Patent misuse is an equitable defense to patent infringement. It "arose 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." Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 704 (Fed. Cir. 1992). The purpose of the patent misuse defense "was to prevent a patentee from using the patent to obtain market benefit beyond that which inheres in the statutory patent right." Id. As the Supreme Court has explained, the doctrine of patent misuse bars a patentee from using the "patent's leverage" to "extend the monopoly of his patent to derive a benefit not attributable to the use of the patent's teachings," such as requiring a licensee to pay a royalty on products that do not use the teaching of the patent. Zenith Radio Corp. v. Hazeltine Res., Inc., 395 U.S. 100, 135-36 (1969).

The fundamental issue of patent pools is forced licensing by the patent holder of patents supposedly non-essential to a technology with essential patents.

In a departure from previous thinking on the subject, Appeals Court averred from a blanket rule that a patent pool as a tying arrangement was patent misuse.

Adopting the administrative law judge's findings, the Commission ruled that the anticompetitive effects of including nonessential patents in the packages of so-called essential patents outweighed the procompetitive effects of that practice. In particular, the Commission held that including such nonessential patents in the licensing packages could foreclose alternative technologies and injure competitors seeking to license such alternative technologies to parties who needed to obtain licenses to Philips's "essential" patents.

In its brief, the Commission argues that it is "hornbook law" that mandatory package licensing has been held to be patent misuse. While that broad characterization can be found in some treatises, see 6 Donald S. Chisum, Chisum on Patents § 19.04[3] (2003), cited in C.R. Bard, Inc., 157 F.3d at 1373; 8 Ernest B. Lipscomb III, Lipscomb's Walter on Patents § 28:27 (3d ed. 1989 & Supp. 2003), Philips invites us to consider whether that broad proposition is sound. Upon consideration, we conclude that the proposition as applied to the circumstances of this case is not supported by precedent or reason.

The Commission ruled that Philips's patent package licensing arrangement constituted per se patent misuse because Philips did not give prospective licensees the option of licensing individual patents (presumably for a lower fee) rather than licensing one or more of the patent packages as a whole.

Phillips had allowed licensees to use technology from any or all patents licensed, and "the royalty is the same regardless of the number of patents used."

There is therefore no basis for conjecture that a hypothetical licensing fee would have been lower if Philips had offered to license the patents on an individual basis or in smaller packages.

The distinction of Phillips from previous cases is that Phillips offered a patent pool licensing arrangement, period. There was no mandatory action required of the patent pool licensees other than taking a license, such as, in prior cases reeking of antitrust, tying patent licensing to product purchase.

In its opinion, the Commission acknowledged that the Virginia Panel case and many other patent tying cases "involve a tying patent and a tied product, rather than a tying patent and a tied patent."

Those cases, however, are readily distinguishable because of the fundamental difference between an obligation to purchase a product and the extension of a nonexclusive license to practice a patent.

A nonexclusive patent license is simply a promise not to sue for infringement. See Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1552 (Fed. Cir. 1995) (en banc); Spindelfabrik Suessen-Schurr Stahlecker & Grill GmbH v. Schubert & Salzer Maschinenfabrik Atkiengesellschaft, 829 F.2d 1075, 1081 (Fed. Cir. 1987). The conveyance of such a license does not obligate the licensee to do anything; it simply provides the licensee with a guarantee that it will not be sued for engaging in conduct that would infringe the patent in question.

The court found patent pools such as Phillips to be procompetitive, in line with the federal government's stated position.

Philips points to the federal government's guidelines for licensing intellectual property, which recognize that patent packages "may provide procompetitive benefits by integrating complementary technologies, reducing transaction costs, clearing blocking positions, and avoiding costly infringement litigation. By promoting the dissemination of technology, cross-licensing and pooling arrangements are often procompetitive." U.S. Department of Justice and Federal Trade Commission, Antitrust Guidelines for the Licensing of Intellectual Property § 5.5 (1995); see also Herbert Hovenkamp, IP and Antitrust § 34.2c, at 34-7 (2004).

Thus, package licensing provides the parties a way of ensuring that a single licensing fee will cover all the patents needed to practice a particular technology and protecting against the unpleasant surprise for a licensee who learns, after making a substantial investment, that he needed a license to more patents.

Significantly, the distinction between what patents in a pool are "essential" to practice a technology, versus the "non-essential" ones for which alternatives may exist, was found a moot issue, as the concept of essentiality is fluid through time.

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 that the patentee 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. See Landon, 336 F.2d at 729. Yet over time, the development of alternative technology may raise questions whether some of the patents in the package are essential or whether, as in this case, there are alternatives available for the technology covered by some of the patents. Indeed, in a fast-developing field such as the one at issue in this case, it seems quite likely that questions will arise over time, such as what constitutes an "essential" patent... Under the Commission's approach, an agreement that was perfectly lawful when executed could be challenged as per se patent misuse due to developments in the technology of which the patentees are unaware, or which have just become commercially viable. Such a rule would make patents subject to being declared unenforceable due to developments that occurred after execution of the license or were unknown to the parties at the time of licensing.