IP and Antitrust: Competition Policies of Intellectual Property in Eighty Cases 9041160426, 9789041160423

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IP and Antitrust The Competition Policies of Intellectual Property in Eighty Cases

NUNO PIRES DE CARVALHO

IP and Antitrust

IP and Antitrust The Competition Policies of Intellectual Property in Eighty Cases

Nuno Pires de Carvalho

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Table of Contents

Foreword

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Introduction: The Competition Policies of Intellectual Property CHAPTER 1 The Competition Policies of Acquiring Intellectual Property §1.01 Setting the Right Dosage 1. The Case of Monopolies (1602), Trinity Term, 44 Elizabeth I 2. Lab. Corp. of America Holdings v. Metabolite Labs., Inc., 548 U.S. 124 (2006) §1.02 Setting the Standards of Differentiation [A] Patents: Genuine Novelty 3. Atlantic Works v. Brady, 107 U.S. 192 (1883) 4. Julia P. Hotchkiss v. Miles Greenwood, 52 U.S. 248 (1850) 5. Graham v. John Deere Co. of Kansas City, 383 U.S. 1 (1966) [1] The Patent in Issue in No. 11, Graham v. John Deere Co. [2] The Patent in Issue in No. 37, Calmar, Inc. v. Cook Chemical Co., and in No. 43, Colgate-Palmolive Co. v. Cook Chemical Co. [B] Copyright: Genuine Creativity/Originality 6. Feist Publications, Inc. v. Rural Telephone Service Co., Inc., 499 U.S. 340 (1991) 7. American Dental Association v. Delta Dental Plans Association, 126 F.3d 977 (7th Cir. 1997) [C] Trademarks: Distinctiveness 8. Mark Foy’s Ltd. v. Davies Coop & Co. Ltd. (“Tub Happy case”) [1956] HCA 41; (1956) 95 CLR 190 (9 August 1956) [D] Alternativeness 9. Le Roy v. Tatham, 55 U.S. 156 (1852) 10. O’Reilly v. Morse, 56 U.S. 62 (1853)

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1

7 7 7 11 15 15 15 18 21 27

28 31 31 39 43 43 48 48 50

Table of Contents 11. Wallace Int’l Silversmiths, Inc. v. Godinger Silver Art Co., Inc., 916 F.2d 76 (2d Cir. 1990) 12. Koninklijke Philips Electronics NV v. Remington Consumer Products Ltd, Case C-299/99 (2002) [E] New Uses, Equivalents, Materials, and Advantages 13. Smith v. Nichols, 88 U.S. 112 (1875) 14. Roberts v. Ryer, 91 U.S. 150 (1875) 15. General Electric Co. v. Jewel Incandescent Lamp Co., 326 U.S. 242 (1945) 16. Great Atlantic & Pacific Tea Co. v. Supermarket Equipment Corp., 340 U.S. 147 (1950) [F] Excluding Abstract Ideas from Patent Protection 17. Boulton and Watt v. Bull, 1795 18. Gottschalk v. Benson, 409 U.S. 63 (1972) 19. Bilski v. Kappos, 561 U.S. 593 (2010) CHAPTER 2 The Competition Policies of Using Intellectual Property §2.01 Refusing to License Intellectual Property 20. Data General Corp. v. Grumman Systems Support Corp., 761 F. Supp. 185 (D. Mas. 1991) 21. Microsoft Corp. v. Commission, In Case T-201/04 (2007) 22. Intergraph Corp. v. Intel Corp., 195 F.3d 1346 (Fed. Cir. 1999) 23. Image Technical Services, Inc. v. Eastman Kodak Co., 125 F.3d 1195 (1997) 24. DW Integrators CC Claimant v. SAS Institute (Pty) Ltd., Case Number: 14/IR/NOV99 (1999) 25. Radio Telefis Eireann (RTE) and Independent Television Publications Ltd. (ITP) v. Commission (Magill case), Joined Cases C-241/91 P and C-242/91 P (1995) 26. IMS Health GmbH & Co., Case C-418/01 (2004) 27. Sega Enterprises Ltd. v. Accolade, Inc., 977 F.2d 1510 (9th Cir. 1992) §2.02 Licensing (and Assigning) Intellectual Property [A] Territorial Restrictions 28. Etablissements Consten SARL and Grundig-Verkaufs-GMBH, Joined Cases 56/64 and 58/64 (1976) 29. Miller Insituform, Inc. v. Insituform of N. Am., Inc., 830 F.2d 606 (6th Cir. 1987) [B] Tying 30. Illinois Tool Works Inc. v. Independent Ink, Inc., 547 U.S. 28 (2006) 31. U.S. Philips Corp. v. ITC, 424 F.3d 1179 (Fed. Cir. 2005) 32. United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001) 33. Kentucky Fried Chicken Corp. v. Diversified Packaging Corp., 549 F.2d 368 (5th Cir. 1977) [C] Covenants Not to Challenge

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57 61 67 67 69 74 77 80 81 90 92

