses to the U.S. patents that |

are actually essential for the manufacture of CD-RWs in

accordance with Orange Book standards (the "tying" patent

licenses) are tied in fact to a license to the Farla '692 patent

(the "tied" patent license), that the market power requirement

of section 271(d)(5) is met, and that the Farla '692 patent is

"separate" from the tying patents.

We also conclude that in the Philips-only CD-RW

license (e.g., CX-469C; FF 71, 72), licenses to the U.S.

patents that are actually essential for the manufacture of CD-

RWs in accordance with Orange Book standards (the "tying"

patent licenses) are tied in fact to a license to the Lockhoff

'219 patent (the "tied" patent license), that the market power

requirement of section 271(d)(5) is met, and that the

Lockhoff '219 patent is "separate" from the tying patents.

The Philips-only CD-RW license contains a list of so-called

63a

essential patents in Exhibit B4, and every option under the

license requires the licensee to "choose{]" to license those

essential patents. CX-469C art. 1.10. The list of patents in

Exhibit B4 includes each of the six asserted patents in this

investigation,"'’ as well as the Farla '692 patent and the

Lockhoff '219 patent. CX-469C, Exhibit B4 at 4, 5.

We conclude that in certain Philips-only CD-R

licenses (e.g., RX-872C) and in certain joint CD-R licenses

(e.g., 1999 Gigastorage CD-WO/MO Disc Agreement (RX-

1832, RX-2024C, Trans. at 834), RX-755C), licenses to the

U.S. patents that are actually essential for the manufacture of

CD-Rs in accordance with Orange Book standards (the

"tying" patent licenses) are tied in fact to a license to the

Farla ‘692 patent'® and to a license to the Lockhoff '219

patent (the "tied" patent licenses), that the market power

requirement of section 271(d)(5) is met, and that the Farla

"Because the essentiality of four of the six patents asserted in

this investigation has not been challenged, those four patents (viz., the

'401 patent, the '856 patent, the '825 patent, and the '764 patent) are

among the "tying" patents. The parties dispute whether two of the

asserted patents (the Kramer '493 and the Kramer '209 patents) are

essential. Either the Kramer patents are properly deemed "essential" or

they are actually nonessential patents that should not have been included

in the list of so-called essential patents. If the former, they are "tying"

patents; if the latter, tied" patents. In either case, the Kramer '493 and

'209 patents are part of the tying arrangement, and therefore both patents

should be found unenforceable for patent misuse.

'’The ALJ found that the patents identified by the licensors as

so-called "essential" patents have changed over time. See, e.g., FF 104-

06. He further found that some licensees are operating under license

agreements that include nonessential patents. FF 78. The burden of

demonstrating a purge of patent misuse rests on complainant and

requires, inter alia, that licenses containing improper provisions must

have expired, or at least that the improper provisions be removed. ID at

147 (citing cases).

64a

‘692 patent and the Lockhoff '219 patent are each "separate"

from the tying patents. The list of so-called essential patents

in certain Philips-only CD-R licenses (e.g., RX-872C, PH

098381-82, 098404) includes each of the six asserted patents

in this investigation, as well as the Farla '692 patent and the

Lockhoff'219 patent.

We further conclude that in the 1999 Gigastorage

joint CD-RW license (RX-903C), licenses to the U.S. patents

that are actually essential for the manufacture of CD-RWs in

accordance with Orange Book standards (the "tying" patent

licenses) are tied in fact to each of the following "tied" patent

licenses: a license to the Ricoh Iwasaki '149 patent; a license

to the Sony Yamamoto '719 patent; a license to the Farla

'692 patent; and a license to the Lockhoff’'219 patent. We

also conclude that each of these "tied" patents is "separate"

from the tying patents, and that the market power

requirement of section 271(d)(5) is met. The list of patents in

Exhibit BS of the license (RX-903C, PH002750-54) also

includes each of the six asserted patents in this investigation,

as well as each of the "tied" patents listed above.

l. The Market Power Requirement of Section

271(d)(5)

We find that the relevant market for analyzing market

power is 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, and adopt’? the

ALJ's market definition and market power analysis.”

"We take no position on the ID's statement that “Philips, Sony,

Taiyo Yuden, and Ricoh are horizontal competitors in the patent

licensing market" (ID at 173), and also take no position on the statement

that "the Philips CD-R and CD-RW patent pools constitute horizontal

agreements among competitors" to control royalty rates (ID at 175)

65a

Philips has market power in the United States market

for licensing essential U.S. patents for the manufacture of

*°We disagree with complainant's contention that in excluding

recordable/rewritable DVDs from the relevant product market, the ALJ

shifted the burden of proof to complainant. Respondents’ expert (Bratic)

testified that recordable DVDs are not reasonably interchangeable with

CD-Rs. Trans. (Bratic) at 1698:20-1701:2. He noted that a recordable

DVD would not play in a CD player and that consumers typically paid

ten times more for DVD players than for CD players. The ALJ could

reasonably reject the conflicting opinion of complainant's expert

(McCarthy) that DVDs were interchangeable with CD-R/RWs, and in the

ID he explained his reasons for doing so. Thus, the burden of proof on

this issue was not shifted to complainant.

Complainant asserts that Bratic was qualified by the ALJ over

its objection "on the issue of patent misuse." Complainant's submission at

61 n38 (quoting Trans. at 1620). The ALJ stated as follows:

I will accept Mr. Bratic as an expert in licensing practices

and economic matters that pertain to licensing, and facts which

indicate to him misuse. Now, | don't accept that as binding on

me in any way or on the Commission in any way as to what the

law is On misuse, but merely the opinion of a person who has

had a lot of experience, obviously, in his views on what the

market considers to be regular and normal] and what appears to

be abnormal.

Trans. at 1623:3-11; see generally 1620:1-1624:18. Complainant also

asserts that "Bratic, an accountant, not an economist, has never before

testified or been qualified to testify about relevant market definitions,

market power or anticompetitive effects in relevant markets. (Bratic Tr.

1908-09.) For these and other reasons, Mr. Bratic was not qualified to

testify on the definition of a relevant market, and it was error for the ALJ

to adopt in whole Mr. Bratic's testimony." Complainant's submission at

61. Bratic testified that he had “testified on relevant markets and market

definitions in many patent cases" (Trans. at 1909:13-14), and that he had

"also testified on price erosion issues and the effects of anticompetitive

behavior as they relate to price erosion in patent infringement matters"

(Trans. (Bratic) at 1911:18--20). See Trans. (Bratic) at 1908-13;1610-19

(educational background and work experience).

66a

CD-R/RWs according to Orange Book standards because, hs

the ALJ found, there are no close substitutes for CD-R/RWs

(ID at 160-64); the -elevant market for licensing essential

CD-R/RW patents is coextensive with the relevant product

market for CD-R/RWs because "manufacturers are

constrained to enter into those licenses in order to make such

unique products" (ID at 166-67); and licenses to at least

some of the Philips patents are essential to the manufacture

of CD-R/RWs (ID at 173). The ALJ did not, as complainant

contends, erroneously presume that because complainant had

a patent, it has market power. Identifying the "tying" patent

licenses as licenses for U.S. patents that are essential for the

manufacture of CD~R/RWs according to Orange Book

standards, the ALJ's analysis demonstrates that the market

power requirement of section 271(d)(5) is met.

