PRINCO CORPORATION and PRINCO AMERICA CORPORATION v. International Trade Commission

United States Court of Appeals for the Federal Circuit
2007-1386
PRINCO CORPORATION and PRINCO AMERICA CORPORATION,
Appellants,
v.
INTERNATIONAL TRADE COMMISSION,
Appellee,
and
U.S. PHILIPS CORPORATION,
Intervenor.
Eric L. Wesenberg, Orrick, Herrington & Sutcliffe LLP, of Menlo Park, California,
argued for appellants. With him on the brief were Robert E. Freitas, Cynthia Wickstrom
Zuniga, Kenneth J. Halpern, and Michael C. Ting.
Clara Kuehn, Attorney, Office of the General Counsel, United States International
Trade Commission, of Washington, DC, argued for appellee. With her on the brief were
James M. Lyons, General Counsel, and Wayne W. Herrington, Assistant General
Counsel.
Jonathan G. Cedarbaum, Wilmer Cutler Pickering Hale and Dorr LLP, of
Washington, DC, argued for intervenor. With him on the brief were A. Douglas
Melamed, Edward C. DuMont, and Perry A. Lange.
Appealed from: United States International Trade Commission

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United States Court of Appeals for the Federal Circuit
2007-1386
PRINCO CORPORATION and PRINCO AMERICA CORPORATION,
Appellants,
v.
INTERNATIONAL TRADE COMMISSION,
Appellee,
and
U.S. PHILIPS CORPORATION,
Intervenor.
On Appeal from the United States International Trade Commission in
Investigation No. 337-TA-474.
___________________________
DECIDED: April 20, 2009
___________________________
Before BRYSON, GAJARSA, and DYK, Circuit Judges.
Opinion for the court filed by Circuit Judge DYK. Opinion concurring in the result in part
and dissenting in part filed by Circuit Judge BRYSON.
DYK, Circuit Judge.
Princo Corporation and Princo America Corporation (collectively “Princo”) appeal
from a final order of the United States International Trade Commission (“Commission”).
The Commission found that compact discs imported by Princo infringed claims of six
patents asserted by U.S. Philips Corporation (“Philips”) and rejected Princo’s patent

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misuse defense. In re Certain Recordable Compact Discs & Rewritable Compact Discs,
No. 337-TA-474, slip op. at 9 (Int’l Trade Comm’n Feb. 5, 2007) (“Final Determination”),
available at 2007 WL 1256290 (public version).
On appeal, Princo contends that the Commission erred by failing to find misuse
with respect to two aspects of Philips’s licensing practices: first, that Philips conditioned
the license of Philips patents essential to the production of Orange Book compliant
recordable compact discs upon the purchase of a license to an allegedly-nonessential
Sony patent (the Lagadec patent), and second, that Philips allegedly agreed with Sony
not to license the Lagadec patent as competing technology to the Orange Book. We
affirm the Commission’s rejection of Princo’s misuse argument based on the first
practice; we vacate and remand for further proceedings with regard to the second.
BACKGROUND
I
This is the second time that this case has come before us. See U.S. Philips
Corp. v. Int’l Trade Comm’n, 424 F.3d 1179 (Fed. Cir. 2005) (“Philips I”) (remanding
case to Commission); see also U.S. Philips Corp. v. Princo Corp., 173 F. App’x 832
(Fed. Cir. 2006) (“Philips II”) (appeal in related infringement action filed by Philips
against Princo in federal district court); In re Princo Corp., 478 F.3d 1345 (Fed. Cir.
2007) (“Philips III”) (same).
The central issue is again whether Princo’s admitted infringement of Philips’s
patents is subject to a patent misuse defense. The background on the parties’ dispute
is as follows.
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Philips and three other companies (Sony, Taiyo Yuden, and Ricoh) own patents
relevant to the manufacture of recordable compact discs (“CD-Rs”) and rewritable
compact discs (“CD-RWs”). Some of those patents cover features of discs necessary to
comply with the “Orange Book,” a technical standard jointly developed by Philips and
Sony in the late 1980s and early 1990s. Manufacturers produce CD-R and CD-RW
discs in accordance with the Orange Book technical standard in order for the discs to be
compatible with CD players and CD-ROM drives installed in computers and home
entertainment systems, which are also manufactured in accordance with the
corresponding Orange Book specifications.
In the early 1990s, the companies agreed to pool their Orange Book-related CD-
R and CD-RW patents. In return for a share of royalties from the pool, Sony, Taiyo
Yuden, and Ricoh authorized Philips to administer the pool and to grant package
licenses of their pooled patents to manufacturers interested in producing Orange Book
compliant compact discs. Philips made available a joint license to the pooled CD-R
patents held by Philips, Sony, and Taiyo Yuden and a joint license to the pooled CD-RW
patents held by Philips, Sony, and Ricoh.1 Licensees desiring to produce Orange Book
discs could choose one of the packages offered by Philips; licenses to individual patents
were not offered. The package licenses required a manufacturer to pay a per-disc
royalty on each compact disc produced using at least one licensed patent. The per-disc
1 Philips contends that in addition to the joint licenses, it also offered a
package consisting of only the Philips patents. The Commission found otherwise,
however, determining as a factual matter that Philips-only package licenses did not
become available until 2000. In addition, in 2001 Philips added additional options by
offering packages including only patents that Philips deemed “essential” to the
manufacture of Orange Book compliant compact discs.
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royalty did not vary depending on which or how many features covered by licensed
patents were actually used to produce the disc, “meaning that licensees must pay a
royalty based on the number of discs manufactured regardless of how many of the
patents are actually used in the manufacturing.” Philips III, 478 F.3d at 1348.
Princo took a package license from Philips in 1997, but like several other
manufacturers of CD-Rs and CD-RWs, ceased paying royalties soon thereafter. Philips
filed a complaint with the International Trade Commission, contending that some of the
manufacturers were violating 19 U.S.C. § 1337(a)(1)(B) by importing compact discs that
infringed Philips’s patents. There was no allegation that the manufacturers had
infringed patents owned by other pool participants. On July 26, 2002, the Commission
instituted an investigation and named nineteen respondents, not including Princo. In re
Certain Recordable Compact Discs & Rewritable Compact Discs, 67 Fed. Reg. 48,948
(Int’l Trade Comm’n July 26, 2002). Princo thereafter moved to intervene and was
added as a respondent.
Although it initially contested the issue of infringement, Princo now admits that its
products are within the scope of Philips’s patents. Instead, Princo asserts patent
misuse by Philips as a defense. Before the Commission, Princo argued that Philips
improperly expanded the scope of its statutory patent rights through price fixing, price
discrimination, and the use of mandatory package licensing to force manufacturers to
take licenses to “nonessential” pool patents in order to obtain licenses to pool patents
that were in fact essential to the manufacture of CD-Rs or CD-RWs. The administrative
law judge (“ALJ”) agreed, ruling that the Philips patents were unenforceable due to
patent misuse per se and under the rule of reason. See In re Certain Recordable
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Compact Discs & Rewritable Compact Discs, No. 337-TA-474, slip op. at 219-20 (Int’l
Trade Comm’n Oct. 24, 2003) (“Initial Determination”). With regard to per se misuse,
the ALJ determined that Philips and other pool members fixed prices at higher than
competitive levels and charged excessive royalties that would drive manufacturers out
of the market, and that Philips committed improper price discrimination by exempting
favored disc manufacturers from paying royalties. With regard to misuse under the rule
of reason, the ALJ found that anticompetitive effects flowed from the inclusion of
nonessential patents in the mandatory package licenses and from the excessive fixed
royalty rates set by the pool.
On review, the Commission affirmed the ALJ’s misuse determination, but on
narrower grounds. In re Certain Recordable Compact Discs & Rewriteable Compact
Discs, No. 337-TA-474, USITC Pub. No. 3686, slip op. at 4-5 (Apr. 11, 2004). The
Commission took no position on the ALJ’s ruling of patent misuse per se based on
theories other than tying, and no position on eight of the twelve pool patents the ALJ
found to be nonessential for the manufacture of Orange Book compliant CD-R/RWs and
hence improperly tied to the essential patents. Id. at 5 n.3, 50-51. Focusing its analysis
on the four remaining allegedly-nonessential patents, the Commission concluded that
Philips’s “practice of mandatory package licensing constitute[d] 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 [the four]
other patents that are not essential to that activity.” Id. at 4-5. It agreed with the ALJ
that the four patents were not actually essential because for the technology covered by
each patent a non-infringing, “economically viable[] alternative technology existed” that
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could be used to create an Orange Book compliant disc. Id. at 61. It also adopted the
ALJ’s conclusion that the tying arrangement constituted misuse under the rule of
reason. Id. at 50.
