U.S. Philips Corp. v. Princo Corp.

NOTE: Pursuant to Fed. Cir. R. 47.6, this disposition
is not citable as precedent. It is a public record.
United States Court of Appeals for the Federal Circuit
05-1388
U.S. PHILIPS CORPORATION,
Plaintiff-Appellee,
v.
PRINCO CORPORATION and PRINCO AMERICA CORPORATION,
Defendants-Appellants.
___________________________
DECIDED: March 27, 2006
___________________________
Before BRYSON, LINN, and DYK, Circuit Judges.
PER CURIAM.
Princo Corporation and Princo America Corporation (collectively “Princo”) appeal
from a decision of the United States District Court for the Southern District of New York,
which granted summary judgment to U.S. Philips Corporation and dismissed Princo’s
patent misuse claim. Based on its interpretation of 35 U.S.C. § 271(d)(5), the district
court concluded that Philips’s package licensing did not constitute patent misuse as a
result of unlawful tying. Because this court, in U.S. Philips Corp. v. International Trade
Commission, 424 F.3d 1179, 1186 (Fed. Cir. 2005), has recently interpreted section
271(d)(5) differently, we vacate and remand.
I
Philips owns patents to technology for manufacturing recordable compact discs
(“CD-Rs”) and rewritable compact discs (“CD-RWs”). Philips grants licenses to those
patents through package licensing. Under its licenses, Philips requires licensees to pay
a royalty based on the number of discs manufactured, regardless of how many of the
patents are actually used in the manufacturing process. A manufacturer is not
permitted to license Philips’s disc patents individually and does not have the option of
paying a lower royalty rate for a license to fewer than all the patents in the package.
In 1997, Princo entered into a CD-R license agreement with Philips. Shortly
thereafter, however, Princo stopped paying the licensing fees, and Philips terminated
the CD-R license agreement. In January 2002, Philips filed the instant action, charging
Princo with patent infringement. Philips also filed a complaint with the International
Trade Commission, claiming that Princo’s importation of CD-Rs and CD-RWs violated
19 U.S.C. § 1337. The district court stayed the infringement suit pending completion of
the Commission’s investigation.
The Commission found Philips guilty of patent misuse based on its conclusion
that Philips’s licensing program effects an unlawful tying arrangement between licenses
to patents that are essential to manufacture CD-Rs or CD-RWs and licenses to patents
that are not essential to the manufacturing process. On appeal, this court reversed the
Commission’s decision. U.S. Philips Corp. v. Int’l Trade Comm’n, 424 F.3d. 1179, 1182
(Fed. Cir. 2005). We concluded that a package licensing agreement that includes both
essential and nonessential patents “does not compel the customer to use the patentee’s
technology.” Id. at 1190. In addition, we held that the Commission had failed to
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acknowledge the procompetitive benefits of package licensing. Id. at 1192. We noted
that package licensing “reduces transaction costs by eliminating the need for multiple
contracts and reducing licensors’ administrative and monitoring costs.” Id. Moreover,
we noted that package licensing has the procompetitive effect of “reducing the degree
of uncertainty associated with investment decisions” because it “provides the parties a
way of ensuring that a single licensing fee will cover all the patents needed to practice a
particular technology.” Id. at 1193. Accordingly, we held that “the analysis that led the
Commission to apply the rule of per se illegality to Philips’s package licensing
agreements was legally flawed.” Id.We also concluded that the Commission erred in its rule of reason analysis. 424
F.3d at 1198. We explained that there was no showing that “any manufacturer had
actually refused to consider alternatives to the technology covered by [the nonessential]
patents or . . . that any commercially viable alternative actually existed.” Id. Thus, we
held that there was insufficient evidence to support the Commission’s conclusion that
including nonessential patents in Philips’s patent package had an actual anticompetitive
effect. Id. at 1195. We also held that the Commission failed to give adequate
consideration to the procompetitive effects of package licensing and did not properly
acknowledge problems associated with licensing each patent 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.” Id. at 1198. Consequently, we remanded for further proceedings
so the Commission could “address all of the issues presented by the administrative law
judge’s decision under both the per se and rule of reason analysis.” Id.05-1388 3
In a second pertinent development postdating the district court’s decision, the
Supreme Court recently reexamined whether, in antitrust tying cases, courts should
recognize a presumption of market power in a patented product. Ill. Tool Works, Inc. v.
Independent Ink, Inc., No. 04-1329 (U.S. Mar. 1, 2006). Although that case arose in the
context of an antitrust claim, the Supreme Court commented on the defense of patent
misuse, noting that Congress had “narrow[ed] the patent misuse defense” with the
enactment of 35 U.S.C. § 271(d)(5). Id., slip op. at 12.
In the instant case, the district court based its summary judgment ruling on
section 271(d)(5). The court interpreted that statute to set forth the limits of the doctrine
of patent misuse in the context of tying arrangements. Under section 271(d)(5), the
court held, “an unlawful tie exists when a buyer is forced to purchase either a license in
a patent for a second product or to purchase the second product itself.” The court
added that multiple patents covering a single product “do not implicate the statute,” and
that requiring a buyer to acquire rights in additional patents covering the same product
“does not constitute use of a patent to control a separate unpatented product.”
Accordingly, the court held that Philips’s package licensing of patents for a single
product “is not tying within the meaning of § 271(d)(5)” and therefore could not
constitute patent misuse.
II
Section 271(d)(5) designates specific practices as not constituting patent misuse.
In particular, the statute provides that it is not patent misuse for a patentee to “condition[
] the license of any rights to [a] patent . . . on the acquisition of a license to rights in
another patent . . . unless, in view of the circumstances, the patent owner has market
05-1388 4
power in the relevant market for the patent . . . on which the license . . . is conditioned.”
In our decision in the first Philips case, we held that section 271(d)(5) “does not define
the scope of the defense of patent misuse, but merely provides a safe harbor against
the charge of patent misuse for certain kinds of conduct by patentees.” 424 F.3d at
1186. In Illinois Tool Works the Supreme Court advanced a similar characterization of
section 271(d)(5), stating that “Congress included a provision in its codification that
excluded some conduct . . . from the scope of the patent misuse doctrine.” Ill. Tool
Works, slip op. at 11.
The district court interpreted section 271(d)(5) not as a safe harbor provision, but
as a definition of patent misuse in the context of tying arrangements. Moreover, the
district court concluded that section 271(d)(5) defines patent misuse in that context as
present only “when a buyer is forced to purchase either a license in a patent for a
second product or to purchase the second product itself” and that “multiple patents
covering a single product do not implicate the statute.” That interpretation of section
271(d)(5) is inconsistent with the proper construction of the statute, which provides a
safe harbor for certain conduct, not a comprehensive definition of patent misuse. In
addition, the court erred in reading the statute to preclude a finding of patent misuse
unless the tied patents involved multiple products. Accordingly, without suggesting that
the court reached the wrong ultimate conclusion on the issue of patent misuse, we hold
that the court erred by relying on section 271(d)(5) as the basis for its decision. We
therefore vacate the district court’s dismissal of Princo’s patent misuse claim and
remand for further consideration in light of this court’s decision in Philips and the
Supreme Court’s decision in Illinois Tool Works.
05-1388 5