Potential Patent Licensing “No-No” # 6: Mandatory Package Licenses

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According to the federal enforcement agencies’ antitrust/IP guidelines:

Package licensing – the licensing of multiple items of intellectual property in a single license or in a group of related licenses – may be a form of tying arrangement if the licensing of one product is conditioned upon the acceptance of a license of another, separate product. Package licensing can be efficiency enhancing under some circumstances. When multiple licenses are needed to use any single item of intellectual property, for example, a package license may promote such efficiencies. If a package license constitutes a tying arrangement, the Agencies will evaluate its competitive effects under the same principles they apply to other tying arrangements.

This principle is fairly straightforward in theory, if not in actual practice. All things being equal, exclusively offering patent licenses through a package carries more risk than offering them as a package but also offering them separately. As the Agencies note, an exclusive offer can look like tying, potentially enabling the licensor to “leverage” market power over some patents to force a licensee to take a license to other patents. (Note that under Illinois Tool Works, a patent no longer presumptively confers market power; such power must be proven.)

Sometimes package licenses are issued by two or more separate companies.  The practice of multiple defendants’ pooling patents in a mandatory package license becomes even more problematic when the pooled patents contain technology necessary to practice a technological standard.  In essence, these situations may present a potential package license issue wrapped inside a horizontal price-fixing agreement or agreement not to compete issue.  Both patent misuse doctrine and antitrust doctrine may be implicated.

For example, in the Princo case (Princo Corp. v. International Trade Commission, 563 F.3d 1301 (Fed. Cir. 2009)), Philips and Sony independently created two different and technologically incompatible methods of solving the same problem presented by recording address space on a blank compact disc. Instead of choosing one solution to the problem and including the associated patents in the patent pool Sony and Philips created, they put patents relating to both of the solutions in the pool but allowed licensees to use only one solution (the Philips solution), which became the industry standard. The possible or arguable consequence was to prevent Sony’s alternative technology (protected by one Sony patent) from ever being tested (and possibly developed) in a commercial setting.

Princo in fact argued that Sony and Philips had unlawfully and in an anticompetitive manner agreed to pool competing alternative technologies in a patent pool and did so in a manner preventing one of the technologies from being developed. The International Trade Commission (“ITC”) rejected Princo’s argument and its patent misuse defense. The Federal Circuit determined that the allegedly nonessential patent could qualify as essential if a license to practice it “could be viewed as reasonably necessary” to practice the industry standard at the time the licenses were executed. This standard is fairly loose and flexible, and informed by the basic principle that package licensing is usually procompetitive. Because the Sony patent met this standard, there was no illegal tying arrangement.

The court, however, did send the case back to the ITC, requiring the ITC to make key findings on pivotal issues. Primary among these was whether Philips and Sony had agreed not to license the Sony patent in a manner allowing the further development of its technology and the possibility of competition between that technology and the Philips technology. Although the court determined that a package license of blocking patents is not patent misuse as a form of tying, an agreement that prevents the development of alternative technologies could constitute misuse under a theory of elimination of competition or price fixing.

Because Princo contended that Philips and Sony agreed from the outset to license the Sony patent in a way that would necessarily prevent it from ever becoming a commercially viable alternative technology that might compete with the standard Philips technology, the court held that Princo’s misuse claim should not have been dismissed. “It is one thing to offer a pooled license to competing technologies; it is quite another to refuse to license the competing 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 . . . .” Id. at 1315-16.

However, on rehearing, the Federal Circuit reversed again, holding that when a patentee offers a license to a patent, the patentee does not misuse the patent by inducing a third party not to license its separate, competitive technology.  That is because any such agreement would not have the effect of increasing the physical or temporal scope of the patent in suit, and it therefore would not fall within the rationale of the patent misuse doctrine.  However, the court did note, possibly in dicta, that such an agreement might be vulnerable to challenge under the antitrust laws.

Moral of the story: package licenses – especially non-exclusive ones – are usually pro-competitive, but they do not necessarily confer an antitrust immunity to enter into horizontal agreements to suppress competitive technologies.