On appeal, we reversed and remanded. Philips I, 424 F.3d at 1198-99. We
explained that offering the package licenses at issue did not constitute a per se violation
“[i]n 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.” Id. at 1193. In addition, we concluded that Philips’s inclusion of
the four allegedly-nonessential patents in the package licenses did not constitute
misuse under the rule of reason because those patents were essential rather than non-
essential. The patents were essential because they covered features necessary for
Orange Book compliance, and the record did not disclose that “any commercially viable
alternative actually existed” to those patents. Id. at 1197-98. However, because the
Commission’s relatively narrow decision based on tying of the four patents “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,” we remanded for further proceedings
concerning Princo’s remaining theories of misuse. Id. at 1198.
II
Among Princo’s arguments on remand were issues concerning misuse relating to
one particular pool patent, Sony’s U.S. Patent No. 4,942,565 (the “Lagadec patent” or
“’565 Patent”), and those are the sole issues on appeal. A brief description of the
development of the Orange Book standard and the relationship of the Lagadec patent to
other pool patents is necessary to an understanding of Princo’s arguments.
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Both the Lagadec patent and Philips’s U.S. Patent Nos. 4,999,825 and 5,023,856
(collectively the “Raaymakers patents”) were included in the CD-R/RW patent pools.
The Raaymakers patents are undeniably essential to the manufacture of Orange Book
compliant discs. The present dispute (as to the tying issue) centers on whether the
Lagadec patent is also essential. The Lagadec and Raaymakers patents stem from the
joint efforts of Philips and Sony engineers to develop recordable CDs in the late 1980s.
The CD-R/RW discs that were eventually developed contain a highly accurate spiral-
shaped “pregroove” track that provides a guide for the recording laser to follow when
writing data to an unrecorded CD-R/RW. The pregroove is not a perfect spiral, but is
slightly “wobbled” at regular intervals. E.g. U.S. Patent No. 5,023,856 fig. 4a. The
undulating wobble is used by the recorder as a clock signal to control the CD-R/RW’s
rotation speed, ensuring that the disc rotates at the correct velocity during recording.
During the course of developing the recordable compact disc standard, Philips
and Sony engineers exchanged proposals concerning different ways of implementing
particular product features. One such feature was the encoding of position data on the
“blank” or unrecorded CD-R/RW disc. Sony and Philips found that it was necessary to
develop means for a CD-R/RW recorder to determine where along the spiral pregroove
track the recorder’s laser was positioned at any given time, or “absolute time” position
data.2
After identifying the need for position data, Philips and Sony separately
developed solutions that built upon the wobble signal on the compact discs that was
2 “Absolute time” refers to the fact that the laser’s location is expressed in
terms of the time required to scan the spiral groove from the start of the disc to the
current position.
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already used to provide velocity control. Philips proposed an analog solution, encoding
the absolute time position data by frequency modulating the wobble signal. In contrast,
Sony proposed a digital modulation method to encode position data using the wobble
signal. The analog Philips method, known as “Absolute Time in Pregroove” or “ATIP,”
was covered by the Raaymakers patents, while the digital Sony solution was covered by
the Lagadec patent.3 Although the two methods solve the same basic problem (the
encoding of position data on recordable CDs using the existing wobbled pregroove, and
doing so in a manner backwards-compatible with existing CD players), they are
fundamentally incompatible, and there is no dispute that a disc made using one
technological approach would not work in an CD recorder designed to read position
data using the other.
Philips and Sony ultimately chose to define the Orange Book standard using the
analog Raaymakers ATIP approach, not the digital Lagadec method. Nevertheless, a
license to the Lagadec patent was included along with the Raaymakers patents in the
standard CD-RW joint license and perhaps in the CD-R joint license as well.4 The joint
licenses only allowed use of pool patents, including Lagadec, to produce Orange Book
compliant discs. They did not allow use of Lagadec to produce a disc using the digital
method for encoding position data taught by Lagadec.
On remand, the Commission did not hold hearings or remand to the ALJ. It
confined itself to new arguments before the full Commission concerning the previously
3 Although the Lagadec patent primarily describes a digital solution, as will
be seen, Claim 6 of that patent is arguably not limited to digital modulation.
4 The record on appeal is unclear as to whether the Lagadec patent was
included in the standard CD-R joint license before 2001, when it was expressly listed by
Philips in the package of “essential” CD-R patents.
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unaddressed portion of the ALJ’s initial decision. Princo advanced, inter alia, two
misuse theories concerning the Lagadec patent. First, Princo pursued a tying theory,
arguing that the Lagadec patent was not essential to the production of Orange Book
compliant discs and was unlawfully tied to patents that were actually essential to the
manufacture of Orange Book compact discs, including the Raaymakers patents.
Second, Princo alleged that the Lagadec and Raaymakers patents covered potentially
competing technologies, and that by agreeing with Sony that the Lagadec patent would
not be available except through a package license that also included the Raaymakers
patents, Philips engaged in a form of price fixing, i.e., foreclosing potential competition
between the technologies of the Lagadec and Raaymakers patents.5
On February 5, 2007, the Commission issued a final determination. Final
Determination at 1. For the reasons discussed below, the Commission reversed the
ALJ’s previously unaddressed rulings that Philips committed patent misuse. Having
determined that Princo’s accused compact discs infringed the claims of the six patents
asserted by Philips, that the asserted claims were enforceable and not invalid, and that
the domestic industry requirement of section 337 was satisfied, the Commission issued
remedial orders.
Princo timely appealed from the final determination of the Commission, and we
have jurisdiction under 28 U.S.C. § 1295(a)(6).
5 The Commission’s independent Investigative Attorney (“IA”), whose role
as defined in 19 C.F.R. § 210.3 is to “engage in investigatory activities in an
investigation or a related proceeding,” did not support any of Princo’s per se misuse
theories below. The IA agreed, however, that inclusion of Lagadec supported a finding
of patent misuse under the rule of reason. The IA argued, inter alia, that “Philips
included the Lagadec patent” to “secure[] Sony’s adherence to the . . . Orange Book
standard” and to “forestall competition from Sony.” Final Determination at 96.
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DISCUSSION
Patent misuse is an equitable defense to patent infringement. It was designed
“‘to restrain practices that did not in themselves violate any law, but that drew
anticompetitive strength from the patent right, and thus were deemed to be contrary to
public policy.’” Philips I, 424 F.3d at 1184 (quoting Mallinckrodt, Inc. v. Medipart, Inc.,
976 F.2d 700, 704 (Fed. Cir. 1992)). The key inquiry in determining whether a
patentee’s conduct constitutes misuse “‘is whether, by imposing conditions that derive
their force from the patent, the patentee has impermissibly broadened the scope of the
patent grant with anticompetitive effect.’” Id. (quoting C.R. Bard, Inc. v. M3 Sys., Inc.,
157 F.3d 1340, 1372 (Fed. Cir. 1998)). Experience has taught that some practices,
such as when a patentee having market power conditions a license upon the purchase
of a separate, staple good, are sufficiently anticompetitive so as to warrant
condemnation on their face. Va. Panel Corp. v. MAC Panel Co., 133 F.3d 860, 869
(Fed. Cir. 1997) (discussing examples of per se misuse).6 Other allegedly-
anticompetitive practices beyond the few specific practices identified by the courts as
constituting misuse per se are evaluated under the rule of reason to determine whether
they “impose[] an unreasonable restraint on competition.” Id.; see also Philips I, 424
F.3d at 1185.
Against this background, Princo contends that the Commission erred by failing to
find patent misuse by Philips either as a result of tying or as a result of an agreement
6 Congress has created a safe harbor in 35 U.S.C. § 271(d)(5) for certain
types of conduct by patentees lacking market power. See Ill. Tool Works Inc. v. Indep.
Ink, Inc., 547 U.S. 28, 41-42 (2008). In the present case, “the Commission found that
Philips has market power in the relevant market and that section 271(d)(5) is therefore
inapplicable.” Philips I, 424 F.3d at 1186.
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between Sony and Philips concerning the availability of the Lagadec patent. We
address these arguments in turn.
I
A
Princo first argues that “Philips has engaged in patent misuse by tying the
Lagadec patent to the essential Orange Book patents in a manner prohibited under
Philips I.” Appellants’ Br. 48. Princo’s primary contention is that through mandatory
package licensing, Philips improperly used its market power to force manufacturers
seeking patents essential to the production of Orange Book compliant discs to also take
a license to Lagadec, an allegedly-nonessential Sony patent.
Tying arrangements have a long history in both the patent misuse and antitrust
contexts. Much of the Supreme Court’s early patent misuse doctrine was developed in
cases involving a challenge to some form of tying arrangement. In Morton Salt Co. v.
G.S. Suppiger Co., 314 U.S. 488, 490-91 (1942), for example, the Court held that a
tying arrangement where the patent license was conditioned upon the purchase of a
separate, staple product amounted to patent misuse, because in such a case “the
patent is used as a means of restraining competition with the patentee’s sale of an
unpatented product.” Id. at 493; see also Ill. Tool Works, 547 U.S. at 45-46 (holding
that a patent alone does not confer market power necessary to show unlawful tying).