2. Tied in Fact

To find patent misuse per se based on a tying

arrangement between two patent licenses, in addition to

finding that the market power requirement of section

271(d)(S) is met, we must also find that the "tying" and

"tied" patent licenses are tied in fact. We find, as did the

ALJ, that in the Philips-only CD-RW license (e.g., CX-

469C; FF 71, 72), licenses to the U.S. patents that are

actually essential for the manufacture of CD-RWs in

accordance with Orange Book standards (the "tying" patent

licenses) are tied in fact to a license to the Farla ‘692 patent

and are also tied in fact to a license to the Lockhoff °219

patent (the "tied" patent licenses).

The ALJ found that, for the Philips-only CD-R and

CD-RW licenses, the package of so-called "essential" patents

had to be taken as a whole and a licensee could not break up

67a

the so-called "essential" patents by selecting only certain of

the so-called "essential" patents to license individually. FF

69-73. Philips asserts that prospective licensees have been

given the option to license patents individually. In support of

this argument, Philips relies on the following language,

which appears in several CD-RW joint licenses issued in

1999: "WHEREAS, Licensee understands, that Philips is

willing to license any one or more patent rights for optical

disc manufacturing, owned or controlled by Philips, whether

within or outside of the CD-RW Standard Specification as

defined hereafter and to disclose and make available the

requested basic information, all on reasonable terms and

conditions." CX-414C at 2 ("CD-RW Disc License

Agreement" with[{ ] ] (June 16, 1999)) (emphasis

added).*' Because complainant Philips has not identified any

Philips-only CD-RW license, or any CD-R license (Philips-

only or joint) that contains similar language, the cited

language does not suggest that prospective licensees under

the Philips-only CD-RW license or the CD-R _ licenses

(Philips-only or joint) were given the option of licensing

individual patents as opposed to being forced to take all of

the so-called essential patents as found by the ALJ. FF 64,

69-72. Thus, in the Philips-only CD-RW license (CX-469C),

“Accord CX-422C at 2 ("CD-RW Disc License Agreement"

with[[ ] ] (Dec. 21, 1999)); Philips’ complaint appendix N, tab 10

("CD-RW Disc Agreement" with [ { ] ] (Feb. 12, 1999)); CX-

420 C at 2 ("CD-RW Disc License Agreement" with Gigastorage

Corporation (Oct. 12, 1999)); see also CX-412C at 2 ("CD-RW Recorder

Agreement" with{ [ } )(Feb. 12, 1999) ("WHEREAS, Licensee

understands, that Philips is willing to license any one or more patent

rights owned or controlled by Philips for optical recording equipment

manufacturing, whether within or outside of the CD-RW Standard

Specifications as defined hereinafter and to disclose and make available

the requested basic information, all on reasonable terms and conditions")

(emphasis added).

68a

licenses to the "tying" patents, viz., the U.S. patents that are

essential to the manufacture of CD-RWs in accordance with

Orange Book standards (and which appear on the list of so-

called essential patents in the license) are tied in fact to

licenses to patents that appear on the list of so-called

essential patents even though those patents are not actually

essential to the manufacture of CD-RWs (e.g., the Farla “692

patent).

Relying on the ALJ's factual findings, FF 93 and FF

94, complainant contends that prospective licensees have

always had the option of choosing to negotiate individual

licenses. We disagree with complainant's interpretation

because the supporting deposition testimony cited by the

ALJ refers to single-licensor package licenses, rather than to

individual licenses. FF 93 and 94 read as follows:

FF 93: "The current joint CD-R disc license makes

clear that interested manufacturers may opt

to take out individual licenses under the

relevant patents of each of Philips, Sony and

Taiyo Yuden instead of a combined license."

See, e.g., RX-992C (PH [076996]); CX-

451C (p. 2); [Depo. Trans. (Van Dijk)

at] 53-54."

FF94: "The joint CD-RW disc license also makes

clear to licensees that Sony, Ricoh, and

Philips retain the right to separately license

their patents rights related to CD-RW. See,

e.g., CX-436C (p.2)."

69a

The Van Dijk deposition transcript cited by the ALJ in

support of FF 93 discusses [ [

CONFIDENTIAL INFORMATION DELETED

CONFIDENTIAL INFORMATION DELETED

CONFIDENTIAL INFORMATION DELETED

ee

y]

Trans. Depo. (Van Dik) at 53:12 - 54:25. Although

complainant also relies on additional testimony from the

same deposition, that testimony lends no support to its

contention:

_ rca

[

CONFIDENTIAL INFORMATION DELETED

([

CONFIDENTIAL INFORMATION DELETED

CONFIDENTIAL INFORMATION DELETED

J

([

CONFIDENTIAL INFORMATION DELETED

}

Trans. Depo. (Van Dijk) at 71:13 - 73:17. In addition to

being inconsistent with the deposition testimony of Van

Dijk, Philips' interpretation of FF 93 and FF 94 is also

inconsistent with the ALJ's statement that "[m]anufacturers

in the market for CD-R/RW discs are unable to negotiate a

70a

reasonable royalty rate with Philips for only particular

blocking patents for the purpose of making CD-R/RWs that

comply with Orange Book standards" (ID at 182 n.111)

(emphasis in the ID).

We find, based on the above, that licenses to each of

the so-called "essential" patents are tied in fact in the Philips-

only CD-RW and CD-R patent licenses, in that none of the

so-called essential patents could be licensed individually for

the manufacture of CD-RWs or CD-Rs apart from the

package. We therefore find a tie in fact between the "tying"

patent licenses (licenses for U.S. patents that are actually

essential for the manufacture of CD-Rs or CD-RWs in

accordance with Orange Book standards) and the "tied"

patent licenses (licenses for so-called "essential" patents that

are actually nonessential to the manufacture of CD-Rs or

CD-RWs) in the Philips-only CD-RW and CD-R patent

licenses.

With respect to the joint licenses for CD-R and CD-

RW technology, we also find, based on the ALJ's findings

and analysis, a tie in fact between the "tying" patent licenses

(licenses for U.S. patents that are actually essential for the

manufacture of CD-Rs or CD-RWs in accordance with

Orange Book standard and the "tied" patent licenses (licenses

for so-called "essential" patents that are actually nonessential

to the manufacture of CD-Rs and CD-RWs). Pnor to 2000,

as the ALJ found, the option to license only the essential

patents of a single licensor, such as Philips, was not

available. ID at 177-78; Trans. (Smith) at 1423-24; FF 166-

67, 369-74. The ALJ further found, however, that even when

the Philips-only and other individual licensor packages

became available in 2000, licensees continued operating

under pooled license agreements that included nonessential

patents and that, indeed, 80 percent of CD-R/RW licenses

worldwide currently are licensed under the joint licenses,

Tla

while only 20 percent have a separate Philips-only license.