105 105 106 110 120 129 139

142 147 152 166 167 167 170 173 173 177 183 194 203

Table of Contents 34. Windsurfing International, Inc. v. European Commission, in Case 193/83, judgment of the Court (Fourth Chamber) on 25 February 1986 35. Lear v. Adkins, 395 U.S. 653 (1969) 36. Idaho Potato Commission v. M&M Produce, 335 F.3d 130 (2d Cir. 2003) [D] Royalties [1] Setting the Level of Royalties 37. Philips Electronics NV v. Ingman Ltd. and another (1998) 38. Kooninklijke Philips Electronics N. V. v. National Institute of Industrial Property (INPI), Appeal in writ of mandamus 2006.51.01.504157-8 (2008) [2] Discriminatory Royalties 39. KFTC Decision No. 2009-281 (Qualcomm case) [3] Royalties on Unpatented Goods 40. Mercoid Corp. v. Mid-Continent Investment Co., 320 U.S. 661 (1944) 41. Automatic Radio Manufacturing Co., Inc. v. Hazeltine Research, Inc., 339 U.S. 827 (1950) [4] Post-expiry Royalties 42. Brulotte v. Thys Co., 379 U.S. 29 (1964) 43. Kai Ottung v. Klee & Weilbach A/S and Thomas Schmidt A/S, Case 320/87 (1989) [E] Resale Price Maintenance 44. Leegin Creative Leather Prods. v. PSKS, Inc., 551 U.S. 877 (2007) [F] Grant-Back Clauses 45. Transparent-Wrap Machine Corp. v. Stokes & Smith Co., 329 U.S. 637 (1947) [G] Cross-licensing, Exclusive Licensing, Assigning, and Pooling 46. Blount Mfg. Co. v. Yale & Towne Mfg. Co., 166 F. 555 (D.C. Mas. 1909) 47. United States v. Line Material Co., 333 U.S. 287 (1948) 48. Tetra Pak v. Commission, Case T-51/89 (1990) 49. Eli Lilly and Co. v. Apotex Inc., 2005 FCA 361, [2006] 2 F.C.R. 478 [H] Unfair Competition 50. Federal Trade Commission v. Raladam Co., 283 U.S. 643 (1931) 51. Federal Trade Commission v. Sperry & Hutchinson Co., 405 U.S. 233 (1972) [I] Obstruction of Markets 52. Shri Shamsher Kataria Informant v. Honda Siel Cars India Ltd. et alii, Case No. 03/2011 (2014) §2.03 Enforcing Intellectual Property Rights [A] Threats to Sue 53. Halsey v. Brotherhood, 1880. L.R. 15 Cn.D. 514 54. Granby Marketing Services Limited v. Interlego AG, [1984] RPC 209 55. Virginia Panel Corp. v. Mac Panel Co., 133 F.3d 860 (Fed. Cir. 1997) 56. CVD, Inc. v. Raytheon Co., 769 F.2d 842 (1st Cir. 1985) [B] Suppression

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203 204 213 220 220 221

225 226 226 231 231 234 236 237 239 242 243 252 252 257 257 263 271 279 287 287 293 298 299 309 309 309 311 318 322 330

Table of Contents 57. Continental Paper Bag Co. v. Eastern Paper Bag Co., 210 U.S. 405 (1908) 58. Julius E. Foster v. American Machine & Foundry Co., 492 F.2d 1317 (2nd Cir. 1974) [C] Abuses of the Judicial (or Administrative) Process [1] Sham Litigation [a] PRE Test 59. Professional Real Estate Investors, Inc. v. Columbia Pictures Inds., Inc., 508 U.S. 49 (1993) 60. Monsanto Company v. Comisión Nacional de la Defensa de la Competencia, Case 13.676/07 61. Sanofi Aventis v. Instituto Nacional da Propriedade Industrial (INPI), Civil Appeal 2008.51.01.817159-7 (2010) [b] Walker Process Test 62. Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172 (1965) 63. Nobelpharma AB v. Implant Innovations, Inc., 141 F.3d 1059 (Fed. Cir. 1998) 64. Semiconductor Energy Lab. Co., Ltd. v Samsung Electronics Co., Ltd., 204 F.3d 1368 (Fed. Cir. 2000) 65. HC 114.846 (YKK Case) (1982) 66. AstraZeneca AB v. Commission, Case C-457/10 P (2012) [2] Other Abuses of the Judicial and Administrative Process 67. Assessment Technologies of WI, LLC v. Wiredata, Inc., 361 F.3d 434 (7th Cir. 2004) 68. Federal Trade Commission v. Actavis, Inc., 133 S. Ct. 2223 (2013) §2.04 Remedies [A] Injunctions 69. eBay Inc. v. Mercexchange, LLC, 547 U.S. 388 (2006) [B] Compulsory Licenses 70. United States v. Glaxo Group Ltd., 410 U.S. 52 (1973) [C] Exhaustion 71. United States v. Univis Lens Co., 316 U.S. 241 (1942) [D] Forfeiture 72. Vitamin Technologists, Inc. v. Wisconsin Alumni Research Foundation, 146 F.2d 941 (9th Cir. 1945) 73. Hartford-Empire Co. v. United States, 323 U.S. 386 (1945) 74. United States v. Crescent Amusement Co., 323 U.S. 173 (1944)

330 335 337 338 338 338 345 348 350 351 353 362 365 368 379 379 385 394 394 394 397 397 402 402 408 408 413 419

CHAPTER 3 The Competition Policies of Intellectual Property in Regulated Markets 423 §3.01 Intellectual Property in Sectors of Special Public Interest 423 75. JT International SA v Commonwealth of Australia [2012] HCA 43 (2012) 424 76. AstraZeneca AB v. Commission, In Case C-457/10 P, 2012 437

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Table of Contents 77. Glenwood Labs., Inc. v. Am. Home Prods. Corp., 455 F.2d 1384 (C.C.P.A. 1972) §3.02 Technical Standards 78. Practice Management Information Corp. v. The American Dental Medical Association, 121 F.3d 516 (9th Cir. 1997) 79. Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297 (2007) 80. Rambus Inc. v. Federal Trade Commission, 522 F.3d 456 (D.C. Cir 2008) 81. Huawei Technologies Co. Ltd v. ZTE Corp., Case C-170/13 (2014) Index