Likewise, the early antitrust cases found that various tying arrangements violated the
antitrust laws. See, e.g., N. Pac. Ry. Co. v. United States, 356 U.S. 1, 10-11 (1958);
see also United States v. Loew’s Inc., 371 U.S. 38, 44-45 (1962); United States v.
Paramount Pictures, Inc., 334 U.S. 131, 156-59 (1948).
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Although tying in many of its varied forms has potential to inflict anticompetitive
harms, in more recent times it has been recognized that tying also has potential to
create substantial procompetitive efficiencies. See, e.g., Ill. Tool Works, 547 U.S. at 36
(“The assumption that ‘[t]ying arrangements serve hardly any purpose beyond the
suppression of competition,’ rejected in [U.S. Steel Corp. v. Fortner Enters., Inc., 429
U.S. 610 (1977)], has not been endorsed in any opinion since.”); Jefferson Parish Hosp.
Dist. No. 2 v. Hyde, 466 U.S. 2, 40-44 (1984) (O’Connor, J., concurring in judgment)
(“Tie-ins may entail economic benefits as well as economic harms, and . . . these
benefits should enter the rule-of-reason balance.”); see also Herbert Hovenkamp, Mark.
D. Janis & Mark A. Lemley, IP and Antitrust § 34.4, at 34-20.1 (2009) (“Typical
procompetitive benefits [of patent pools] include the clearing of blocking positions, the
advantages flowing from integration of complementary technologies, and the cost
savings from avoiding litigation.”).
In Philips I, we considered one particular form of patent-to-patent tying, where
patents essential to the practice of a standardized technology (the Orange Book
standard) were licensed together as a package. We concluded that “[i]n 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,”
Philips’s practice of package licensing essential patents together could not be
condemned as misuse per se but instead should be evaluated under the rule of reason.
Philips I, 424 F.3d at 1193. As we explained, the group of patents essential to practice
a particular technology or standard generally may be viewed as a unified product:
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
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that the [patentholder] 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.
Id. at 1196; see Hovenkamp, Janis & Lemley, supra, § 22.3 at 22-13, 14. Inclusion in a
package license of essential patents to enable the practice of the particular technology
by clearing blocking positions is not tying of the type that patent misuse doctrine seeks
to prevent. See Philips I, 424 F.3d at 1196; Int’l Mfg. Co. v. Landon, Inc., 336 F.2d 723,
729 (9th Cir. 1964).
Moreover, we concluded that Philips’s practice of offering essential patents as a
package survived under the rule of reason. There, the allegation was that four Orange
Book pool patents were not actually essential because alternative technologies existed
that could be used in their place to produce Orange Book compatible compact discs
without infringing the four patents. Philips I, 424 F.3d at 1194-95. We rejected the
argument that the four patents were not essential, as the record showed that those
patents in fact had “no practical or realistic alternative.” Id. at 1194, 1198. As a result,
the tying of those four patents to so-called essential patents would have no
anticompetitive effect “because no competition for a viable alternative product is
foreclosed.” Id. at 1194.
On remand, the Commission rejected Princo’s Lagadec tying claim under the
framework of Philips I, stating that “[Princo]’s argument is fundamentally flawed because
the [Raaymakers] patents are inside, not outside, the package.” Final Determination at
80. The Commission similarly rejected the IA’s Lagadec tying claim, stating that “the
premise of the IA’s argument . . . that the Lagadec ’565 patent cannot be used to make
an Orange Book compliant CD, is fatal to his rule of reason tying claim.” Id. at 94.
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Elsewhere in its opinion, the Commission declined to decide whether Lagadec was a
blocking patent, i.e., a patent that covered the Orange Book standard and was therefore
essential to the production of Orange Book compliant discs. Final Determination at 23.
On appeal, Princo contends that the Commission erred in rejecting its misuse
claim under Philips I, arguing that the Lagadec patent is not an “essential patent” for
purposes of the Orange Book standard. It maintains that requiring licensees to
purchase Lagadec, a nonessential patent, in order to obtain licenses to truly essential
patents therefore constitutes misuse. We need not parse the Commission’s somewhat
opaque decision as to the tying claim for, like Philips, we believe that this issue can be
resolved by focusing on the issue not decided by the Commission—namely, the scope
of Claim 6 of the Lagadec patent.
Philips contends that Lagadec is essential as a blocking patent because at least
one patent claim, Claim 6, reads on every Orange Book compliant disc. Claim 6
provides: “A disc-shaped recording medium . . . having formed thereon a substantially
spiral pregroove which is wobbled . . . and formed by . . . a first signal . . . that has been
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modulated by a second signal . . . .” ’565 Patent col.10 ll.14-24.7 Philips maintains that
Claim 6 is broadly written to cover recordable compact discs containing a wobbled
pregroove formed by “a first signal . . . that has been modulated by a second signal that
contains coded information,” and does not require the use of any particular type of
modulation (for example, digital modulation). ’565 Patent col.10 ll.22-25. Although it
acknowledges that Lagadec “generally teaches a digital method of encoding position
data not used by the Orange Book,” it contends that the specification cannot be used to
read a “digital” limitation into Claim 6 where such a limitation is absent from the
language of the claim. See Phillips v. AWH Corp., 415 F.3d 1303, 1323-24 (Fed. Cir.
2005) (en banc).
In contrast, Princo argues that Lagadec is not in fact a blocking patent because
Claim 6 must be read in light of the specification, which discloses primarily a digital
7 In full, Claim 6 of the Lagadec patent is as follows:
6. A disc-shaped recording medium capable of having a data signal
optically recorded thereon and optically reproduced therefrom, said
recording medium comprising:
a substrate layer having first and second surfaces, said first surface
having formed thereon a substantially spiral pregroove which is
wobbled in a radial direction of said disc-shaped recording medium
and formed by a control signal consisting of a first signal that has a
predetermined frequency and that has been modulated by a second
signal that contains coded information and that has a frequency at
least an order of magnitude lower than said predetermined
frequency;
a recording layer formed on the first surface of said substrate layer and
adapted for subsequent optically recording the data signal thereon;
and
a protective layer formed on said recording layer.
’565 Patent col.10 ll.14-31.
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encoding scheme. Princo does not identify any individual claim limitation of Claim 6 that
is absent from the Orange Book compact discs; rather, it argues that because the
Lagadec specification must be understood as teaching away from analog methods, the
patent must be read as claiming only a digital encoding scheme. Princo contends that
Lagadec therefore is not an essential patent, because Claim 6 cannot be construed as
blocking a recordable compact disc using the analog encoding method required by the
Orange Book standard.
The Commission did not decide this question, nor do we need to do so. We
conclude that Lagadec can qualify as an essential Orange Book patent if a license to
practice Claim 6 of the Lagadec patent could be viewed as reasonably necessary to
practice the Orange Book standard. We further conclude that it would have been
reasonable for a manufacturer to believe a license under Claim 6 was necessary at the
time the licenses were executed.
Philips I recognized that patent pools could generate procompetitive efficiencies
in the form of reduced transaction costs, reduced litigation expenses, and most
importantly the overall “procompetitive effect of reducing the degree of uncertainty
associated with investment decisions.” Philips I, 424 F.3d at 1192-93. These
efficiencies are not limited to situations in which a potential pool patent is, in fact, a
blocking patent. As we noted in Philips I, one of the major potential efficiencies of
package licensing in the context of innovative technology is the avoidance of
“uncertainty that could only be resolved through expensive litigation.” Id. at 1198; see
also id. at 1192 (“Package licensing can also obviate any potential patent disputes . . .
and thus reduce the likelihood that a licensee will find itself involved in costly litigation.”).
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Prohibiting the inclusion in a package license of a patent that is arguably essential,
merely because it ultimately proved not to be essential would undercut, even eliminate,
this potential procompetitive efficiency.
We thus think that perfect certainty is not required to avoid a charge of misuse
through unlawful tying. Rather, in this context a blocking patent is one that at the time
of the license an objective manufacturer would believe reasonably might be necessary
to practice the technology at issue. A leading treatise has made a similar observation in
the context of patent pools and cross-licensing agreements:
Indeed, even if the patents are only arguably conflicting, there are
strong reasons to permit the settlement of patent disputes by means of a
cross-licensing agreement. Not only will judicial economy be served and
litigation costs reduced by settling such disputes, but the delay and
uncertainty associated with blocking patent disputes may prevent either
party from going forward with a commercial product for years while
litigation is pending. Where two or more patents are arguably blocking,
therefore, settling the dispute by means of cross-licensing is likely to be
procompetitive.
Hovenkamp, Janis & Lemley, supra, § 3.3, at 3-36 (emphasis added); see also Roger B.
Andewelt, Analysis of Patent Pools Under the Antitrust Laws, 53 Antitrust L.J. 611, 616
(1985) (“[T]he line between competitive patents and blocking or complementary patents
is frequently very difficult to draw. Obtaining access to patents that appear competitive
would provide assurance of access to the needed technology if a court later determines
that the patents are blocking.”).
Our understanding of the likely procompetitive benefits of package licensing
patents which reasonably might be necessary to practice a given technology is further
informed by industry practice in the analogous area of standards-setting organizations.