FF 78, 95. The ALJ further found, as explained more fully

below, that licensees were discouraged from purchasing the

single licensor packages, as opposed to the joint license.

Indeed, the ALJ specifically found that Philips offered no

evidence that the anticompetitive effects of including many

nonessential patents in the lists of essential patents in the

CD-RJRW pools had dissipated. FF 602.

In support of its argument that prospective licensees

have been given the option to license patents individually,

complainant Philips notes that CX-414C ("CD-RW Disc

License Agreement" with[[ } ] (June 16, 1999)) provides

that "Philips is willing to license any one or more patent

rights for optical disc manufacturing, owned or controlled by

Philips, whether within or outside of the CD-RW Standard

Specification." The record does not support complainant's

argument. The quoted language also appears in the 1999

joint CD-RW license to Gigastorage (CX-420C at 2, FF

250). The ALJ heard testimony regarding negotiations

concerning the 1999 Gigastorage licenses and found that

Gigastorage was told that separate licenses from the

licensors would be more expensive than a joint license, that

separate licenses could not be converted to a joint license at a

later date, and that the royalty rate was the same regardless

of the number of patents used. FF 369-376. He found that

manufacturers like Gigastorage were "forced to license

technology that they do not want." ID at 194. We also note

that the cited language is not present in more recent joint

72a

CD-RW license agreements. See, e.g., Philips' complaint

confidential appendix N, tabs 1, 7, 16, 17, and 18.”

The ALJ found that "[w]hen Gigastorage discussed

with Philips entering into the CD-R patent pool license

agreement, Gigastorage did not believe it needed a license to

every patent in the pool and inquired into obtaining a license

to less than all of the patents on Philips’ patent list.

Gigastorage hoped that by eliminating some patents the

royalty rate would be lower. Philips responded that the

royalty is the same regardless of the number of patents used."

FF 376. (citing Trans. (J. Chen) at 840:15-841:13, 848:4-11,

918:12-919:7. The ALJ also found that "the evidence of

record shows that manufacturers know enough about the

patents in the pools to realize that they are being forced to

license technology that they do not want." ID at 194 (citing

Trans. (J. Chen) 918:4-920:7); FF 439. The relevant

testimony of Mr. Chen of Gigastorage reads as follows:

Q: You had a copy of the license and the patent

list before you entered into the license; is

that night, sir?

A: In the -

Q: No, I'm just asking you, you had a copy of

the license and the patent list before you

entered into the license with Philips?

Appendix N is entitled "License Agreements of CD-RW

Licensees." Tab | is "CD-RW Disc Patent License Agreement" with, [ [

] ] (June 17, 2000). Tab 7 is "CD-RW Disc Patent License Agreement”

with [[ ] July 1, 2000). Tab 16 is "CD-RW Disc Patent License

Agreement” with [ [ ] } June 16, 2000). Tab 17 is "CD-RW Disc

Patent License Agreement” with [ [ ] ] (June 21, 2000). Tab 18 is "CD-

RW Disc Patent License Agreement” with.[ [ ] ] (Sept. 25, 2000).

73a

They give us, yes.

And you didn't look at that patent list, did

you?

Of course, yes. J just explained that. I will

explain again. Before we signed the patent

license, we have a patent list, because

Philips offer us so-called standard joint

license agreement to us, so of course,

including the patent list. But in the patent

list, there are over 100, over 100 patents. So

- and also, there are a lot of irrelevant

patents in the list, for example the CD audio,

CD-ROM and CD-I, and also the CD-

MO patent in the list. Of course, we have a

list, and also, we expressed such opinion to

Philips Taipei. So L have a phone call with

Danny Lin. He's a manager of Philips Taipei

who is in charge of patent licensing in

Taiwan. I, on the phone, spoke with him

regarding this issue, those patents we don't

need, why they need to put in the list: But

we got the answer I just explained. We got

the answer, even if you use one patent of the

list or two or more, you still need to pay the

same royalty rate, the same amount. So I

have, before, we signed a joint license

agreement.

Mr. Chen, I want to direct you to tab 2 of

your binder, which is a copy of your

deposition testimony, and direct your

attention to page 158, line 13. Page 158, line

13.

74a

A: Line 13.

Q: You testified at your deposition "I have

looked at the patent list, this is an attachment

to the agreement, and there are so many

numbers that | didn't look at them in detail,

and I remember there were over 100." Do

you remember that testimony?

A: Yeah, that's my answer, right

JUDGE HARRIS: Yes, he remembers that.

BY MS. AQUINO: So you didn't look at the patents

in detail; correct?

A: Yes. I also explained that we have a patent

list, but we don't have the patent in very

detail, but from the patent list, I remember in

the deposition, I also explain to you, it's very

easy to take a look in the list, there are

different category for the patent. So at that

time I explained to you they are CD audio,

CD-ROM and CD-I and also the CD-MO in

the patent list. So it's very obvious we don't

need that, but in the detail, we don't have

time, we don't have the manpower to go into

the detail, and also, that's over 100 patents.

Trans. (J. Chen) at 918:4-920:7 (emphasis added).

Relying upon the italicized portion of the above-

quoted testimony, complainant argues that, rather than

demonstrating that Gigastorage could not choose the patents

it wanted to license, the "testimony demonstrates only that

75a

Philips was prepared to license whatever patents Gigastorage

wanted, but that the royalty would not change."

Complainant's submission on review at 84. The ALJ

concluded, however, that the witness understood Philips’

response as a rejection of Gigastorage’s request to license

fewer patents at a lower royalty (i.e., the witness "realize[d]

that [he was] being forced to license technology that [he did]

not want" (ID at 194)), rather than as expressing a

willingness to license individually the patents in the CD-R

joint license. The ALJ is in the best position to evaluate trial

testimony, and we believe his interpretation is the correct

one.

“In support of its argument that it “is willing to negotiate

licenses under whatever patent a licensee chooses" (Complainant's

submission on review at 81), complainant also cites the following

hearing testimony of Brian Wieghaus, complainant's general manager of

optical licensing in North America:

Q: What is Philips's policy with respect to offering its

patents for use other than in the field of use of a joint licensing

program?

A: Essentially, it's negotiable.

Q: What is Philips's policy with respect to offering

individual] patents for license?

A: Again, it's negotiable.

Trans. at 305. However, the testimony of Wieghaus that precedes the

above-quoted excerpt concerns unusual nonstandard optical products in

niche fields. Trans. (Wieghaus) at 303-05. Thus, rather than being

directed to licensing patents for use in implementing the CD-R/RW

standard, the question relates to negotiations for the use of patents in

such non-standard fields. The Wieghaus testimony therefore provides no

support for complainant's contention that prospective CD-R/RW

manufacturer licensees had the option of obtaining licenses to individual

patents.

