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

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386008_0684%3A2

## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 2005

## Text

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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).

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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.

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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

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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.

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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.

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[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

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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. —

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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

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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.

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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.

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[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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386008_0684%3A2. Public record. Not legal advice.