Such organizations typically seek to reduce the uncertainty involved in developing a
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technological standard by requiring of their members disclosure of patents that might
cover aspects of the standard being developed, because “nondisclosure . . . could put
the [patentee member] in a position in which it could literally block the use of the
published [standard] by any company unless the company obtained a separate license
from the [patentee].” Qualcomm Inc. v. Broadcomm Corp., 548 F.3d 1004, 1013 (Fed.
Cir. 2008). The standard-setting industry organization in Qualcomm did not require its
members to disclose only patents actually blocking practice of the standard, however;
rather, members understood the duty to require disclosure of those patents that
“reasonably might be necessary to practice the [standard].” Id. at 1018 (emphasis
added); see also Rambus Inc. v. Infineon Techs. AG, 318 F.3d 1081, 1100 (Fed. Cir.
2003). In the package licensing context, it may be similarly the case that a given patent
that appears to be necessary ultimately may prove not to be so. But including the
patent within the package license nevertheless may be procompetitive; for example,
doing so may beneficially avoid “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.” Philips I, 424 F.3d at 1198. Indeed, as with
disclosure in the standard-setting context, a major goal of package licensing is this type
of avoidance of uncertainty and costly litigation.
Here, we agree with Philips that inclusion of the Lagadec patent in the patent
pool did not give rise to an illegal tying arrangement, because Claim 6 reasonably might
2007-1386 18

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be necessary as a blocking patent to the Orange Book standard.8 Claim 6, on its face,
would have presented an obvious source of concern for an Orange Book manufacturer.
Princo does not appear to contend that a recordable disc produced according to Orange
Book standards lacks “a substantially spiral pregroove which is wobbled in a radial
direction of said disc-shaped recording medium,” where that wobbled pregroove is
“formed by a control signal consisting of a first signal that has a predetermined
frequency and that has been modulated by a second signal that contains coded
information.” ’565 Patent col.10 ll.23-28. As Philips points out, the Lagadec patent
contains no express or indisputable disclaimer limiting the scope of the claims, and our
attention is not drawn to any prosecution history that would support such a limitation.
Princo contends only that the scope of the claim must be limited by the primarily digital
disclosure of the patent’s specification. A manufacturer evaluating the patent would
thus be left gambling on the uncertain proposition of whether the specification was
sufficiently narrow that Claim 6 would be correspondingly limited.
This is especially true in light of the fact that the law of claim construction was
unsettled in the late 1990s, when the licenses of which Princo complains were
executed. See Philips I, 424 F.3d at 1198 (explaining that the propriety of a license
generally must be evaluated as of the time when it is issued). While some cases at that
time were perceived by litigants as suggesting, as Princo now argues, that broad claims
8 In its reply brief, Princo argues that because the Commission did not determine
whether Lagadec is a blocking patent, we may not uphold its decision on this alternative
legal ground. This argument misunderstands the holding of S.E.C. v. Chenery Corp.,
318 U.S. 80, 87 (1943). The relevant facts concerning the underlying Orange Book
technology are undisputed, and whether the patent claims could reasonably be
construed to cover that technology is a legal matter well within the competence of an
appellate tribunal to decide. See id. at 88.
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might be limited to the disclosed embodiments,9 other cases continued to caution
against improperly importing limitations into otherwise broad claims.10 Further, several
of the core cases of our modern claim construction jurisprudence (including those
clarifying the proper role of the specification in construing claim language) were
relatively recent or had not yet been decided. E.g., Phillips v. AWH Corp., 415 F.3d
1303 (Fed. Cir. 2005) (en banc). Against this background, legitimate questions could
have existed as to the scope of the Lagadec patent.
We thus conclude that Princo has failed to meet its burden of demonstrating that
at the time the Lagadec patent was included in the package licenses, an objective
manufacturer, faced with the patent and the plain language of Claim 6, would not have
believed that a license reasonably might be necessary to manufacture Orange Book
compact discs. Lagadec qualified as an “essential” patent for purposes of the Orange
Book pool. See Philips I, 424 F.3d at 1196. We affirm the Commission’s determination
that Princo’s misuse claim based on tying is without merit.
B
In a related argument, Princo contends that Philips has violated the Supreme
Court’s teaching in Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 135
(1969), that “conditioning the grant of a patent license upon payment of royalties on
products which do not use the teaching of the patent [is] misuse.” In short, Princo
contends Philips’s licensing practice at issue violates Zenith because under the joint
9 See, e.g., Toro Co. v. White Consol. Indus., Inc., 199 F.3d 1295 (Fed. Cir.
1999); Wang Labs., Inc. v. Am. Online, Inc., 197 F.3d 1377 (Fed. Cir. 1999)
10 See, e.g., Comark Commc’ns, Inc. v. Harris Corp., 156 F.3d 1182, 1186
(Fed. Cir. 1998); Electro Med. Sys., S.A. v. Cooper Life Scis., Inc., 34 F.3d 1048, 1054
(Fed. Cir. 1994).
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license royalties from the manufacture of compact discs are paid to Sony because of
Lagadec even though “the Lagadec patent cannot be used in an Orange Book
compliant disc.” Appellants’ Br. 43-45. Philips and the Commission reply that Princo
has waived this per se misuse argument by failing to raise it below. However, even if
we were to assume (without deciding) that Princo is correct about Zenith’s scope and
the argument was not waived—an assumption about which we have considerable
doubt—Princo’s argument is not persuasive. As previously discussed, at the time the
package licenses at issue were executed it appeared that Lagadec reasonably might be
necessary to manufacture Orange Book compact discs. Manufacturers taking a
package license including Lagadec eliminated the uncertainty of potentially infringing
Claim 6 of that patent when they manufacture Orange Book compliant discs. Because
the blocking aspect of the patent is, or reasonably might be, necessary to Orange Book
manufacturers, it cannot fairly be said on these facts that a royalty is paid on products
which do not use the teaching of the Lagadec patent.
II
In addition to challenging the practice of requiring manufacturers who sought
licenses to essential Orange Book patents to also take a license to Lagadec, Princo
challenges a second aspect of Philips’s conduct involving Lagadec. Although Princo
presents variations of its argument under different names, including price fixing, we
understand the essence of its claim to be that, as discussed earlier, Lagadec
represented an alternative technological solution to the Raaymakers patents with
respect to encoding position data using the preexisting wobble signal. Princo argues
that Philips and Sony agreed not to license Lagadec in a way that would allow a
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competitor “to develop, use or license the [Lagadec] technology to create a competing
product.” Appellants’ Reply Br. 1; see also Intervenor’s Br. 33-34 (“What Princo calls its
principal price-fixing argument . . . thus really amounts to the accusation that Philips
bribed Sony not to use . . . Lagadec to compete against the Orange Book.”). Thus,
Princo contends, even if Lagadec properly may be included in the package licenses,
Philips committed patent misuse by agreeing with Sony to not license Lagadec in a
manner allowing “the further development of the Lagadec technology and the possibility
of competition between that technology and its own [Raaymakers technology].”
Appellants’ Reply Br. 3.
The Commission rejected Princo’s argument under both a per se analysis and
under the rule of reason, relying in both cases on substantially the same reasoning.
The Commission did not directly address whether there was an agreement to prevent
Lagadec from being licensed as a competing technology, apparently concluding instead
that no misuse could exist regardless of any such agreement:
If Philips is correct that the Lagadec ’565 patent is a “technically blocking
patent,” then no misuse flows from including the patent in the joint
licenses. On the other hand, [if Lagadec is not blocking], we reject
respondents’ and the IA’s various theories of patent misuse because there
has been no showing that the Lagadec ’565 patent competes with another
patent in the pool [and] no showing that the pool licensors would have
competed in the technology licensing market absent the pooling
arrangement, and no showing of the anti-competitive effect required under
a rule of reason analysis.
. . .
Notably, even if Lagadec is a substitute technology for the ATIP standard,
it is not a substitute technology that can be used to manufacture Orange
Book compliant CD-R/RW discs. Consequently, the record in this
investigation does not support a finding that the Lagadec ‘565 patent
competes with the ‘825 or ‘856 patents.
Final Determination at 23-24 (footnote omitted); see id. at 80-81. We conclude that the
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Commission erred in holding that these grounds would be sufficient to defeat a claim of
misuse even if such an agreement existed.11
The first ground relied upon by the Commission in rejecting Princo’s argument
was that if “the Lagadec ’565 patent is a ‘technically blocking patent,’ then no misuse
flows from including the patent in the joint licenses.” Final Determination at 23. This
conclusion rested on our statement in Philips I, 424 F.3d at 1196, that a patentee
holding blocking patents 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.”
We believe, however, that the Commission read our decision in Philips I too
broadly if it meant to suggest that Lagadec’s status as a blocking patent could immunize
an agreement not to compete. While our decision in Philips I confirmed that the
package licensing of blocking patents is not patent misuse as a form of tying, we did not
there consider whether an agreement that would prevent the development of
alternatives would constitute misuse under a theory of elimination of competition or
price fixing. That poses a different question, and not one foreclosed by our decision in
Philips I.