76a

As discussed above, we find, as did the ALJ, that

licensees are, unable license individual patents but must take

a license to all of the so-called "essential" patents. The .

availability of single-licensor package licenses would negate

a tie in fact in the joint license between so-called essential

patents that are owned by different licensors because the

licensee has the option of single-licensor packages from each

of the different licensors. The ALJ found, however, that

Philips-only package licenses did not become available until

2000. ID at 177-78; Trans. (Smith) at 1423-24; FF 166-67,

369--74. We affirm his finding that the option to license only

the essential patents of a single licensor under a single-

licensor package license, as opposed to licensing every one

of the so-called essential patents of every one of the licensors

under a joint license, was not available earlier. We therefore

find, in the joint licenses negotiated prior to that point in

time, a tie in fact between the "tying" patent licenses

(licenses for U.S. patents that are actually essential for the

manufacture of CD-Rs or CD-RWs in accordance with

Orange Book standards) and the "tied" patent licenses

(licenses for so-called "essential" patents that are actually

nonessential to the manufacture of CD-Rs or CD-RWs)

regardless of ownership. In the joint licenses negotiated after

that point in time, we find a tie in fact between the "tying"

patent licenses (licenses for U.S. patents that are actually

essential for the manufacture of CD-Rs or CD-RWs in

accordance with Orange Book standards) and the "tied"

patent licenses (licenses for so-called "essential" patents that

are actually nonessential to the manufacture of CD-Rs or

CD-RWs) owned by the same licensor.

3. Separability

As discussed in the previous section, we find that in

the Philips-only CD-RW license (e.g., CX-469C; FF 71, 72),

77a

licenses to the U.S. patents that are actually essential for the

manufacture and sale of CD-RWs in accordance with Orange

Book standards (the "tying" patent licenses) are tied in fact to

a license to the Farla ‘692 patent (the "tied" patent license).

We affirm the ALJ's finding that the Farla '692 patent, which

is included in the Philips-only CD-RW patent license as a so-

called "essential" patent, is actually nonessential to the

manufacture of CD-RWs (or CD-Rs) according to Orange

Book standards.”

Complainant asserts that "[t]here is no evidence or

finding that any pooled patent is not infringed by the making

of an Orange Book disc." Complainant's submission at 78. It

notes that -

[t]he ALJ's conclusion regarding which patents are

"essential" and which patents should or should not

be pooled together - based ... on a standard that

ignores whether patents are actually infringed - has

no applicability to the law of patent misuse based_on

tying which examines whether the alleged tied

products are separate products by looking at the

nature of the invention to determine whether the

product is a "necessary concomitant of the

invention." See Senza-Gel, 803 F.2d at 670 n.14.

Whatever may be said of the ALJ's determination of

ID at 201-05. The ALJ found that the Farla '692 patent "was

included in the CD-R license agreement for many years before it was

removed from the list of essential patents in 2001." ID at 204 (citing RX-

840, RX-778, RX-755, RX-914). He also found that "at least as of a

license agreemeut signed in January 2002, the Farla 692 patent was still

being listed as an essential patent under the CD-RW license agreement."

ID at 204 (citing RX-770 at PHO87634). As pointed out by the IA, the

following additional CD-RW licenses also include the Farla ‘692 patent:

RX-766 at PHO87728, RX-773 at PHO88934.

78a

essentiality, it was not based on what patent the

licensee needs or infringes in making a licensed

product.

Complainant's submission at 78 n.52 (citations omitted). We

disagree with complainant's contentions, and find that the

Farla ‘692 patent is "separate" from the tying patents.

The ALJ found that "[l]icenses to at least some of the

Philips patents are essential to the manufacture of CD-

R/RWs that are in technical and practical compliance with

the Orange Book." ID at 173; FF 222. Contrary to

complainant's contentions, the record in this investigation

establishes that a licensee could produce an Orange Book

compliant CD-R or CD-RW disc (using the so-called

"essential" patents that are actually essential) without

infringing the Philips Farla '692 patent.2> The evidence

supporting this finding is the testimony of respondents’

expert (McLaughlin).”°

?>as discussed in Part C, supra, the mandatory package

licensing of blocking patents is not patent misuse per se because such

patents may be considered to be a single product. As the Ninth Circuit

stated in /nternational Manufacturing Co. v. Landon, Inc., 336 F.2d 723,

731 (9th Cir. 1964), 'where the licensee could produce a commercially

acceptable product utilizing one patent but not infringing the others in the

package, then clearly we would not have a case involving blocking

patents.”

Respondents assert that in appendix B of complainant's

submission on review, complainant for the first time challenges the

opinion of its expert (McLaughlin) as to the essentiality of specific

patents, raising arguments that were never presented to the ALJ

Respondents concede, however, that the appendix also "discusses factual

or legal issues that may have been raised before the ALJ." Respondents’

reply at 78. The Commission need not consider arguments raised by

complainant in appendix B of its submission on review challenging the

patent-by-patent essentiality opinion testimony of respondents’ expert

79a

Complainant generally asserts that the testimony of

-respondents' expert (McLaughlin) is not evidence that

alternative technologies exist that do not infringe the patents.

It notes that McLaughlin testified on cross-examination that

he was "not intimately familiar with the term infringement,"

and asserts that "the ALJ refused to permit [complainant's

counsel] to question Dr. McLaughlin on the importance of an

infringement analysis in determining essentiality, stating that

[the ALJ said that] ‘this expert's task was not to consider the

question of infringement but to consider the question of

essentiality."' Complainant's reply at 29 n.24 (quoting Trans.

at 1583). While McLaughlin stated that he was "not

intimately familiar with the term ‘infringement, we do not

believe that this means that his testimony is incompetent that

certain patents (including, e.g., the Farla '692 patent) do not

"cover" Calimetrics' alternative OPC and write strategy

technology.”’ This is because in his testimony McLaughlin

compared an exemplary claim in the patent at issue and

explained why the technology was not covered. The hearing

testimony cited by complainant does not suggest that the

ALJ prevented complainant from questioning McLaughlin

about his findings concerning those patents on cross-

examination.

The ALJ found that the "claims of the Farla 692

patent are directed to a particular method of carrying out a

Strategy for writing data, otherwise known as a ‘write

strategy,’ onto a blank recordable disc." ID at 201; FF 471-

that were not raised before the ALJ. Hazani v. United States Int'l Trade

Comm'n, 126 26F.3d 1473, 1476-77 (Fed. Cir. 1997). However, as

discussed below, the Commission finds complainant's arguments

unpersuasive.

’Calimetrics is a company owning alternative technology. See,

e.g., ID at 203.

80a

72. He noted that "Dr. McLaughlin testified that at least one

economically viable alternative for performing write strategy

exists that does not infringe the Farla patent," and that "Dr.

McLaughlin identified an OPC and write strategy method

available from Calimetrics, Inc., where he is employed as a

Principal Scientist, as an alternative that is not covered by

the Farla ‘692 patent and that would comply with the

requirements of the Orange Book if it were used." ID at 203;

FF 482--485; Trans. (McLaughlin) at 1493:3-8; 1520:16-22;

1527:7-1528:8; 1563:18-1564:23; 1571:3-1571:10.

