                 NOTE: Pursuant to Fed. Cir. R. 47.6, this disposition
                   is not citable as precedent. It is a public record.


 United States Court of Appeals for the Federal Circuit


                                        05-1388

                            U.S. PHILIPS CORPORATION,

                                                  Plaintiff-Appellee,

                                            v.

         PRINCO CORPORATION and PRINCO AMERICA CORPORATION,

                                                 Defendants-Appellants.

                           ___________________________

                           DECIDED: March 27, 2006
                           ___________________________


Before BRYSON, LINN, and DYK, Circuit Judges.

PER CURIAM.

      Princo Corporation and Princo America Corporation (collectively “Princo”) appeal

from a decision of the United States District Court for the Southern District of New York,

which granted summary judgment to U.S. Philips Corporation and dismissed Princo’s

patent misuse claim. Based on its interpretation of 35 U.S.C. § 271(d)(5), the district

court concluded that Philips’s package licensing did not constitute patent misuse as a

result of unlawful tying. Because this court, in U.S. Philips Corp. v. International Trade

Commission, 424 F.3d 1179, 1186 (Fed. Cir. 2005), has recently interpreted section

271(d)(5) differently, we vacate and remand.
                                             I

       Philips owns patents to technology for manufacturing recordable compact discs

(“CD-Rs”) and rewritable compact discs (“CD-RWs”). Philips grants licenses to those

patents through package licensing. Under its licenses, Philips requires licensees to pay

a royalty based on the number of discs manufactured, regardless of how many of the

patents are actually used in the manufacturing process.           A manufacturer is not

permitted to license Philips’s disc patents individually and does not have the option of

paying a lower royalty rate for a license to fewer than all the patents in the package.

       In 1997, Princo entered into a CD-R license agreement with Philips. Shortly

thereafter, however, Princo stopped paying the licensing fees, and Philips terminated

the CD-R license agreement. In January 2002, Philips filed the instant action, charging

Princo with patent infringement. Philips also filed a complaint with the International

Trade Commission, claiming that Princo’s importation of CD-Rs and CD-RWs violated

19 U.S.C. § 1337. The district court stayed the infringement suit pending completion of

the Commission’s investigation.

       The Commission found Philips guilty of patent misuse based on its conclusion

that Philips’s licensing program effects an unlawful tying arrangement between licenses

to patents that are essential to manufacture CD-Rs or CD-RWs and licenses to patents

that are not essential to the manufacturing process. On appeal, this court reversed the

Commission’s decision. U.S. Philips Corp. v. Int’l Trade Comm’n, 424 F.3d. 1179, 1182

(Fed. Cir. 2005). We concluded that a package licensing agreement that includes both

essential and nonessential patents “does not compel the customer to use the patentee’s

technology.”   Id. at 1190.   In addition, we held that the Commission had failed to




05-1388                                      2
acknowledge the procompetitive benefits of package licensing. Id. at 1192. We noted

that package licensing “reduces transaction costs by eliminating the need for multiple

contracts and reducing licensors’ administrative and monitoring costs.” Id. Moreover,

we noted that package licensing has the procompetitive effect of “reducing the degree

of uncertainty associated with investment decisions” because it “provides the parties a

way of ensuring that a single licensing fee will cover all the patents needed to practice a

particular technology.” Id. at 1193. Accordingly, we held that “the analysis that led the

Commission to apply the rule of per se illegality to Philips’s package licensing

agreements was legally flawed.” Id.

          We also concluded that the Commission erred in its rule of reason analysis. 424

F.3d at 1198. We explained that there was no showing that “any manufacturer had

actually refused to consider alternatives to the technology covered by [the nonessential]

patents or . . . that any commercially viable alternative actually existed.” Id. Thus, we

held that there was insufficient evidence to support the Commission’s conclusion that

including nonessential patents in Philips’s patent package had an actual anticompetitive

effect.    Id. at 1195.   We also held that the Commission failed to give adequate

consideration to the procompetitive effects of package licensing and did not properly

acknowledge problems associated with licensing each patent individually, “such as the

transaction     costs   associated   with   making   individual   patent-by-patent   royalty

determinations and monitoring possible infringement of patents that particular licensees

chose not to license.” Id. at 1198. Consequently, we remanded for further proceedings

so the Commission could “address all of the issues presented by the administrative law

judge’s decision under both the per se and rule of reason analysis.” Id.




05-1388                                       3
       In a second pertinent development postdating the district court’s decision, the

Supreme Court recently reexamined whether, in antitrust tying cases, courts should

recognize a presumption of market power in a patented product. Ill. Tool Works, Inc. v.

Independent Ink, Inc., No. 04-1329 (U.S. Mar. 1, 2006). Although that case arose in the

context of an antitrust claim, the Supreme Court commented on the defense of patent

misuse, noting that Congress had “narrow[ed] the patent misuse defense” with the

enactment of 35 U.S.C. § 271(d)(5). Id., slip op. at 12.

       In the instant case, the district court based its summary judgment ruling on

section 271(d)(5). The court interpreted that statute to set forth the limits of the doctrine

of patent misuse in the context of tying arrangements. Under section 271(d)(5), the

court held, “an unlawful tie exists when a buyer is forced to purchase either a license in

a patent for a second product or to purchase the second product itself.” The court

added that multiple patents covering a single product “do not implicate the statute,” and

that requiring a buyer to acquire rights in additional patents covering the same product

“does not constitute use of a patent to control a separate unpatented product.”

Accordingly, the court held that Philips’s package licensing of patents for a single

product “is not tying within the meaning of § 271(d)(5)” and therefore could not

constitute patent misuse.

                                              II

       Section 271(d)(5) designates specific practices as not constituting patent misuse.

In particular, the statute provides that it is not patent misuse for a patentee to “condition[

] the license of any rights to [a] patent . . . on the acquisition of a license to rights in

another patent . . . unless, in view of the circumstances, the patent owner has market




05-1388                                       4
power in the relevant market for the patent . . . on which the license . . . is conditioned.”

In our decision in the first Philips case, we held that section 271(d)(5) “does not define

the scope of the defense of patent misuse, but merely provides a safe harbor against

the charge of patent misuse for certain kinds of conduct by patentees.” 424 F.3d at

1186. In Illinois Tool Works the Supreme Court advanced a similar characterization of

section 271(d)(5), stating that “Congress included a provision in its codification that

excluded some conduct . . . from the scope of the patent misuse doctrine.” Ill. Tool

Works, slip op. at 11.

       The district court interpreted section 271(d)(5) not as a safe harbor provision, but

as a definition of patent misuse in the context of tying arrangements. Moreover, the

district court concluded that section 271(d)(5) defines patent misuse in that context as

present only “when a buyer is forced to purchase either a license in a patent for a

second product or to purchase the second product itself” and that “multiple patents

covering a single product do not implicate the statute.” That interpretation of section

271(d)(5) is inconsistent with the proper construction of the statute, which provides a

safe harbor for certain conduct, not a comprehensive definition of patent misuse. In

addition, the court erred in reading the statute to preclude a finding of patent misuse

unless the tied patents involved multiple products. Accordingly, without suggesting that

the court reached the wrong ultimate conclusion on the issue of patent misuse, we hold

that the court erred by relying on section 271(d)(5) as the basis for its decision. We

therefore vacate the district court’s dismissal of Princo’s patent misuse claim and

remand for further consideration in light of this court’s decision in Philips and the

Supreme Court’s decision in Illinois Tool Works.




05-1388                                      5