Philips I involved a tying claim based on Philips’s practice of requiring
manufacturers to license four allegedly non-essential patents in order to obtain licenses
to truly essential pool patents. The Commission had determined that the four allegedly-
nonessential patents were separate products from the package of “essential” Orange
11 Because we conclude that the licensing practice alleged by Princo would,
if proven, violate the rule of reason, we need not determine whether it should be
evaluated under a per se rule.
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Book patents, because the Orange Book features covered by those four patents could
be achieved equally well through the use of alternative non-pool technologies not
covered by those patents. Id. at 1194-96. Thus, the Commission reasoned, “the
package licensing agreements adversely affected competition in the market for the
nonessential technology,” because no Orange Book disc manufacturer would have
incentive to license and use any of the alternative technologies if they had already been
forced to take a license to the equivalent pool patents as part of the package license.
Id. at 1194 (describing findings).
On appeal, we determined that the Commission’s findings were unsupported by
substantial evidence, as the record did not actually show market foreclosure with regard
to alternative technologies. The record did not show that “any commercially viable
alternative actually existed” to the allegedly-nonessential patents. Id. at 1198. Any
potential market foreclosure in that case was simply too speculative to support a finding
of misuse, as “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.” Id. at 1196. In contrast, the potential efficiencies we identified from
packaging the patents at issue included the integration of complementary technologies,
reduced transaction costs, reduced litigation expenses, and most importantly the overall
“procompetitive effect of reducing the degree of uncertainty associated with investment
decisions.” Id. at 1192-93. Because the package licenses had significant potential to
generate procompetitive efficiencies, and the risk of future anticompetitive harm was at
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best speculative, we concluded that the Commission’s analysis finding the licensing
agreements unlawful per se and under the rule of reason was in error.
Philips I thus foreclosed arguments that a patent is non-essential because of a
supposed alternative where the claimed alternative is not commercially viable; market
foreclosure in such a case is typically too speculative to justify a finding of misuse. See
424 F.3d 1194, 1198. But it is also clear that Philips I did not consider, let alone
foreclose, arguments based on alleged agreements to prevent the development of a
competing alternative technology. Notably, in Philips I, the pool did not include the
allegedly competing alternatives to the four challenged pool patents. There was no
agreement not to license those competing technologies, and no allegation that the
package licenses directly restrained licensing of the alternative technologies that disc
manufacturers might desire to use in place of pool technology. Rather, the market
remained free to develop such alternative technologies.
In contrast, here Princo contends that Philips and Sony agreed from the outset to
license Lagadec, a potential competitor to the Raaymakers pool patents, in a way that
would necessarily prevent it from ever becoming a commercially viable alternative
technology that might compete with the Orange Book standard. The essential nature of
the Lagadec patent to the Orange Book standard cannot justify the refusal to allow it to
be licensed for non-Orange Book purposes. It is one thing to offer a pooled license to
competing technologies;12 it is quite another to refuse to license the competing
12 As noted by Philips, even when blocking patents are not involved, pooling
may in some cases have procompetitive benefits, such as enabling licensees to obtain
access to alternative technologies through one negotiation without determining at the
outset which technology is the most efficient. Intervenor’s Br. 36-37 (citing Andewelt,
supra, at 616).
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technologies on any other basis. In contrast to tying arrangements, there are no
benefits to be obtained from an agreement between patent holders to forego separate
licensing of competing technologies, as counsel for Philips conceded at oral argument.
Oral Arg. 26:10-26:25, available at http://oralarguments.cafc.uscourts.gov/mp3/2007-
1386.mp3 (Oct. 6, 2008).
Agreements between competitors not to compete are classic antitrust violations.
See, e.g., Palmer v. BRG of Ga., Inc., 498 U.S. 46, 49 (1990); Otter Tail Power Co. v.
United States, 410 U.S. 366, 377 (1973); United States v. Topco Assocs., Inc., 405 U.S.
596, 608 (1972). Agreements preventing patent licensing of competing technologies
also can constitute such violations. Standard Oil Co., Ind. v. United States, 283 U.S.
163, 174 (1931) (“Where domination exists, a pooling of competing process patents . . .
is beyond the privileges conferred by the patents and constitutes a violation of the
Sherman Act.”); id. at 175 (“In the case at bar, the primary defendants own competing
patented processes for manufacturing an unpatented product . . .; and agreements
concerning such processes are likely to engender the evils to which the Sherman Act
was directed.”); United States v. New Wrinkle, Inc., 342 U.S. 371, 380 (1952) (“An
arrangement was made between patent holders to pool their [competing] patents and fix
prices on the products for themselves and their licensees. The purpose and result
plainly violate the Sherman Act.”); cf. U.S. Dep’t of Justice & Fed. Trade Comm’n,
Antitrust Guidelines for the Licensing of Intellectual Property § 5.1 ex. 9 (Apr. 6, 1995)
(“In the absence of evidence establishing efficiency-enhancing integration from the joint
assignment of patent rights, the Agency may conclude that the joint marketing of
competing patent rights constitutes horizontal price fixing and could be challenged as a
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per se unlawful horizontal restraint of trade.”). Such agreements are not within the
rights granted to a patent holder.
Second, the Commission rejected the misuse defense on the ground that there
has been “no showing that the pool licensors [Sony and Philips] would have competed
in the technology licensing market absent the pooling arrangement.” Final
Determination at 23-24, 96. Treating this argument as “viewing the licensing
arrangement as tantamount to a merger that eliminates Sony as a potential competitor,”
the Commission found no harm to future competition because there had been no
showing that Sony “would probably have entered the market within a reasonable period
of time” and “would have entered and survived to become a significant competitive
force.” Id. at 97-98.
The analogy of a merger of two companies offered by Philips and accepted by
the Commission is not an accurate one. The Commission found that there had been no
showing, as might be necessary in the case of a challenged merger, that Sony and
Philips “would have competed in the technology licensing market” absent the pooling
arrangement or that a standard based on Lagadec would have entered the market soon
and survived to become a competitive force. Final Determination at 26, 98 (citing 5
Phillip E. Areeda & Herbert Hovencamp, Antitrust Law ¶ 1121b at 53, ¶ 1128a at 94 (2d
ed. 2003)). But unlike the alleged agreement not to compete at issue here, a merger of
two companies has potential countervailing efficiencies that offset potential harms to
future competition. For example, mergers have the potential to create socially desirable
resource savings through improved economies of scale and improved allocation of
capital, to name just a few. See 5 Areeda & Hovenkamp, supra, ¶¶ 1103-1107 at 12-
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49. In contrast, an agreement of the sort alleged by Princo is unlikely to have any
efficiencies that could not be achieved equally well through a non-exclusive agreement
that would have left open the possibility that the Lagadec technology could have been
further developed. Indeed, as noted earlier, at oral argument counsel for Philips was
able to identify no efficiencies flowing from such an agreement.
Third, the Commission rejected Princo’s misuse argument on the ground that
“even if Lagadec is a substitute technology for the ATIP standard, it is not a substitute
technology that can be used to manufacture Orange Book compliant CD-R/RW discs.”
Final Determination at 24. The Commission’s analysis was flawed in this respect as
well.
While the Commission’s observation that the Lagadec patent could not be used
in place of the Raaymakers patents to manufacture Orange Book CD-R/RWs is
supported by substantial evidence, that observation is irrelevant. The very thrust of
Princo’s misuse argument is that the alleged agreement to offer Lagadec only through
the joint licenses harms competition because Lagadec is non-Orange Book technology
and could have been a competitive alternative to Orange Book technology. Thus, the
fact that Lagadec is not an “Orange Book compliant” substitute for the Raaymakers
ATIP technology does not answer Princo’s defense of misuse.
Directing this court’s attention to footnote 20 of the Commission’s determination,
Philips argues that the Commission correctly rejected Princo’s argument on the basis
that there had been no showing that the Lagadec was in fact a “commercially viable”
technology. Final Determination at 24 n.20. The Commission’s footnote, however,
must be understood within the context of the surrounding text, which focuses on
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whether Lagadec was a commercially viable technology for purposes of the Orange
Book:
“[T]he Lagadec ‘565 patent constitutes completely different technology
that does not work well according to the Orange Book Standards. This
testimony renders Lagadec extraneous to the Orange Book.” . . . [fn19]
[fn19] The ALJ credited testimony that the Lagadec approach is
prone to errors and “did not provide a scheme that would work and
was reliable.”
The ALJ concluded that “Lagadec constitutes, at best, a substitute
technology for the ATIP standard, and at worst, an extraneous, non-
working add-on to the patent pool.” Notably, even if Lagadec is a
substitute technology for the ATIP standard, it is not a substitute
technology that can be used to manufacture Orange Book compliant CD-
R/RW discs. [fn20]
[fn20] Respondents have pointed to no evidence that the Lagadec
approach is a commercially viable technological alternative to the
technology of Philips’ ’825 or ’856 patents. Moreover, the
commercial viability of a method that is prone to errors, unreliable,
and unworkable is doubtful.