443 445 445 448 458 468 479

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Foreword

The cases that appear in this book have been selected because they serve a purpose: to illustrate some of the many facets of the interface of intellectual property law with competition law (or antitrust). Their selection was the result of a choice, and every choice naturally translates the views of who makes it. My main concern during the selection process was to identify cases that, in various jurisdictions, express the various public policies that mold that interface. Some of those cases are well known and appear in a number of other compilations. Others are less known, but to this author they are no less illustrative of relevant public policies. Of course, the collection of cases is far from being exhaustive, nor was that the intention. But if they serve as guidance to the main principles and policies that, sometimes coherently, sometimes not, preside over the very complex relationship between intellectual property and antitrust, the objective of this compilation will have been attained. To identify court opinions that expressly state policies has not always been possible, given that the setting of policies is a role that generally belongs to parliaments, not to courts. However, courts, when applying the law (and, in some jurisdictions, when making the law), frequently do not hesitate to state their own reading of public policies. Therefore, their way of interpreting those policies is no less important than the way they interpret or make the law. Most of the cases selected are judicial court opinions. A few are administrative court opinions. In one event, the opinion of an attorney-general (of the Court of Justice of the European Union) was included. The reason of its selection was that it precedes the (forthcoming, at the time of this writing) opinion of the Court on mandatory licensing terms under FRANDS and the accompanying issue of the availability (or not) of injunctions. Overall, the eighty cases illustrate the logics of the three-step pyramid that the interface intellectual property/competition constitutes, and which the Introduction explains. The cases are organized in three parts. The first part contains a number of cases in which courts have looked at the policies that are behind differentiation and have accordingly set the thresholds and limits to the acquisition of intellectual property. The second part looks at abuses of intellectual property in their multifaceted dimensions. And the third part focuses on the inherent contradiction between market regulation and the acquisition and use of intellectual property rights.

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Foreword The cases selected come from various jurisdictions that correspond to different levels of economic and social development. They are not so many as to reflect a worldwide picture. Unlike the characters of Jules Verne’s novel from whose title this book has drawn inspiration, who completed an entire tour around the world, this book only visits a few jurisdictions (eight, in total, with the note that one of them, the European Union, is supranational and spreads across twenty-seven national states). But it seemed to me that the sampling of eighty cases was sufficient to illustrate the main convergences and divergences in approaches to the treatment of the interface between intellectual property and competition. Anyway, there is something very dynamic about that interface, which makes its legal treatment to be constantly moving. To take a steady snapshot of that interface would be impossible. Therefore, in selecting cases I have tried to focus on those that reflect or enunciate fundamental policies, given their long lasting effects. After reading the eighty cases (yes, they are eighty, even though the table of contents lists eighty-one entries—like Phileas Fogg, who gained one day on his journey from travelling eastwards, I gained one case in entering the AstraZeneca opinion of the Court of Justice of the European Union twice (cases nos. 66 and 76)) the reader will have acquired a fairly accurate idea of the tensions behind the values of the free market, which intellectual property serves, and the variety of responses they provoke. Those tensions result either from abusive behavior of intellectual property holders or from the temptations of market regulation. In response to those tensions, on certain matters the views of courts in different jurisdictions are almost consensual. But on other issues they diverge considerably. One example is the discussion on the limits of royalty setting. In one country, courts would say that intellectual property owners should be allowed to set prices on their intangible assets as high as the market can bear. But in another, courts would say exactly the opposite (cases nos. 37 and 38). The overwhelming majority of cases come from the United States. The reason is obvious: the United States is the largest free market-based economy, and has developed an enormously wide wealth of jurisprudence concerning the interface intellectual property/competition. Actually, the United States was not the first country to discuss that interface in courts: the United Kingdom was the first to develop a body of jurisprudence on that matter, starting with the famous Case of Monopolies, which opens this book. Darcy v. Allein was not, strictly speaking, about intellectual property, and was decided even before the United Kingdom adopted the Statute of Monopolies, of 1624, which contained a provision (section VI) on patents for inventions. But Darcy v. Allein established a fundamental principle—eventually the most fundamental one—that informs a major part of the debate on the interface intellectual property/ competition: that patents for monopolies (and patents for inventions, for that matter) should not provide exclusive rights in subject matter that is not genuinely new, because, when they do so, they constrain competition that existed before the grant. In other words, Darcy v. Allein speaks very vehemently—still today, three-hundred years after its holding—against too much intellectual property, perhaps one of the factors that more frequently distort the way intellectual property serves as an essential foundation of market-oriented economies.