Complainant asserts that, rather than requiring that

respondents prove patent misuse, the ALJ improperly shifted

the burden of proof on the issue to it. Complainant contends

that the ALJ required it to demonstrate that the Farla ‘692

patent had been removed from the CD-RW licenses,

although the burden of proof should have remained on

respondents to demonstrate that the Farla ‘692 patent was

still included in the CD-RW licenses.

In response, respondents assert that "[g]iven that

there was undeniable evidence that Farla was listed as

essential in the past, the ALJ properly placed the burden on

Philips to show that it no longer was [on the list of essential

patents]. (FF 486, 488.) In any event, the fact that a

nonessential patent has in the past been on the list is

sufficient to support a finding of patent misuse.”

Respondents’ reply at 85 n.46.

The ALJ did not shift the burden of proof on this

issue to complainant. The ID states as follows:

The [Farla '692] patent was included in the CD-R

license agreement for many years before it was

removed from the list of essential patents in 2001.

Compare RX-840; RX-778; RX-755; RX-914.

8la

‘Hiowever, at ‘least as of a ficense agreement signed

in January 2002, the Farla ‘692 patent was still

being listed as an essential patent under the CD-RW

license agreement, See RX-770 at PHO87634.

It is unclear whether the Farla “692 patent

remains listed on Philips' standard _ license

agreements as an essential patent in the CD-RW

pool. Philips' website of form license agreements

does not include the lists of essential and

nonessential patents for the CD-RW disc pool. See

"Philips Intellectual Property and Standards, CD-

R/RW Patents," at

http://www. licensing. philips.com/licensees/patent

/ob/ (CD-R/RW hyperlink) (last visited on August

26, 2003). In the absence of evidence to the contrary,

it can only be assumed that the Farla ‘692 patent

continues to be listed as an essential patent on

the form CD-RW _license was well as on_the

agreements of all existing CD-RW _ licenses. As

such, it unreasonably forecloses competition from

alternative technologies that also comply with the

Orange Book.

ID at 204-05 (emphasis added). Thus, the basis for the ALJ’s

conclusion that the Farla ‘692 patent continues to be listed as

an essential patent in CD-RW licenses is that, although the

patent had been removed in 2001 from the list of essential

CD-R patents, the patent was still listed as an essential patent

in a 2002 CD-RW patent license (RX-770 at PH087634 (Jan.

1, 2002)). The ALJ could permissibly infer from this

evidence that the Farla ‘692 continues to be listed as an

essential CD-RW patent. No party has directed us to

evidence in the record that the patent has been removed from

the list of essential CD-RW patents. We conclude that

82a

complainant's arguments concerning the Farla patent are

without merit.

As discussed above, the record in this investigation

establishes that a licensee could produce an Orange Book

compliant CD-RW disc without infringing the Philips Farla

‘692 patent. Thus, the Farla ‘692 patent is not in a blocking

relationship with the U.S. patents that are actually essential

for the manufacture of CD-RWs, and we find that the Farla

‘692 patent is separate from those patents.

As discussed in the previous section, we also find

that in certain joint CD-R and CD-RW licenses there is a tie

in fact between the "tying" patent licenses (licenses for U.S.

patents that are actually essential for the manufacture of CD-

Rs or CD-RWs in accordance with Orange Book standards)

and the "tied" patent licenses (licenses for so-called

“essential” patents that are actually nonessential to the

manufacture of CD-Rs or CD-RWs) regardless of ownership.

For the reasons discussed below, we affirm the ALJ's

findings that the Ricoh Iwasaki ‘149 patent and the Sony

Yamamoto °719 patent, which are included in certain joint

licenses, are actually nonessential to the manufacture of CD-

RWs (or CD-Rs) according to Orange Book standards, and

find that they are separate from the essential patents in the

joint licenses.

The ALJ found that "[I]icenses to at least some of the

Philips patents are essential to the manufacture of CD-

R/RWs that are in technical and practical compliance with

the Orange Book." ID at 173. As discussed below, the record

in this investigation establishes that a licensee could produce

an Orange Book compliant CD-RW disc using the so-called

"essential" patents that are actually essential, without

83a

infringing either the Ricoh Iwasaki ‘149 patent or the Sony

Yamamoto *719 patent.”® Thus, none of these patents is part

of the complex of blocking patents that are required for the

manufacture of Orange Book compliant CD-R or CD-RW

discs, and we conclude that each of these patents is

"separate" fronrthe “tying” patents.””

The Iwasaki '149 Patent

The ALJ found that the "claims of the Iwasaki '149

patent are directed to a particular method of performing the

OPC procedure, which is setting laser power to an

appropriate level to record onto a particular disc." D at 205;

Trans. (McLaughlin) at 1516:24-1518:7; 1520:24-1521:11.

He also found that "at least one economically viable

alternative for performing OPC exists that does not infringe

the Iwasaki '149 patent,’ and that "[t]he OPC and wnite

strategy method available from Calimetrics, Inc. was

identified by Dr. McLaughlin as an alternative that is not

covered by the Iwasaki patent and would comply with the

requirements of the Orange Book if it were used" ID at 205-

06;1517:2-20;1521:12-1522:13; 1563:18-1564:23; 1571:3-

10.

Complainant states that the Ricoh Iwasaki '149 patent

is not listed as a patent in the CD-R patent pool and that

Ricoh is not a CD-R pool licensor.

*®We do not decide whether the Spruit "351 patent, the Hamada

‘388 or ‘009 patents, the Lagadec *565 patent, the Ogawa 994 patent, the

Kramer 493 or ‘209 patents, or the Mimnagh ‘462 patent are "separate"

from the tying patents.

General challenges to the testimony of respondents’ expert

(McLaughlin) raised by complainant are discussed supra in connection

with our discussion of the Farla '692 patent.

84a

The ALJ found the Ricoh Iwasaki '149 patent to be

nonessential, reasoning as follows:

Respondents contend, without contest by

Complainant, that the Ricoh Iwasaki '149 patent is

nonessential and should not be included as such in

the Philips CD-R and CD-RW patent pools. RPHB

at 13-15. The claims of the Iwasaki '149 patent are

directed to a particular method of performing the

OPC procedure, which is setting laser power to an

appropriate level to record onto a particular disc.

McLaughlin Tr. 1516:24-1518:7; RX-52 (Iwasaki

'149 patent). The OPC method defined by the

Iwasaki patent consists of calculating a standardized

gradation factor by monitoring the amplitudes of

signals from test data patterns. McLaughlin Tr.

1520:23-1421:11; RX-52 (Iwasaki '149 Patent).

Respondents assert that the Iwasaki '149

patent is not essential to practice the Orange Book

for at least two reasons. First, the Orange Book does

not mandate a particular method for carrying out the

OPC function. McLaughlin Tr. 1507:10-1509:17;

RX-407C (Orange Book CD-R Standard at

PH015759); RX-408C (Orange Book CD-RW

Standard at PH023331-023332). Philips's employee

and technical witness, Hans Mons, testified that

some of the characteristics the Orange Book defines

for CD-Rs and CD-RWs are not mandatory, and that

Orange Book-compliant CD-Rs and CD-RWs do

not need to conform to the non-mandatory

characteristics defined by the Orange Book. Mons

Tr. 453:18-454:2; McLaughlin Tr. 1504:10-18.