Final Determination at 23-24 (emphases altered, internal citations omitted).13 The
Commission did not determine that Lagadec was fundamentally incapable of being
commercialized as part of an alternative standard, but merely that it was not workable
within the context of existing Orange Book technology. The Commission’s
determination thus does not include findings of fact directed to the question of whether,
13 The Commission based its statement that Lagadec’s commercial potential
was “doubtful” on the testimony of a Philips expert that the Lagadec method was “prone
to errors,” “unreliable,” and “unworkable.” Final Determination at 24 n.20. These
statements, however, appear to have been volunteered by the expert during testimony
related to the validity of the Raaymakers ’825 and ’856 patents, not in the context of
whether Lagadec could have been a competitive alternative to the Orange Book
technologies.
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absent agreement to the contrary, Lagadec could have been developed as part of an
alternative technological platform.
To the extent that Philips contends that the Lagadec technology must already
have been developed to the point of commercial viability before misuse could be found,
it is incorrect. See Intervenor’s Br. 36 (noting that no evidence showed that Lagadec
“was” a commercially viable alternative and therefore “an actual” competitor). The
thrust of Princo’s argument is that by agreement Lagadec was effectively suppressed;
the result of that suppression was that the technology could not become a viable
competitor. It cannot be the case that horizontal competitors can insulate themselves
from misuse liability simply by agreeing to suppress competing technologies before they
are fully developed. If that were the rule, then patentees engaging in such suppression
of potential alternative technologies could never be called to account. In short, because
standardization of technology and the development of patent pools are likely to occur
early in the development of a given technology market, requiring stringent proof of the
destruction of future competition, with its accompanying imponderables, would
effectively immunize from misuse manufacturers who agree to suppress competition
from alternative technologies.
In determining the appropriate standard under the rule of reason, it is important
to bear in mind several pertinent considerations. First, the fact that a patent’s disclosed
embodiments may not be commercially viable cannot be dispositive. Technology
disclosed in a patent typically needs to be further developed before a viable commercial
embodiment is possible. Indeed, our cases have recognized that one way the patent
laws encourage the development of new products is by securing an inventor’s rights
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during the time between patenting of an immature technology and commercialization.
Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1547 (1995) (en banc) (“The patent laws
promote the progress in different ways, prominent among which are by protecting the
investment of capital in the development and working of a new invention from ruinous
competition till the investment becomes remunerative.” (quotation marks omitted)). The
efforts required to commercialize an invention disclosed by a patent can be
considerable. For example, in CFMT, Inc. v. Yieldup International Corp., 349 F.3d
1333, 1338 (Fed. Cir. 2003), we noted that the invention, while enabled by the issued
patent, nevertheless required “hundreds of modifications” and months of
experimentation by the inventors to achieve a suitable commercial implementation. In
doing so, we observed that issuance of a patent “does not require an inventor to meet
lofty standards for success in the commercial marketplace.” Id. at 1338.
Second, it may be difficult to show that the patented technology would or would
not be commercially viable in the absence of market incentives to commercialize the
technology.
Third, even a faulty technology may provide some meaningful competition. As a
leading commentator has suggested in the analogous context of Section 2 of the
Sherman Act:
Even the acquisition of one out of several equivalent patents might have
exclusionary effects. The acquired patent might, with further advances in
the art, turn out to have been the most promising. . . . Further, the inquiry
[into whether a given patent is superior or inferior] is rarely worthwhile, for
even inferior technologies can provide some, even if not perfect,
competition to the patentee.
3 Areeda & Hovenkamp, supra, ¶ 707d at 203-04.
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Fourth, as discussed above, there are no benefits to be achieved from
suppression of potentially competing technology, suggesting that there would be no
harm to competition from adopting a protective rule.
While we reject the suggestion that a showing of misuse in these circumstances
requires proof that an allegedly-suppressed technology was already commercially
viable, the question remains as to what showing must be made to invoke the patent
misuse defense. On the one hand, evidence that a suppressed technology would have
been viable would be sufficient; on the other, proof that a suppressed technology could
not have been viable would be sufficient to negate a charge of misuse. We need not
determine at this time where on the continuum between “certainly would have been
viable” and “certainly could not have been viable” the appropriate standard lies. We
leave that issue for consideration in the first instance by the Commission, together with
the question of whether the evidence here satisfies the standard.14
14 The record appears to contain competing evidence as to Lagadec’s
potential. On the one hand, both the Commission and Philips recognize that Lagadec
provided an alternative to the Orange Book method. See Final Determination at 24
(“Lagadec constitutes, at best, a substitute technology. . . .”); Intervenor’s Br. 35 (noting
that Princo had “point[ed] to evidence suggesting that the digital modulation method
taught by the Lagadec patent was a technological alternative to the analog method of
the [Raaymakers] patents”). On the other, Philips’s witness suggested that commercial
development might be difficult. However, the record contains a 1986 Sony
memorandum describing the Lagadec proposal that suggests potential solutions existed
to some of the problems identified by Philips’s expert even at that early date. For
example, the expert stated that the Lagadec encoding method would cause unwanted
interference at the low and high ends of the frequency spectrum. The memorandum
indicates that interference caused by the Lagadec method at high frequencies could be
reduced by “simple audio oversampling” and that interference at low frequencies could
be reduced with “[a] simple digital highpass filter.” The patent as issued reflects these
solutions. E.g. ’565 Patent col.6 ll.47-52; id. col.7 ll.54-58 (discussing band-limitation to
eliminate disturbance at high and low frequencies).
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III
We turn then to the final question—whether there was in fact an agreement
between Philips and Sony to prevent the licensing of Lagadec as a competitor to the
Orange Book. Philips maintains that Princo has made no showing that Sony agreed
with Philips that Lagadec would be unavailable. The Commission did not reach this
issue in rejecting Princo’s argument. Final Decision at 23-26, 80-81, 96-98. There is
sufficient evidence supporting Princo’s theory that we conclude that further Commission
proceedings are necessary.
First, it is undisputed that the Orange Book joint licenses that included Lagadec
only permitted the use of the Lagadec license to produce Orange Book compliant discs.
As the ALJ noted, “All of Philips’ CD-R and CD-RW licenses contain a field of use
provision limiting the license grant to use of the patents to manufacture . . . discs that
comply with either the CD-R or CD-RW ‘Standard Specifications.’” Initial Determination
at 370. The licenses did not allow the use of Lagadec to produce discs competitive with
the Orange Book standard.
Second, there is evidence that could support a finding that Sony granted Philips
an exclusive license to Lagadec for CD-R purposes, and that Philips agreed not to
license the patent (absent “exceptional” circumstances) except for the manufacture of
Orange Book compliant discs.
The parties appear to agree that a 1993 agreement between Philips and Sony
“granted exclusive right[s] to license Sony’s CD-R patents for purposes of
manufacturing CD-R discs and recorders.” Intervenor’s Br. 40 n.17; see also id. at 36
n.13. While it may be that the 1993 agreement did not initially list Lagadec as an
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included patent, that agreement was not limited to listed patents. It stated that it
pertained to “Patent Rights . . . including but not limited to” the listed patents. J.A. 3319.
The parties appear to differ as to whether Lagadec was subject to the 1993 agreement
before 2001. Princo points to evidence that Lagadec was, in fact, licensed by Philips for
CD-R purposes before 2001. See J.A. 3506, 3532 (1999 CD-R joint license and
accompanying exhibit of patents listing Lagadec). It is also unclear whether the 1993
agreement was extended to cover Sony’s patents for purposes of CD-RW licensing
before a separate agreement to that effect was executed in 2000, though Philips admits
that it somehow had the authority to license Lagadec for CD-RW purposes before that
time. Intervenor’s Br. 12; J.A. 3534, 3561 (1999 CD-RW joint license and
accompanying exhibit of patents listing Lagadec).
There is also a question as to how to interpret the 1993 agreement. Princo
contends that in the agreement Philips agreed not to license Sony patents for non-
Orange Book purposes absent “exceptional” circumstances. Appellants’ Reply Br. 12-
13. Princo urges that the evidence shows that Philips did not, in fact, license Sony
patents for any other purposes, again supporting an inference that it agreed not to do
so.15
The 1993 agreement gave Philips an “exclusive right to license such Patent
Rights . . . for use in Articles listed in Appendix 2.” J.A. 3319. Appendix 2 lists “CD-
15 Princo points out that when asked if he was “aware of any separate
license agreements between a licensee and Philips whereby only certain patents that
are identified in the CD-R disc license were licensed,” a Philips witness testified “I’m not
aware of any such license agreements.” J.A. 1934. Such “business behavior is
admissible circumstantial evidence from which the fact finder may infer agreement.”
Theatre Enters., Inc. v. Paramount Film Distrib. Corp., 346 U.S. 537, 541 (1954).