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Foreword Another editorial remark is that the footnotes found along this book are mine. In order to keep the size of this book within a reasonable measure, I have omitted all opinions’ original footnotes as well as many of their citations. The title of this book refers to policies rather than to policy. The reason is that, as the cases and materials in this book show, there is not one single public policy as regards the way intellectual property interacts with competition. In general, the rationale of market-based economies is to leave the acquisition and use of intellectual property free and clear of regulatory constraints, so as to foster unimpeded rivalry—because it is rivalry among merchants, producers, and service providers that leads to the availability of interchangeable products and services (some better than others, some cheaper, some more prestigious, etc.), and therefore permits consumers to choose. However, sometimes public policies, motivated by other concerns, act against differentiation and diminish the differentiating role of intellectual property. But a number of the cases here selected do reveal a subjacent tension that is not confined to regulated products. In those cases, judges could not avoid manifesting their personal views and biases against the freedom conveyed by intellectual property—particularly when the freedom of creating and selling is exercised against those who do not have the freedom of choosing. Of course, those judges tend to forget that perhaps the problems are not in intellectual property—when well measured and correctly used—but in the lack of consumers’ freedom of choice that results from poverty. The title of this book refers to the competition policies of intellectual property. It assumes that there is a certain degree of dependency: competition law is a general legal instrument that informs the normative structure of free market economies. It therefore also informs intellectual property, generally with the intent of ensuring that it achieves its main purpose, but eventually admitting the partial eclipsing of that function in favor of other public policies, such as access to essential goods and services—in regard of which society accepts the reduction of levels of differentiation. In other words, competition law is more flexible than intellectual property. Whereas the latter promotes rivalry, the former, even basically seeking to ensure the same goal, puts more emphasis on consumer welfare. For the sake of consumer welfare, economic efficiencies may lead to less differentiation, and thus less intellectual property. Not only because of the mentioned difference of goals, but in general because the interface intellectual property/competition involves some of the fundamental aspects of our life in community, many of the public policies identified in this book are controversial. Being policies, they preside over the formulation of human conduct that corresponds to certain ways of thinking, very often impressed by cultural and economic beliefs. This book does not avoid those controversies, and here and there I have added comments expressing doubts about the consistency of certain of those policies. At this point, I am therefore under the obligation to emphasize that the choice of cases and materials as well as all opinions expressed in this book are exclusively my responsibility, and that they do not necessarily reflect the views of the Secretariat of the World Intellectual Property Organization (WIPO), which I serve, or WIPO Member States.

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Introduction: The Competition Policies of Intellectual Property

The competition policies of intellectual property can be summarized in few words: they are policies of calibration of differentiation. Indeed, although intellectual property is designed in accordance with a policy of promoting and ensuring product differentiation (in broad terms), it is not rare that other public policies interfere with its differentiating capacity and in a way or another have an impact on its role of supporting market freedom. Some of those other policies reinforce the differentiating role of intellectual property, and others undermine it. This introduction very briefly explains how competition policies interact with intellectual property in compliance with various—and not always coherent—public policies. Intellectual property is composed by various legal regimes that protect rights and interests in intangible assets that have a differentiating nature. Economics of competition explain this notion. Edward Chamberlin proposed the theory of monopolistic competition as a more realistic alternative to the opposing situations of perfect (or pure) competition, in one pole, and pure monopoly, in the other.1 In a situation of perfect competition, the products sold by various sellers on the relevant market are entirely homogenous. Therefore, sellers do not have the power to set prices, because consumers feel free (and capable) to shift from one product to the other whenever they see a price increase. However, this is an extremely rare situation, if it ever happens. For example, if ten products were absolutely identical and interchangeable, the respective manufacturers and merchants would still struggle to beat rivals: they would differentiate products by pricing, timing, location, or building consumer loyalty (by means of advertisement). Chamberlin proposed that by introducing differences in products, competitors would be able to acquire a certain amount of power to set prices—up to a certain level, beyond which consumers would feel motivated to seek a substitute. Of course, the existence of differences eliminates the homogeneity of products: they cease to be completely substitutable. Samsung and Apple Smartphones are substitutable to the extent they are both fourth-generation mobile phones, but because they perform 1. Chamberlin, E., The Theory of Monopolistic Competition (Harvard Univ. Press, Cambridge, 1933).

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Nuno Pires de Carvalho different functions, they are not completely so. To the extent (larger or smaller, depending on the amount of differentiating features) consumers are willing to pay a premium price to continue loyal to either of the devices, sellers are able to set prices without concern with the potential reaction by competitors. Therefore, when a new Samsung or iPhone model reaches the market, consumers will be price insensitive to a certain extent. They will be locked-in to their personal preferences.2 This limited capacity to set prices based on differentiation was characterized by Chamberlin as monopolistic competition. The virtue of the theory of monopolistic competition is that it emphasizes the role of differentiation and explains the fundamental role of intellectual property. But one has to take into consideration two caveats. In legal terms, monopolistic competition is an oxymoron. Otherwise, every time a manufacturer introduced a differentiating feature in a given product, with the effect of locking consumers in (or with the intent of doing it) he would be guilty of violating antimonopoly statutory provisions. However, monopolistic competition is not a situation of monopoly, because entry is free and substitutes are available. Second, one has to understand the notion of product differentiation in a much broader sense than proposed by the theory. Actually, differentiation does not necessarily concern a product in a direct way, but rather the whole business that lies in the background of the product (or, for that matter, of the service). Under this broader approach, even commodities are differentiated—and this explains why intellectual property is also important for commodities. “There is no such a thing as a commodity. All goods and services are differentiable.” 3 In a groundbreaking article, Theodore Levitt has persuasively demonstrated that there are two possible ways of introducing differentiation in all sorts of products, commodities comprised: by augmenting the product or by lowering prices. Product augmentation can come in many different ways, from modifications in technical features and design to external services that accompany the product. As an example of external services, Levitt mentions warehousing management advice and training programs for the employees of the distributors of health and beauty aids. Commodities are also subject to differentiation, which results from the way their delivery is managed. This applies to “primary metals, grains, chemicals, plastics, and money.”4 If not in another way, commodity suppliers are differentiated by trade names. The same goes for differentiation based on location, which is susceptible of being appropriated by means of shop signs.

