Philips filed a complaint with the International Trade Commission alleging that several CD manufacturers were importing into the United States certain CD’s that infringed Philip’s patents. In the course of the proceedings, the defendants raised patent misuse as an affirmative defense, alleging that Philips had improperly forced them, as a condition of licensing patents that were necessary to manufacture CD’s in accordance with the industry standard, to take licenses to other patents that were not necessary. The ITC affirmed the findings of an administrative judge that the package licensing constituted illegal tying arrangements under antitrust law and thus rendered the subject patents unenforceable. The ITC relied on the per se analysis and, as an alternative ground, on rule of reason analysis.Because Philip’s package licensing agreements do not compel the licensees to use any particular technology covered by any of the licensed patents (nor do they foreclose a licensee from licensing a competitor’s alternative technology), and because there was no evidence that the hypothetical licensee fee would have been lower if Philips had offered to license the patents on an individual basis or in smaller packages, the Federal Circuit held that the ITC was wrong as a matter of law in ruling that the package licensing agreements were per se illegal.
The Court rejected defendants claim that per se patent misuse should be found based on the case of United States v. Paramount Pictures, Inc. (334 U.S. 131). In Paramount, the Supreme Court ruled that a movie distributor had engaged in unlawful conduct because it offered to permit exhibitors to show films they wished to license only if they agreed to license and exhibit other films that they were not interesting in licensing. The Federal Circuit distinguished Paramount, finding that, in the present case, Philips’ package licensing agreements did not compel the licensees to use any “non-essential” technology. The Court thus held that the Paramount case was not a sound basis for finding patent misuse per se in this case.
In addition, the Court also rejected the factual findings of the ITC that the non-essential patents constituted separate products from the essential patents, and that the package licensing agreement adversely affected competition in the market for the non-essential technology. The Court held that in its rule of reason analysis, the ITC erred by overlooking the benefits of the package approach, such as reduced transaction costs.
Also at issue in this case was the presumption that patents confer market power. In the case of an antitrust claim of patent tying, the Federal Circuit recently reiterated that such a presumption exists. Indep. Ink. Inc. v. III. Tool Works Inc., 396 F.3d 1342 (Fed. Cir.), cert. granted 125 S. Ct. 2937 (2005). In the present case, however, the Court stated that such a presumption does not apply when an allegation of patent tying is raised in the context of a patent misuse defense. The Supreme Court may reconcile these somewhat contradictory rulings in deciding the Independent Ink case.
The Federal Circuit reversed the patent misuse ruling and remanded for further proceedings.