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WO” (i.e., CD-R) “Disc” and “Recorder.” J.A. 3321. The agreement is unclear as to
whether Appendix 2 is referring only to Orange Book compliant products. Other
portions of the 1993 agreement, however, arguably tend to suggest both that the license
was broader than for Orange Book uses and that Philips was to license for non-Orange
Book purposes only in “exceptional” circumstances. That agreement went on to state
that “it is expressly understood . . . that in licensing . . . any Patent Rights relative to
Articles . . . both our companies shall give at all times due regard to our joint efforts to
promote the standardization of optical recording and retrieval systems.” J.A. 3320. It
further noted that “we confirm with respect to the aforementioned Patent Rights . . . that
we will license such Patent Rights outside the jointly agreed upon system standards
only in cases which can reasonably be considered exceptional.” Id.
Third, there is evidence that, if the 1993 agreement applied to Lagadec, Sony
itself may have agreed with Philips not to license the Lagadec patent for non-Orange
Book purposes. Again the agreement stated “we confirm with respect to the
aforementioned Patent Rights on joint inventions that we will license such Patent Rights
outside the jointly agreed upon system standards only in cases which can reasonably
be considered exceptional.” J.A. 3320. There is a question as to whether the word “we”
refers only to Philips, or to Sony as well. Again, we think the agreement is unclear, and
on remand the Commission should consider its proper interpretation.
The portions of the record before us in the joint appendix are thus unclear as to
whether the 1993 agreement became applicable to Lagadec, whether Philips received
an exclusive license to Lagadec for all purposes, and whether Philips and Sony agreed
generally not to license Lagadec outside the Orange Book standard. On remand, the
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Commission should determine which interpretation is correct, taking into account any
other relevant evidence pertinent to the agreement above.
In summary, the Commission did not determine whether the parties agreed not to
license Lagadec outside the Orange Book context. Because we lack the Commission’s
familiarity with the full record, a remand is appropriate so that the factfinder may make
that determination in the first instance. In doing so, we emphasize that the burden of
proving misuse, and the corresponding risk of having made an insufficient record, lies
with Princo. If the Commission determines on remand that the record contains
insufficient evidence to justify a finding that Sony and Philips agreed that Lagadec
would not be licensed as competitive technology, then there would be no misuse under
Princo’s theory.
CONCLUSION
In summary, we affirm the Commission’s determination that Princo failed to meet
its burden of demonstrating that Philips’s patents are unenforceable due to patent
misuse on the grounds of unlawful tying.
However, we conclude that the Commission’s analysis of the agreement issue
was predicated on legal errors in several respects, and that the Commission erred in
failing to determine whether Princo established that such an agreement existed. We
vacate and remand for the limited purposes of determining (1) whether Lagadec was a
potentially workable alternative to the Orange Book technology and (2) whether Princo
has established that Sony and Philips agreed that Lagadec would not be licensed in a
manner allowing its development as competitive technology.
AFFIRMED-IN-PART, VACATED-IN-PART, and REMANDED
2007-1386 36

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2007-1386 37
COSTS
No costs.

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United States Court of Appeals for the Federal Circuit
2007-1386
PRINCO CORPORATION and PRINCO AMERICA CORPORATION,
Appellants,
v.
INTERNATIONAL TRADE COMMISSION,
Appellee,
and
U.S. PHILIPS CORPORATION,
Intervenor.
On appeal from the United States International Trade Commission
In Investigation No. 337-TA-474.
BRYSON, Circuit Judge, concurring in the result in part and dissenting in part.
I would affirm the Commission’s final determination and would not remand for
further findings.
1. The majority rejects Princo’s tying claim on a ground not adopted by the
Commission, concluding that the Commission’s decision on that issue is “somewhat
opaque.” I find the Commission’s decision on that issue to be both clear and sufficient
to reject Princo’s argument of patent misuse based on tying. I agree, however, that the
majority’s ground for decision is also correct and offers a satisfactory alternative
rationale for affirming the Commission’s determination on that issue.

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The tying argument is based on the contention that the Lagadec patent is not
among those “essential” to the manufacture of an Orange Book compliant disc. Tying
that non-essential patent to the package of essential Orange Book patents, according to
the argument, was anticompetitive and unjustified, and thus constituted patent misuse.
As the Commission explained, the premise of that argument—that the Lagadec
patent cannot be used to make an Orange Book compliant disc—is fatal to the tying
claim. That is because prospective manufacturers of Orange Book compliant discs
would be interested in obtaining a license for the essential patents in the patent pool;
they would not be interested in a patent that could not be used to make an Orange Book
compliant disc. For that reason, the requirement that purchasers take a license to a
pool of patents that included the Lagadec patent could not have adversely affected
competition, because at most the licensees were required to accept something they did
not want and would not have tried to obtain by other means and from other sellers. See
Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 16 (1984) (“When a purchaser is
‘forced’ to buy a product he would not have otherwise bought even from another seller
in the tied product market, there can be no adverse impact on competition because no
portion of the market which would otherwise have been available to other sellers has
been foreclosed.”).
Princo seeks to dress up its tying claim by referring to Philips’s conduct as
“sequestering substitute patents within a pool.” But the tying of the Lagadec patent to
the other patents in the pool, without more, cannot in any reasonable sense be
characterized as “sequestering.” Princo’s real argument on this point, made elsewhere
in its brief, is that the Lagadec patent “couldn’t be used and that some of the pool cost,
2007-1386 2

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must be attributed to its inclusion.” That argument, however, is contrary to the
Commission’s findings and to simple economic analysis. As the Commission found, if
the Lagadec patent, as Princo asserts, could not be used to make Orange Book
compliant discs, there is no economic reason to conclude that the price of a license to
the Orange Book pool of patents would be lower if the Lagadec patent were excluded.
The licensees were interested in producing discs, not in counting the number of patents
covered by the license. The Commission explained that the profit-maximizing price for
the license would be the same regardless of whether it included no unwanted patents or
dozens of them, as long as it contained all the patents needed to make Orange Book
compliant discs.
2. That reasoning likewise disposes of Princo’s argument that Philips has
engaged in conduct that constitutes unlawful tying under the Supreme Court’s decision
in Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100 (1969). Once again, I
agree that the majority’s ground for deciding this issue is valid, but it is unnecessary to
invoke that ground of decision because this case plainly does not involve unlawful tying
under the Zenith standard.1 In Zenith, the Supreme Court found misuse where a patent
holder licensed a package of some 500 patents involving radio and television
technologies and set royalties based on the licensees’ total radio and television sales—
even if some of those sales were of products that used none of the licensed patents. Id.
at 134-35. Here, in contrast, it is undisputed that many of the patents included in the
1 The parties spend some time debating whether Princo has waived this
argument. The Commission and the intervenor contend that the “Zenith” argument has
been waived because neither Princo nor the Investigative Attorney argued that the tying
arrangement in this case constituted per se patent misuse. Because the Supreme
Court’s analysis in Zenith is inapplicable here in any event, I agree with the majority that
it is unnecessary to resolve the waiver question.
2007-1386 3

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joint license are necessary to manufacture Orange Book compliant discs, and the
licensees were obligated to pay royalties only on discs that used at least one patent in
the package. That difference is a significant one because, as discussed above, as long
as some of the patents included in the license are used to manufacture Orange Book
compliant discs (and all such necessary patents are included in the license), then the
price of the license does not depend on whether the package also includes unwanted
patents. Unlike in Zenith, Philips was not using the leverage of the Orange Book
licenses to increase revenues unrelated to its patent rights, such as by “garner[ing] as
royalties a percentage share of the licensee’s receipts from sales of other products.”
Zenith, 395 U.S. at 135.
3. As for Princo’s argument that Philips committed patent misuse by “conspiring
to include in a mandatory patent pool their competing patents and thereby engag[ing] in
prohibited price fixing,” the majority holds that the Commission’s decision on that issue
cannot be sustained and that the case must be remanded to the Commission for further
proceedings. I disagree. In my view, the Commission’s findings of fact and legal
conclusions provide a sufficient ground for upholding the Commission’s ruling that
Princo has failed to satisfy its burden of showing patent misuse through a horizontal
price-fixing agreement.
Princo begins by attacking the Commission’s finding that there is no evidence
that the patents in the joint package licenses “cover technologies that are close
substitutes.” Princo contends that the evidence shows that the Lagadec patent and the
Raaymakers patents “are substitutes for one another,” and that the “Commission’s
conclusion that there has been no showing that the Lagadec patent was a potential
2007-1386 4

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competitor of the Philips Raaymakers patents or that Sony and Philips acted with the
purpose of avoiding potential competition with each other” is unsupported by substantial
evidence.
The Commission found that the evidence failed to show that the Lagadec and
Raaymakers technologies were substitutable. In particular, the Commission stated that
the respondents “have not identified, nor are we aware of, evidence in the record that
the patents in the joint package licenses ‘cover technologies that are close substitutes.’”