2. Here the term lock-in is liberally used. In the specialized terminology employed in antitrust law, a situation of lock-in is a situation in which the consumer faces higher costs from exiting from a given product than staying with it. An example that comes to mind—and which has generated considerably diverging solutions among jurisdictions—is cars. A customer who buys a car may later be confronted with very high prices of replacing spare parts. However, it would be more costly to sell the car and buy a different model than paying the premium price demanded by the car maker (who, eventually, may have patent or design exclusive rights in that spare part). On this unsettled issue, see, in general, Christopher Heath & Anselm Kamperman Sanders (eds.), Spares, Repairs and Intellectual Property Rights (Wolters Kluwer, Alphen aan den Rijn, 2009). 3. T. Levitt, Marketing Success through Differentiation—Of Anything, Harvard Business Review, 83 (January–February, 1980). 4. Id.

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Introduction: The Competition Policies of IP Consumers can make choices because of the differentiation that is preserved by intellectual property. Brands such as Coca-Cola and Pepsi-Cola tell consumers that the branded goods are different products that cater to the same needs (that is, that they are interchangeable, and that they compete). They inform consumers about different flavors. Behind the different flavors there is an enormous variety of other differences, such as chemical formulae, manufacturing processes, bottle and cap designs, and distribution and marketing strategies. On the packages of many products the consumer will see symbols such as ©, ®, ™, D within a circle, or P within a circle. These are indications that internal or external differences have been introduced and are intrinsic to those products. Intellectual property, in all its facets and modalities, ensures that those differences will not be eliminated by free riders, willing to acquire a share in the monopolistic pie of product differentiation. Intellectual property, according to Chamberlin’s model, is the visible expression of monopolistic competition. Intellectual property, therefore, is everywhere (where a free market economy prevails) because it covers all those intangible elements that contribute to differentiate merchants and manufacturers, as well as their products and services. It is the subject matter of intellectual property (in all its modalities) that permits consumers to make choices. We are surrounded by intellectual property. Every merchant, every artisan needs to protect and affirm his/her individuality in order to carry out his/her profession. It is by affirming and using such individuality that businesses attract and maintain their clients. In the absence of the intangible elements that distinguish one business from another, clients do not know where to go to buy goods and services. Those elements are of many kinds: from the names that identify and distinguish businesses and their products or services to the products and services themselves and the knowledge about them. Intellectual property is pervasive and manifests itself spontaneously wherever manufacturers and merchants endeavor to call the attention and the preference of customers, from the large and sophisticated research facilities of the pharmaceutical or Smartphone industries to the humble fresh fruit markets in poor countries’ traditional villages. The core function of differentiation cuts across the whole spectrum of intellectual property and gives it horizontal consistency. The protection of all of its components has always been based on a condition of differentiation, in one way or another. This is evidenced by the fact that the terms that in general make certain intangible assets eligible for intellectual property protection, such as novelty, inventive activity (or nonobviousness), originality, distinctiveness, confidentiality (or secrecy or nondisclosure), are all synonymous with differentiation. Conversely, the prohibition of practices that constitute or lead to confusion, imitation, plagiarism, deceit, reputation tarnishing, is another expression of differentiation. This means that, in general, intellectual property and competition (or antitrust) laws are in confluence. However, very often, certain public policies interfere with the way intellectual property should normally operate, either with the purpose of reinforcing its differentiating role, or with the objective of submitting it to other public goals, and thereby diminishing that same role. Therefore, the interface between intellectual property and competition is not linear. We can describe it as a sort of a three-step pyramid. On the first step, the fundamental one and that serves as the support for the

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Nuno Pires de Carvalho whole building, we find differentiating intellectual property. This seemingly pleonastic expression means that, as a primary concern, lawmakers (and intellectual property offices) have the responsibility of granting intellectual property protection to intangible assets that are genuinely differentiating. It is differentiation that allows free markets to thrive. The contrary undermines competition, because in the absence of differences, consumers will not be able to make informed choices both as regards the merchants (or manufacturers) and their products and services. To use a paradox, we can say that not all differences are differentiating. Patents for unmodified genes or other natural substances or for minor improvements, copyright for compilations of factual information, trademarks for words found in the dictionary or for features of an essentially functional nature, are examples of intellectual property that generates confusion, instead of promoting differentiation. Those intellectual property rights give origin to monopolies and monopsonies. They are the opposite of free market tools. On the other hand, to refuse intellectual property protection to genuine differences or to refuse that effective enforcement measures are made available to rights holders also lead to confusion, because less efficient merchants and manufacturers are thereby allowed to imitate their more competent rivals. In the first case we have too much or overprotecting intellectual property. Too much intellectual property covers non-sufficiently differentiating assets and makes it impossible for competitors to use or to create alternative intangible assets. It hampers pre-grant existing competition (even if only potentially). In the second case, we have too less or underprotecting intellectual property. Too less intellectual property (such as the unavailability of protection for sounds, colors and smells as trademarks as well as insufficient rules of enforcement) fails to cover differentiating assets and therefore generates confusion. Consequently less efficient competitors are able to imitate more efficient competitors and thereby destroy differentiation. Ultimately, too much and too less intellectual property are the same, because both generate confusion, distort competition, and refuse consumers the possibility of making informed decisions.5 The second step of the pyramid concerns the use of intellectual property. Because of the special nature of their subject matter—intangible assets—intellectual property rights are primarily designed in a manner of excluding others.6 It follows that intellectual property rights are essentially used by means of their excluding others. 5. In this regard, we should not forget that the measure of right dosage for intellectual property is not the same in all countries. Different objectives, different views, and national idiosyncrasies, lead to different levels of protection. This may generate inconsistencies in international trade, and may create difficulties to affected national industries, but the fact is that not all governments see intellectual property in the same way. The TRIPS Agreement itself, in spite of its overall purpose of harmonizing intellectual property protection at certain minimum levels, so as “to reduce distortions and impediments to international trade” (Preamble, first paragraph) has left a wide margin of maneuver for WTO Members to design the dosage of protection. 6. The Secretariat of the World Intellectual Property Organization has explained this aspect as follows: Intellectual property rights (IPRs) are fundamentally the right to say ‘no,’ or, in other words, the right to exclude. Almost invariably, they are defined by international agreements and national statutes in a negative way, thereby expressing their essentially