Second, as stated earlier in connection with

the Farla '692 patent, the Iwasaki '149 patent is not

essential as a practical matter because at least one

economically viable alternative for performing OPC

85a

exists that does not infringe the Iwasaki '149 patent.

McLaughlin Tr. 1563:1-12. The OPC and wnite

strategy method available from Calimetrics, Inc.

was identified by Dr. McLaughlin as an alternative

that is not covered by the Iwasaki patent and would

comply with the requirements of the Orange Book if

it were used. McLaughlin Tr. 1521:12-1522:13;

1523:5-13.

Finally, Respondents contend that the

Calimetrics method is not covered by the Iwasaki

'149 patent. McLaughlin Tr. 1521:12-18. The

Iwasaki patent requires the calculation of a certain

mathematical quantity, and the calculation of that

mathematical quantity does not occur during the

Calimetrics OPC procedure. McLaughlin — Tr.

1521:19-1522:13.

Dr. Rubenstein has not rendered any opinion

as to the essentiality of the Iwasaki '149 patent.

Rubenstein Tr. 2263:11-2264:12. Neither has

Complainant offered any expert testimony to

counter the evidence presented by Dr. McLaughlin

on the patent's nonessentiality. Thus, the evidence of

record demonstrates that the Iwasaki '149 patent is

nonessential to the practice of the Orange Book, and

its inclusion among the list of "essential" patents in

the pools unreasonably forecloses competition.

ID at 205-06. To the extent that the ALJ found the Iwasaki

'149 patent to be “nonessential" to practice the CD-R

technology, we modify the ALJ's findings of fact to reflect

that the record indicates that the patent concerns only CD-

RW technology. Trans. (McLaughlin) at 1500-01; RX-2381.

In his ID the ALJ specifically relied on the fact that

complainant did not challenge the testimony of respondents'

expert (McLaughlin) concerning the Iwasaki '149 patent.

86a

Nonetheless, in its submission on review, complainant now

asserts that the OPC procedure in attachment C3 of Part III

of the Orange Book is mandatory because certain parameters

must be included in the ATIP. It contends that the OPC

procedure in attachment C3 is mandatory because these

parameters are determined according to that OPC procedure.

Complainant's argument is not persuasive, however, because

there is testimony in the record that, although attachment C3

"gives an example of an OPC-like procedure" in section 3.3

(CX-162C at PH023332), the title of the section, "A

procedure for the determination of the OPC parameters for

media," indicates that "there's more than one way to do that."

Trans. (McLaughlin) at 1509:3-17. We conclude that the

ALJ's findings of fact are not clearly erroneous.

The Yamamoto '719 Patent

The ALJ found that the "claims of the Yamamoto

‘719 patent contain functional limitations for creating a

master disc. [Trans. (McLaughlin) at] 1534:14-25; RX-50.

The limitations define a method of using a single laser beam

to create a master containing both a wobbled pre-groove and

pre-recorded data." ID at 206. He further found that "[alJt

least one economically viable alternative for creating a

master exists that does not infringe the Yamamoto patent.

[Trans. (McLaughlin) at) 1535:7-15. According to Dr.

McLaughlin, the Calimetrics two-beam mastering method is

a commercially viable alternative to the patent. [Trans.

(McLaughlin) at} 1568:3-15;1570:1-9." D at 207.

Complainant contends that the ALJ's reasoning is

erroneous because it depends on McLaughlin's erroneous

construction of the claims of the Yamamoto patent.

According to complainant, the claims are not limited to

producing a master disc with a single laser beam. It asserts

that because, for example, claim 7 uses the transition term

87a

tt tt:

“comprising,” "infringement of this claim requires at least

one recording beam, but it is plainly not limited to exclude

methods using more than one beam." Complainant's

submission app. B at 41 (emphasis in orginal). Complainant

further argues that McLaughlin did not testify that

Calimetrics developed a two-beam mastering technique, but

merely speculated about possible alternatives to the

Yamamoto patent.

We do not find complainant's argument that the scope

of the claims of the Yamamoto patent is not restricted to a

single recording beam persuasive. The "Background of the

Invention" section of the Yamamoto patent specification

states that "[h]itherto, in the case of forming patterns of

different widths onto a mother disc, the pits 31, groove 32,

and recording spots corresponding to their widths are

prepared and both of these recording spots are switched."

RX-50, col. 1, 11. 23-27. The specification goes on to

identify as a "problem" the fact that "since it is necessary to

form two beams, the laser power must ... be set to a large

value." RX-50, col. 1, II. 37-38. The "Summary and Object

of the Invention" section of the patent specification

specifically states that "an-object of the present invention [is]

to provide an optical recording apparatus in which both the

pits and a wide groove can be formed by using only one

recording spot and the foregoing drawbacks are eliminated."

RX-50, col. 1, II. 46-50 (emphasis added). The specification

goes on to state that "[bJoth of the pits and the wide groove

are formed by using the single recording beam as explained

above. Thus, the foregoing problem which ... occurs when

two beams are switched and used can be avoided." RX-50,

col. 2,11.7-11 (emphasis added). See also RX-50, col. 4, II.

38-43, 46-48. Thus, the specification identifies a problem

and clearly states that the use of a single recording beam in

the present invention avoids the problem.

88a

The ALJ stated that McLaughlin referred to the two-

beam mastering method that is a commercially viable

alternative to the Yamamoto patent as "Calimetrics two-

beam mastering method" ID at 207 (citing Trans.

(McLaughlin) at 1568:3-15,1570:1-9). We agree with

complainant that the supporting testimony (see also 1568:16-

20 and 1571:3-10) does not identify the two-beam mastering

method as a Calimetrics method McLaughlin did testify,

however, that the two-beam method is a commercially viable

alternative to the Yamamoto patent. We conclude that

complainant's argument regarding the scope of the

Yamamoto patent claims and its argument that the two-beam

alternative to the Yamamoto patent is speculative are without

merit.

The Lockhoff '219 Patent

As stated above, we find that in certain Philips-only

CD-R licenses (e.g., RX-872C), licenses to the U.S. patents

that are actually essential for the manufacture of CD-Rs in

accordance with Orange Book standards (the "tying" patent

licenses) are tied in fact to a license to the Lockhoff '219

patent and to a license to the Farla “692 patent (the "tied"

patent licenses). As also discussed in the previous section,

we find that in the Philips-only CD-RW licenses (e.g., CX-

469C; FF 71, 72), licenses to the U.S. patents that are

actually essential for the manufacture of CD-RWs in ©

accordance with Orange Book standards (the "tying" patent

licenses) are tied in fact to a license to the Lockhoff '219

patent. For the reasons discussed below, we affirm the ALJ's

finding that the Lockhoff '219 patent is actually nonessential

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

Orange Book standards, and find that it is separate from the

essential patents.

