Besides a trial court, Phillips took its case to the International Trade Commission (ITC).

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 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.

The district court in the Phillips case granted summary judgment based on § 271(d)(5), using that provision as a definition of what constitutes patent misuse in tying arrangements.

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 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.

While the CAFC (05-1388) didn't suggest a wrong conclusion by the district court, its basis for decision was flawed, and so the case is remanded.