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Introduction: The Competition Policies of IP Using intellectual property, therefore, means enforcing it, i.e., exercising the right to say “no” to rivals. As a corollary, using intellectual property also means licensing and assigning it. It is on this second step that we find the public policies concerning the prevention and the repression of abuses of intellectual property. Indeed, very often intellectual property that has been granted or acknowledged in the right dosage is used by its owners in a way that runs against the objectives set in the law. It is here that intellectual property and antitrust become confluent. Abuses of intellectual property rights distort—when they do not eliminate all together—their differentiating function. Abusive uses may be of many sorts—as many as the creativity of the human spirit may engender—and therefore it is impossible to draw a complete list. In the literature and in compilations of case law frequent examples of abuses are: enforcement of fraudulently procured rights; excessive (abusive) pricing; tied sales of patented and off-patent materials; enforcement of suppressed patents (“suppressed” meaning patents whose claimed inventions are not commercially exploited; it is in this context that the problem of “patent trolls” or nonpracticing entities arises); refusals to license (including abusive licensing clauses, such as covenants not to challenge the validity of the titles licensed; abusive royalties; package licensing; output, research or commercial limitations; suppression and other use restrictions horizontal and vertical price restrictions; grant-back clauses; charging royalties after the expiry of the title); patent pooling and exclusionary acquisition of rights; artificial extension of patent terms (also called “pay-for-delay”); patent litigation settlements with reverse payments; and combinations of two or more of these practices.

exclusive nature. For example, most of the provisions of the Agreement on TradeRelated Aspects of Intellectual Property Rights (TRIPS Agreement), of 1994, which define the rights granted to IP owners, do so by providing for the right to prevent others from copying or using the subject matter of protection. In this aspect, IPRs differ sharply from property rights in tangible goods. Law is about the regulation of social conduct. Every time one wishes to do something that interferes with (and consequently reduces) other persons’ freedom, one needs permission from the law. It follows that the law must give him/her the power to use his/her tangible property, because such a use is naturally exclusive and rivalrous in nature, and thus interferes with other persons’ freedom: possession over a tangible good is rivalrous and therefore de facto excludes others per se from possessing it. For example, if a person erects a house on a piece of land, no one else can erect another house in the same place. There is simply no space for that. That is why property rights in tangible goods are primarily defined as rights to use and exploit. There is no need for the law to establish the right to prevent others from using a piece of land as a primary prerogative, because that exclusion is a natural (if not physical) consequence of possession. By contrast, IPRs are property rights in intangible goods. Being intangible, the possession of their subject matter does not de facto impede per se others from possessing them simultaneously. In economics jargon, IPRs cover non-rival subject matter. Therefore, the right in that subject matter must be, primarily, protected by a legal right to exclude others from using (or copying) them, for possession alone is not enough to secure exclusivity. This explains why intellectual property rights are usually stated in a negative manner (i.e., the right to exclude others from doing something rather than the positive right to do something), as opposed to rights in tangible goods. In other words, this explains why the essence of IPRs is the right to say “no”—this negative dimension corresponds to the very intangible nature of the subject matter protected.

See WIPO, Refusals to License IP Rights—A Comparative Note on Possible Approaches (2013), at 3-4, available at .

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Nuno Pires de Carvalho On the third step, intellectual property meets market regulation. The third step corresponds to those cases in which factors that are external to intellectual property constraint its differentiating role, even if it has been correctly granted and fairly used. In those cases, special market circumstances transform intellectual property rights into barriers to entry or put restrictions on the way their rights are exercised. This refers to two sorts of factors. First, in some cases, market regulation prohibits third parties to develop alternative intangible assets so as to compete with the intellectual property owner. This may happen, in general, in two circumstances. One is when the government, or a governmental agency, establishes that a given invention becomes part of a technical standard whose observation by the industry is mandatory. In this case, third parties cannot create an alternative invention in order to obtain the same or an equivalent output. The solution is a compulsory license. A similar problem occurs when a technical standard elaborated by a private standard setting organization (SSO) is made mandatory. In this case the SSO is not allowed to enforce copyrights in the standard, because it is assumed that, having the effects of a law, all interested persons should be given free access to it. However, the right to compensation ensues. Finally, certain data, which are necessary for obtaining marketing approval in relation to certain products, such as pharmaceutical and agrochemical substances, require the elaboration of tests that are dangerous to human and animal health, as well as to the environment. Therefore, their repetition may be prohibited. This means that the first company to obtain the approval shall have no competition, unless permission is given to a junior entrant to have access to those data. In this case, a compulsory license would also be in order. It should be noted that sometimes market self-regulation leads to similar results, such as the generalized adoption by the industry of a voluntary standard. Not being mandatory, those standards are not immune to alternativeness, but in practical terms competitors have enormous difficulties in using their own inventions, brands and other differentiating intangible assets. In general, the third step of the pyramid corresponds to the notion of intellectual property as an essential facility, i.e., an insurmountable barrier to the entry of rivals given the latter’s impossibility of creating their own intangible assets with the purpose of either luring rivals’ clients or keeping their own—or both. On the third step of the pyramid, we see also other factors that restrain the differentiating function of intellectual property for the sake of public policies that have nothing to do with the logics of a free market. On that step intellectual property rights may have been correctly granted and adequately used, and yet public policies may impose exceptions and limitations to entrepreneurs’ private rights. This takes place with particular intensity in sectors that produce and sell goods and services that are deemed of special public interest, such as pharmaceuticals, food, and environment.