89a

The Lockhoff '219 patent is directed to a method of

copy control (FF 553). Complainant contends that because

the Lockhoff '219 patent is "technically essential" to practice

the Orange Book standard, the fact that an alternative

technology exists to the Lockhoff '219 patent is irrelevant for

purposes of an "essentiality" analysis - because a

"technically essential" patent reads on the Orange Book. The

ALJ found the evidence in conflict, however, and relied on

the hearing testimony of respondents' expert McLaughlin. ID

at 213.

The ALJ stated that Rubenstein found the Lockhoff

'219 patent to be technically essential (ID at 212). The ALJ

took specific note of RX-126C (May 14, 2002 Rubenstein

Status Report) at PH065726), which is the relevant evidence

complainant identifies on this point.°° The ALJ found that

alternative methods existed "such as embedding the copy

control in the content" and that [e]mbedding copy control in

the content would satisfy the Orange Book but would not be

covered by the Lockhoff '219 patent." FF 556, 557 (citing

Trans. (McLaughlin) at 1529:14-1531:21). Thus, we affirm

the ALJ's findings of fact, and find that the Lockhoff '219

patent is separate from the essential! patents.

4. Conclusion

*°Complainant's references to CX-163C at PHOI5771 (B12.1 -

12.3 of attachment B12 of part II of the Orange Book (CD-R)) and CX-

162C at PHO23341 (C9.1 - 9.3 of attachment C9 of part III of the Orange

Book (CD-RW)) are inconsistent with the cited portion of Rubenstein's

status report (RX-126C at PH065726), which identifies attachments B1

and C}.1 as relevant to the Lockhoff '219 patent and which also identifies

attachments B12-1, B12-2, C9-1, and C9-2 as relevant to U.S. Patent No.

5,428,598.

90a

For the reasons discussed above, we conclude that the

patents asserted in this investigation are unenforceable for

patent misuse per se.

Il. Analysis of Patent Misuse Under the "Rule of

Reason" Standard

The ALJ also found patent misuse under the rule of

reason standard ID at 152-53, 182-83, 219-20. He found that

complainant's CD-R/RW patent license agreements included

as so-called "essential" patents for manufacturing CD-R/RW

discs according to the Orange Book standard certain patents

that were actually nonessential. ID at 185-213. He concluded

that this practice constituted an extension of complainant's

statutory right to exclude under its patents. ID at 183-85. He

also found that such inclusion of nonessential patents in the

license agreements had the anticompetitive effect of

foreclosing competition in alternative technology that

competes with the technology covered by a nonessential

patent that was included as a so-called "essential" patent. [ID

at. 196-213. We adopt this portion of the ALJ's analysis

under the rule of reason standard with the modifications

discussed below.

As to the ALJ's conclusion that certain patents

included as so-called “essential” patents in complainant's

licensing agreements are actually nonessential, we adopt the

ALJ's analysis and conclusions with respect to the Farla ‘692

patent, the Yamamoto ‘719 patent, the Lockhoff ‘219 patent,

and the Iwasaki ‘149 patent.°! We take no position on the

ALJ's conclusion that the following patents included as so-

“Arguments raised by complainant in its submissions

concerning the ALJ's analysis of the Farla ‘692 patent, the Lockhoff ‘219

patent, the Yamamoto '719 patent, and the Iwasaki '149 patent are

addressed supra

9la

called "essential" patents in the licensing agreements are

actually nonessential: the Kramer '493 and *209 patents, the

Ogawa ‘994 patent, the Lagadec '565 patent, the Spruit '351

patent, the Mimnagh '462 patent, and the Hamada ‘388 and

‘009 patents.

The ALJ also found that the CD-R/RW patent

pooling arrangements between complainant and _its

colicensors constituted horizontal agreements among

competitors who controlled the royalty rate for patents in the

pools, and concluded that these horizontal restraints rose to

the level of patent misuse per se as price fixing and price

discrimination. We take no position on these conclusions,

and also take no position on the ALJ's conclusion that the

royalty rate mechanism of the patent pooling arrangements is

an unreasonable restraint on competition.”

As explained below, we find patent misuse under the

rule of reason standard based on the ALJ's findings that the

Philips-only CD-RW license included as a_ purported

essential patent the Farla ‘692 patent, which is in fact

We 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 issue of whether the anticompetitive effects of including

nonessential patents in the list of so-called essential patents outweigh the

procompetitive effects, e.g., /D at 214-15 (attributing the development of

CD-R and CD-RW consumer market to standardization), ID at 215-16

(acknowledging well-recognized procompetitive effects of pools that

license technically essential patents, but identifying inherent competitive

problems posed by pools that encompass nonessential patents); ID at

217-18 (discussing separate lists of essential and nonessential patents that

are under control of Philips and its licensor partners and are not

negotiable); ID at 219 ("Efforts on the part of pool members to have their

patents included in the pool as ‘essential as a practical matter,’ even

though those patents do not cover anything in the Orange Book, [are]

merely an attempt to forestall competing technologies”).

92a

nonessential; that such inclusion had the anticompetitive

effect of foreclosing an alternative technology developed by

Calimetrics; and that the anticompetitive effects outweigh

the procompetitive effects. We also find patent misuse under

the rule of reason standard based on the ALJ's findings that

certain joint CD-RW licenses (e.g., RX-903C) included as

purported essential patents the Philips Farla “692 patent and

the Ricoh Iwasaki “149 patent, which are in fact

nonessential; that such inclusion had the anticompetitize_—

effect of foreclosing an alternative technology developed by

Calimetrics; and that the anticompetitive effects outweigh

the procompetitive effects.

A. Lega! Standard for Patent Misuse under the

Rule of Reason

We adopt the ALJ's articulation of the legal standard

for finding patent misuse under the rule of reason. ID at 182-

83. Essentially, "[a] rule of reason analysis requires a

determination of whether an agreement is on balance an

‘unreasonable restraint of trade, that is, whether its anti-

competitive effects outweigh its pro-competitive effects."

Columbia Broad Sys., Inc. v. Am. Soc'y of Composers,

Authors & Publishers, 620 F.2d 930, 934 (2d Cir. 1980)

(citing Nat'l Soc'y of Prof l Eng'rs v. United States, 435 U.S.

679 (1978); Cont'l T. V., Inc. v. GTE Sylvania, Inc., 433 US.

36 (1977); and Bd of Trade of Chicago v. United States, 246

U.S. 231 (1918)).

A rule of reason analysis should be applied in

evaluating allegations of patent misuse that do not constitute

patent misuse per se. Virginia Panel Corp. v. MAC Panel

Co., 133 F.3d 860, 869 (Fed. Cir. 1997) (referencing the rule

of reason standard applied in the antitrust case State Oil Co.

v. Kahn, 118 S. Ct. 275, 279 (1997)). To the extent that

respondents’ arguments with respect to the cases of

93a

Berlenbach y. Anderson & Thompson Ski Co., 329 F.2d 782

cg" Cir. 1964); Jack Winter, Inc. v. Koratron Co., 375 F.

