An important question in industry standard-setting has been whether a patent holder who owns essential and non-essential patents that read on a standard may insist that licensees take a license to both sets of products.  On September 21, 2005, the United States Court of Appeals for the Federal Circuit rejected a challenge to such conduct in U.S. Philips Corp. v. International Trade Commission, Docket No. 04-1361.  The Federal Circuit's decision reverses the decision of the International Trade Commission ("ITC") in In re Certain Recordable Compact Disks & Rewritable Compact Discs, Inv. No. 337-TA-474 (Mar. 25, 2004), which held that requiring licensees to license both essential and non-essential patents constituted patent misuse.  The Federal Circuit's decision makes it much more likely that patent holders will license patents that are relevant to an industry standard on a portfolio basis.

Background

The Philips case began when Philips accused a group of CD-R and CD-RW manufacturers of infringing Philips' patents that were essential to the manufacture of CDs complying with the CD-R and CD-RW standards and filed a complaint against them at the ITC.  The accused manufacturers responded, in part, by alleging that Philips was engaged in patent misuse because it had refused to allow the manufacturers to license only a subset of its essential CD-R and CD-RW patents.  The manufacturers claimed that not all of the Philips essential patents were in fact essential to the practice of the standards and that Philips should have allowed them to license only the patents that they wanted.  Moreover, they argued that Philips should have reduced its royalty demands to reflect the smaller set of patents that the manufacturers wanted to license.  

After conducting a hearing on the case, an ITC administrative law judge found that not all of the Philips patents in question were in fact essential to the standard and that Philips had created an impermissible tying arrangement because it required prospective licensees to license both essential and non-essential patents in a single package.   The ALJ then held that this conduct constituted patent misuse and that Philips could not enforce its patents.  The full Commission affirmed these findings.

Federal Circuit Decision

On appeal, the Federal Circuit reversed the ITC decision and held that Philips could offer nonexclusive licenses for a package of patents reading on the CD-R and CD-RW standards, even if the package included patents that were essential and non-essential to the practice of those standards.  The key findings of the decision are:

• "[T]he 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 upon the patents that are essential to the technology in question."
• "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 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."
• Package patent licensing can produce efficiencies that could not be achieved through licensing of individual patents.
• It was inappropriate for the ITC to apply a per se analysis to the Philips licensing arrangement.
• The Commission's finding that the Philips package licensing arrangement had anticompetitive effects could not be sustained because there was no evidence that "any manufacturer had actually refused to consider alternatives to the technology covered by the patents [alleged to be nonessential] or for that matter that any commercially viable alternative actually existed."

Key Implications

The Federal Circuit's decision significantly increases the likelihood that companies holding essential patents that read on an industry standard will license all of their patents relevant to the standard in one package.  The decision suggests that, in most circumstances, package licenses will not be invalidated simply because one or more of the patents included in a package is non-essential.  We note that the decision is not yet final, and that a petition to review the panel decision en banc or for a writ of certiorari could be filed.  The decision will not become final until the time periods for filing such petitions has lapsed.