Court Opinion

ID: 9845922
Source: CourtListenerOpinion
Date Created: 2023-09-24 03:31:09.879475+00
Date Added: 2024-06-11T09:16:26.479183
License: Public Domain

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.
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 manu*1322facturers 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, 104 S.Ct. 1551, 80 L.Ed.2d 2 (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, 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, 89 S.Ct. 1562, 23 L.Ed.2d 129 (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, 89 S.Ct. 1562. Here, in contrast, it is undisputed that many of the patents included in the joint license are necessary to manufacture Orange Book compliant discs, and the licensees were obligated to pay royalties only on discs *1323that 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 “gamerpng] as royalties a percentage share of the licensee’s receipts from sales of other products.” Zenith, 395 U.S. at 135, 89 S.Ct. 1562.
3. As for Princo’s argument that Philips committed patent misuse by “conspiring to include in a mandatory patent pool them competing patents and thereby engagpng] 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 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, 126 S.Ct. 1276, 164 L.Ed.2d 1 (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 *1324that the 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 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 no showing that the pat*1325ents 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 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 *1326interest 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 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, 51 S.Ct. 421, 75 L.Ed. 926 (1931) (recognizing that the pooling of blocking patents serves a legitimate purpose); Dep’t of Justice & FTC, Antitrust Guidelines for the Licensing of Intellectual PropeHy § 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.

. 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.

. 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 *1325administrative 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 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.