Supp. 1 (N.D. Cal. 1970); and Columbus Auto. Corp. V.

Oldberg Mfg. Co., 264 F. Supp. 779 (D. Colo. 1967), affd,

387 F.2d 643 (10" Cir. 1968), are understood as urging us to

adopt a different course, we reject those arguments. :

The ALJ found patent misuse because nonessential

patents are included in the list of so-called "essential" patents

in the licenses at issue, and such inclusion forecloses

economically viable alternative technology for making CD-

R/RWs that competes with technology covered by the

"nonessential" patent. He found the Farla ‘692 patent to be

"nonessential" because respondents' expert (McLaughlin)

"testified that at least one economically viable alternative for

performing write strategy exists that does not infringe the

Farla patent." ID at 203. The ALJ found that McLaughlin

identified an economically viable alternative for performing

an Optimum Power Control (OPC) and write strategy

available from Calimetrics that would comply with the

requirements of the Orange Book if it were used and that was

not covered by the Farla ‘692 patent. ID at 203-04; FF 482-

485. He also found the Iwasaki “149 patent to be

"nonessential". because McLaughlin identified an

economically viable alternative for performing OPC

available from Calimetrics that is not covered by the Iwasaki

patent and would comply with the requirements of the

Orange Book if it were used. ID at 205-06.

3 See also Robert J. Hoerner, "The Decline (and Fall?) Of the

Patent Misuse Doctrine in the Federal Circuit," 69 Antitrust Law Journal

669 (2002), discussing inconsistency between Federal Circuit cases and

those cited by respondents.

94a

In its petition for review, complainant asserts that the

per se standard of patent misuse in tying cases that was

applied in American Securit Co. v. Shatterproof Glass Corp.

has been legislatively over-ruled by the 1988 Patent Misuse

Reform Act, which it characterizes as imposing (as a

threshold requirement) a finding of market power and

requiring a "rule of reason" analysis in analyzing patent

misuse.”* Complainant submits that because an inquiry under

the "rule of reason" is now required to support a finding of

patent misuse in a tying case, Shatterproof’s holding that

mandatory package licensing extends the scope of a patent is

no longer good law.>

Relying on ZI/nternational Manufacturing Co. v.

Landon, Inc., 336 F.2d 723 (9th Cir. 1964),°° complainant

argues that Shatterproof "does not support a determination

that Philips has broadened the scope of its CD-R or CD-RW

patents by package licensing them." Complainant's petition

**We address the question of whether 35 U.S.C. § 271(d)(5)

eliminated the per se approach to patent tie-ins in section LA. supra.

“We reject complainant's contention that Shatterproof is

"directly contrary" to Broadcast Music. As pointed out by the ALJ (ID at

182 n.111), Broadcast Music did not involve mandatory package

licensing.

**Complainant points out that the Landon court stated that "it is

not an unlawful tying arrangement for a seller to include several items in

a single mandatory package when the items may be reasonably

considered to constitute parts of a single distinct product,” and that "[t]he

product ... ts no less a single product because its novel aspects are

disclosed by two interlocking patents. In such a case, not only is it not

unreasonable to treat both patents as constituting a single product, but

also licensing them in a package deal appears to be the most practical

way of making them available for public use.” Complainant's petition for

review at 40-41 (quoting 336 F.2d at 730).

95a

for review at 40. It contends that the package licenses are

intended to “enable a manufacturer" to make CD-R or CD-

RW discs, and that the licenses provide manufacturers with

the patents "need[ed] to manufacture the product." Jd. at 40.

It asserts that "[b]ecause each of the patents in the package

covers aspects of a single product and each is licensed for

the limited purpose of making the product, the package

licensing of the patents does not extend their scope." /d. at 40

(emphasis in original). Complainant argues that the benefits

of package licensing are recognized in section 5.5 of the

DOJ/FTC Antitrust Guidelines and in the three Business

Review Letters from the DOJ Antitrust Division involving

package licensing. Respondents and the IA _ oppose

complainant's position.

A leading treatise indeed characterizes Landon as

"yecogniz[ing] an exception to the American Securit rule

against mandatory package licensing in the case of blocking

patents" Donald S. Chisum, Chisum on Patents §

19.04[3][c]. And the DOJ has also recognized in its business

review letters that packaging blocking patents can be

niocompetitive:

A starting point for an antitrust analysis of any

patent pool is an inquiry into the validity of the

patents and their relationship to each other. A

licensing scheme premised on invalid or expired

intellectual property rights will not withstand

antitrust scrutiny. [footnote omitted] And a patent

pool that aggregates competitive technologies and

sets a Single price for them would raise Serious

competitive concerns. On the other hand, a

combination of complementary intellectual property

‘ rights, especially ones that block the application for

which they are jointly licensed, can be an efficient

96a

and procompetitive method of disseminating those

rights to would-be users.

CX-355 (WEG-2 Business Review Letter) at 9 (emphasis

added).

If the [three] [l]icensors [participating in the

pool] owned pateni 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 raise serious

competitive concerns." [footnote omitted] In

combining such substitute patents, the pool could

serve as a price-fixing mechanism, ultimately

raising the price of products and services that utilize

the pooled patents. Jf on the other hand the pool

were to bring together complementary patent rights,

it could be "an efficient and procompetitive method

of disseminating those rights to would-be users. "

[footnote omitted] By reducing what would

otherwise be three licensing transactions to one, the

pool would reduce transactions costs for [l]icensors

and licensees alike. By ensuring that each

[l]icensor's patents will not be blocked by those of

the other two, the pool would enhance the value of

all three [l]icensors' patents.

CX-357 (3C DVD Business Review Letter) at 9 (quoting

MPEG-2 Business Review Letter (CX-355) at 9) (emphasis

added); accord CX-358 (6C DVD Business Review Letter)

at 9. Under the standard articulated by the Landon court,”’

“If we had a case where the licensee could produce a

commercially acceptable product utilizing one patent but not infringing

97a

however, neither the Farla ‘692 patent nor the Iwasaki ‘149

patent are in a blocking relationship with the other patents

included in the pool.**®

The DOJ business review letters also identify two

anticompetitive effects arising from the inclusion in the pool

of patents that are substitutes for one another. CX-358 at 10.

The 6C DVD business review letter discusses the effects as

follows:

Consider, for example, a situation in which there are

several patented methods for placing DVD-ROMs

into packaging - each a useful complement to DVD-

ROM manufacturing technology, but not essential to

the standard A DVD-ROM maker would need to

license only one of them; they would be substitutes

for each other. Inclusion in the pool of two or more

such patents would risk tuming the pool into a

price-fixing mechanism. Inclusion in the pool of

only one of the competing nonessential patents,

which the pool would convey along with the

essential patents, could in certain cases

unreasonably foreclose the non-included competing

patents from use by manufacturers; because the

manufacturers would obtain a license to the one

patent with the pool, they might choose not to

the others in the package, then clearly we would no

This text is long and has been trimmed here. Open the source document for the complete record.