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.
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:
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.