Final Determination 22 (citing U.S. Dep’t of Justice & FTC, Antitrust Guidelines for the
Licensing of Intellectual Property § 5.1 (1995)). For that reason, the Commission
concluded, the joint package licenses “have not been shown to be ‘the joint marketing of
competing patent rights.’” Id. (emphasis in original). Because “the patents have not
been shown to be competing,” the Commission ruled, the pool royalty rate set by Philips
and its co-licensors was not “a pricing agreement between competing entities with
respect to their competing products.” Id. (citing Texaco, Inc. v. Dagher, 547 U.S. 1, 6
(2006)).
There is no force to Princo’s contention that the Commission’s finding on that
issue is unsupported by substantial evidence. Because the Commission found that no
evidence was introduced on that issue, it fell to Princo on appeal to point to the
evidence that would support its contention that the Lagadec patent was a viable
potential competitor for the Raaymakers patents. It has not done so. Instead, Princo
has relied entirely on an inference that the Lagadec patent must have been a potential
competitor for Philips’s Orange Book patents because otherwise Philips would not have
allowed Sony to share in the patent pool licensing royalties. Princo contends that the
2007-1386 5

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agreement can be explained only as a naked conspiracy to suppress competition or, as
Princo puts it, that “Sony was paid not to compete” with Philips. Not only does that
argument not constitute evidence of the viability of the Lagadec technology as a
potential basis for a system that would compete with the Orange Book system, but it
ignores ample record evidence of other reasons that Sony shared in the royalties from
the Orange Book licensing agreements.
The Commission rejected, as unsupported by the evidence, the argument made
by the Investigative Attorney that “Philips included Sony in the pool not because Sony
brought anything necessary to CD-R/RW technology, but rather because Sony is a
major player in the industry, whose cooperation Philips wanted.” See Final
Determination 97 & n.63. The Commission likewise rejected as unsupported the
administrative law judge’s remark that the inclusion of Lagadec in the patent pool
“appears to be an attempt to forestall digital approaches to achieving what the Philips
analog technology has achieved.” Final Determination 23 n.18.
Not only was there no evidence to support those assertions, but the evidence
affirmatively showed that there were other reasons for Sony’s receiving a share of the
royalties of the Orange Book patent pool, including the evidence that Sony had
contributed substantial resources to the project to develop the Orange Book standard,
and that the royalty division reflected a rough assessment of the value of each party’s
portfolio of worldwide patent rights. Because Princo did not persuade the Commission
that those justifications for Sony’s royalty share in the proceeds of the licensing pool
were pretextual, the Commission properly rejected Princo’s argument that the only
2007-1386 6

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possible reason for Sony’s receiving a portion of the proceeds of the agreement is that it
had engaged in a horizontal agreement with Philips to fix prices.
Significantly, the Commission’s finding regarding the potential for the Lagadec
technology to generate a competing system was not limited to the state of the
technology at the time the patent pool was put into place. The Commission found that
no evidence had been introduced suggesting that there was any prospect of competition
between the Lagadec patent and other patents in the pool. As the Commission put it,
“there has been no showing that the Lagadec ’565 patent competes with another patent
in the pool, no showing that the pool licensors would have competed in the technology
licensing market absent the pooling arrangement, and no showing of anti-competitive
effect” from the inclusion of the Lagadec patent in the patent pool. Final Determination
23; see also id. at 26 (Princo has “not pointed to evidence that establishes that, absent
the pooling arrangements, the pool licenses would have competed in the technology
licensing market”). The Commission noted that the administrative law judge had
credited testimony that the Lagadec approach “is prone to errors and ‘did not provide a
scheme that would work and was reliable.’” Id. at 24 n.19.2 Because “there has been
2 The majority asserts that the Commission “did not determine that Lagadec
was fundamentally incapable of being commercialized as part of an alternative
standard, but merely that it was not workable within the context of existing Orange Book
technology.” I do not interpret the Commission’s statements to be so limited. The
expert who testified that the Lagadec approach was “prone to errors” (and whose
testimony was credited by the administrative law judge) identified several problems with
Lagadec’s approach that were not restricted to the viability of Lagadec as a component
of the Orange Book platform. For example, the expert noted that “from basic physics,
you can just see that [Lagadec’s approach] is not a good solution, and it really wouldn’t
work well.” Thus, while the Commission noted that Lagadec “does not work well
according to the Orange Book standards,” it added, separately, that Princo had “pointed
to no evidence that the Lagadec approach is a commercially viable technological
alternative to the technology of Philips’s ’825 or ’856 patents,” and that “the commercial
2007-1386 7

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no showing that the patents in the pool are substitutable,” the Commission concluded,
“the agreement between the licensors to set a fixed royalty for the joint licenses under
the pool is not price fixing per se in the market for licensing CD-R/RW patents.” Final
Determination 26.
Although the majority suggests that Philips contended that the Lagadec
technology “must already have been developed to the point of commercial viability
before misuse could be found,” I read the Commission’s observations about the
absence of evidence of substitutability to apply not only to the present but to the future
as well. To the extent that the Commission did not deal in detail with the question
whether there was a realistic possibility that the Lagadec technology could have been
developed into a viable competing system, the fault for any such shortfall rests with
Princo, which did not offer any evidence, or even argument, to that effect.
Princo was free to offer evidence that Lagadec was substitutable technology and
that there was a realistic prospect that the invention of Lagadec could be refined in the
future to the point that it could be used as a platform for technology that would compete
with the technology used in the Orange Book compliant discs. But Princo did not offer
any such evidence. The Commission did not require a showing that Lagadec could
have been used without further development to create a commercially successful
technology. To the contrary, even though Princo did not point to any evidence of a
realistic possibility that the Lagadec invention could be developed into competing
viability of a method that is prone to errors, unreliable, and unworkable is doubtful.”
Final Determination 24 n.20. Moreover, the burden was on Princo to show that pool
licensors would have competed in the technology licensing market, and the Commission
found that Princo did not point to any evidence that Lagadec represented a
commercially viable approach, either inside or outside the context of the Orange Book
standards.
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technology in the foreseeable future, the Commission’s analysis encompassed the
possibility of future developments. Nonetheless, the Commission found no evidence
that Lagadec would have been likely to lead to competing technology but for the pooling
arrangements. Princo failed to show a likelihood that the digital method of encoding
position data recited in the Lagadec patent would lead to the development of discs that
would use that technology instead of the Orange Book analog method of encoding
position data, and that the digital encoding technology would be used in discs and disc
readers that would compete with Orange Book compatible systems. As the
Commission explained, unless the competing technology would have entered the
market “to become a significant competitive force,” it could not have augmented future
competition in an important way. Yet the Commission found that the record contained
no evidence that Sony would have entered the market and become a significant
competitive force. Final Determination 98. Moreover, Princo offered no evidence that
any potential licensee ever expressed an interest in licensing Lagadec for use in
technology that would compete with the Orange Book compliant discs. Any suggestion
that the Lagadec patent could have provided the basis for a competing system is thus
entirely speculative and unsupported by argument or evidence before the Commission.
Finally, the majority’s conclusion with respect to Princo’s tying argument (with
which I agree), that “Lagadec qualified as an ‘essential’ patent for purposes of the
Orange Book pool,” undermines Princo’s price-fixing argument. Princo sets forth the
legal rule that it contends governs this case: “the pooling of non-blocking, substitute
patents [is] universally recognized as highly anticompetitive” and is unlawful. If the
Lagadec patent is an “essential,” or “blocking” patent, that rule by its own terms does
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2007-1386 10
not apply. The majority’s conclusion that the Lagadec patent was “essential” because
claim 6 of that patent “reasonably might be necessary as a blocking patent to the
Orange Book standard” thus takes this case outside of the legal rule on which Princo
relies. See Standard Oil Co. v. United States, 283 U.S. 163, 171 & n.5 (1931)
(recognizing that the pooling of blocking patents serves a legitimate purpose); Dep’t of
Justice & FTC, Antitrust Guidelines for the Licensing of Intellectual Property § 5.5, ex.
10 (1995) (noting that where manufacturers pool blocking patents, “the manufacturers
are not in a horizontal relationship with respect to those patents”).
Although the majority correctly notes that the Commission did not address the
question whether Philips and Sony agreed not to license Lagadec as a competitor to the
Orange Book, it is not clear that Princo squarely presented that argument to the
Commission. In its briefing before the Commission, Princo argued that Orange Book
licensees were not permitted to use the package patents for products outside the scope
of the Orange Book, but it did not point to evidence that Sony was precluded from
licensing Lagadec for non-Orange-Book uses. In any event, Princo still needed to show
that any agreement not to allow Lagadec to be licensed outside the Orange Book would
have had some anticompetitive effect in order for the agreement to constitute a form of
horizontal price fixing. The Commission’s finding that Princo failed to demonstrate that
absent the patent pool agreement Sony would have competed with the Orange Book
technology—either directly or by licensing the Lagadec patent—was sufficient to
support the Commission’s conclusion that the patent pool was not shown to have any
such anticompetitive effect.
I would therefore affirm the Commission’s final determination.

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