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SETTING THE RIGHT DOSAGE

1. On the first of the three-step pyramid that constitutes the interface intellectual property-competition we find the debates on how to set intellectual property in a right dosage. Too much intellectual property reduces the levels of competition that existed before the rights were granted or started existing (in the case of those intellectual property rights that do not depend on a formal grant). The Case of Monopolies puts this in biblical terms: to grant too much intellectual property is the same as taking from the miller the upper or the lower mill, and thus prohibiting him to work. Too less intellectual property is the opposite, because it leads to confusion. However, both too much and too less intellectual property are the same to the extent they make differentiation impossible. In either event consumers will be at a loss.

1. The Case of Monopolies (1602), Trinity Term, 44 Elizabeth I UNITED KINGDOM, COURT OF KING’S BENCH1 Edward Darcy, Esquire, a Groom of the Chamber to Queen Elizabeth, brought an Action on the Case against Thomas Allein, haberdasher of London, and declared that Queen Eliz., 13 Junii, anno 30, intending that her subjects being able men to exercise husbandry, should apply themselves thereunto, and that they should not employ themselves to the making of playing cards, which had not been any ancient manual occupation within this Realm; and that the making of such a multitude of cards, card 1. Steve Sheppard (ed.), The Selected Writings and Speeches of Sir Edward Coke, vol. 1 (Liberty Fund, Indianapolis, Indiana, 2003), 394-404, available at .

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playing was become very frequent, and chiefly amongst servants and apprentices and poor artificers; and to the end her subjects might apply themselves to more faithful and necessary trades, by her Letters Patents under the Great Seal of the same did grant unto Ralph Bowes, Esquire, full power, license, and authority by himself, his servants, factors, and deputies, to provide and buy in any parts beyond the Sea, all such playing cards as he thought good, and to bring them within this Realm; and to sell and utter them within the same, and that he, his servants, factors, and deputies should have and enjoy the whole Trade, Traffic, and Merchandize of all playing cards: and by the said Letters Patents further granted to the said Ralph Bowes that the said Ralph Bowes, his servants, factors, and deputies, and no other should have the making of playing Cards within the Realm, to have and to hold for twelve years; and by the said Letters Patents the Queen charged and commanded, that no person or persons besides the said Ralph &c. should bring any cards within the Realm during those twelve years; nor should buy, sell, or offer to be sold within the said Realm, within the said term any playing cards, nor should make, or cause to be made any playing cards within the said Realm, upon pain of the Queens gracious displeasure, and of such fine and punishment as offenders in the Case of voluntary contempt deserve. And afterwards the Queen, 11 Aug. anno 40 Eliz., by her Letters Patents reciting the former grants made to Ralph Bowes, granted the Plaintiff, his Executors, Administrators, and their deputies, the same privileges, authorities, and other the said premises for one and twenty years after the end of the former time, rendering to the Queen hundred marks per annum; and further granted to him a Seal for to mark the Cards. And further declared that after the end of the said term of twelve years, scil. 30 Junii, an. 42 Eliz. the Plaintiff caused to be made four hundred grosses of cards for the necessary uses of the subjects, to be sold within this Realm, and had spent in the working of them 5000 l. and that the Defendant knowing the said grant and prohibition in the Plaintiff’s Letters Patents, and other the premises, 15 Martii, 44 Eliz. without the Queens License or the Plaintiffs, &c. at Westminster did cause eighty grosses of playing cards to be made and as well those, as 100 other grosses of playing cards, of which many were made within the Realm, or brought within the Realm by the Plaintiff, or his servants, factors or deputies, &c. nor marked with his Seal; he had imported within the Realm, and had sold and uttered them to sundry persons unknown, and showed some in certain, for which the Plaintiff could not utter his playing Cards, &c. contra formam praedict’ literar’ patentium, et in contemptum dictae Dominae Reginae, whereby the Plaintiff was disabled to pay his farm rent, to the Plaintiffs damages. The Defendant, besides to one half gross pleaded, Not Guilty; and as to that he pleaded, that the City of London is an ancient city, and within the same, time out of mind there hath been a Society of Haberdashers; … And pleaded that he was civis et liber homo de civitate et societate illa, and sold the said half gross of playing Cards, being made within the Realm, &c. as it was lawful from him to do; upon which the Plaintiff did demur in Law.… And in this Case two general questions were moved and argued at the Bar, arising upon the two distinct grants in the said Letters Patents, viz:

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1. If the said Grant to the Plaintiff of the sole making of Cards within the Realm were good or not? … As to the first question it was argued on the Plaintiffs side, that the said Grant of the sole making of playing Cards within the Realm, was good for three causes: 1. Because the said playing Cards were not any merchandize, or thing concerning Trade of any necessary use, but things of vanity, and the occasion of expense of time, wasting of patrimonies, and of the livings of many, the loss of the service and work of servants, causes of want, which is the mother of wo and perdition, and therefore it belonged to the Queen … to take away the great abuse, and to take order for the moderate and convenient use of them. 2. In matters of recreation and pleasure the Queen hath a Prerogative given her by the Law to take such order for such moderate use of them as shall seem good to her. 3. The Queen in regard of the great abuse of them, and of the deceit of the subjects by reason of them might utterly suppress them, and by consequence without injury to any one, she might moderate and suffer them at her pleasure. And the reason of the Law which gave the King these Prerogatives in matters of recreation and pleasure was, because the greatest part of men is ready to exceed in them.… As to the first it was argued by the Defendants Counsel, and resolved by Popham Chief Justice, et per totam Curiam that the said Grant to the Plaintiff of the sole making of Cards within the Realm was void; and that for two reasons. 1. The same is a Monopoly, and against the Common Law. 2. That it is against divers Acts of Parliament against the Common Law, for four causes: (1) All Trades, as well Mechanical, as others, which avoid idleness (the bane of the Commonwealth) and exercise men and youths in labor for the maintenance of them and their Families, and for the increase of their livings, to serve the Queen if need be were profitable for the Commonwealth; and therefore the grant to the Plaintiff to have the sole making of them is against the Common Law, and the benefit and liberty of the subject. (2) The sole Trade of any Mechanical Artifice, or any other Monopoly is not only a damage and prejudice to those who exercise the same Trade, but also to all other subjects, for the end of all these Monopolies is for the private gain of the Patentees; and although provisions and cautions be added to moderate them; yet res profecto stulta est nequitiae modus; it is mere folly to think that there is any measure in mischief or wickedness. And therefore there are three inseparable incidents to every Monopoly against the Commonwealth: 1. That the price of the said commodity shall be raised, for he who has the sole selling of any commodity, may make the price as he pleases.… 2. The second incident to a Monopoly is that, after a Monopoly granted, the Commodity is not so good and merchantable as it was before; for the patentee having the sole trade, regards only his private, and not the public well. (3) This same leads to the impoverishing of divers Artificers and others, who before by labor of their hands in their Art or Trade had kept themselves and their families, who now of necessity shall be constrained to live in idleness

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and beggary. And the Common Law in this point agrees with the equity of the Law of God, as appears in Deut. cap. xxiv. ver. 6. Non accipies loco pignoris inferiorem et superiorem molam, quia animam suam apposuit tibi (You shall not take in pledge the lower and the upper millstone, for the same is the miller’s life; by which it appears, that every man’s Trade does maintains his life, and therefore he ought not to be deprived or dispossessed of it, no more than of his life). And the same also agrees with the Civil Law.… (4) This grant is of this first impression, for no such was ever seen to pass [by Letters Patent] under the great Seal of England before this time, and therefore it is a dangerous innovation as well without any or example as without authority of Law, or reason. And it was observed that this grant to the Plaintiff was made for twenty-one years, so that his Executors, Administrators, Wife, or Children, or others inexpert in the Art and Trade shall have this Monopoly. And it cannot be intended, that Edward Darcy Esquire, and Groom of the Queen’s Privy Chamber had any skill in this Mechanical trade in making of Cards, and then it was said, that the Patent made to him was void, for to forbid others to make Cards who have the art and skill, and to give him the only making of them who had no skill to make them, shall make the Patent utterly void, vide 9 Ed. 4. 5 b. And although the grant does extend to his Deputies, and it may be said, he may appoint Deputies who shall be expert; yet if the Grantee himself be inexpert, and the grant be void as to him, he cannot make any Deputy to supply his room, quia quod per me non possum, nec per alium.… And it is evident by the preamble of the said Act of 3 Edw. 4. c. 4. That the bringing in of foreign Cards was forbidden at the grievous complaint of the poor Artificers Cardmakers, who were not able to live of their trades, if foreign Cards should be brought in; as appears by the preamble: By which it appears, that the said Act provides remedy for the maintenance of the trade of making Cards, for as much as the same maintain divers families by their labor and industry. And the like Act is made in 1 Hen. 3. cap. 12. And therefore it was resolved, that the Queen could not suppress the making of Cards within the Realm, no more than the making of Dice, Bowls, Balls, Hawks-hoods, Bells, Lewers, Dog-couples, and other like, which are works of labor and art, although they shall be for pleasure, recreation and pastime, and they cannot be suppressed if not by Parliament, nor a man restrained to use any trade but by Parliament. 37 Edw. 3. cap. 16. 5 Eliz. cap. 4. Also such charter of a Monopoly, against the freedom of Trade and Traffic, is against divers Acts of Parliament, scil. 9 Ed.3. c. 1 & 2. Which for the advancement of the freedom of Trade and Traffic extends to all vendible things, notwithstanding any charter of franchise granted to the contrary, or usage, or custom, or judgment given thereupon; which charters are adjudged by the same Parliament to be of no force, or effect, and made at the request of Prelates, Barons, and Grandees of the Realm, to the oppression of the Commons. And by the Statute of 25 Ed. 3. cap. 2. it is Enacted, that the Act of 9 E. 3. shall be kept, held, and maintained in all points. And it is further thereby enacted, that if any Statute, Charter, Letters Patents, Proclamation, Command, Usage, Allowance, or judgment be made to the contrary, that the same be utterly void, vide Magna Charta cap. 18. 27 Edw. 3. cap. 11, &c.…

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2. Lab. Corp. of America Holdings v. Metabolite Labs., Inc., 548 U.S. 124 (2006) SUPREME COURT OF THE UNITED STATES Dissent by Justice Breyer, with whom Justice Stevens and Justice Souter join This case involves a patent that claims a process for helping to diagnose deficiencies of two vitamins, folate and cobalamin. The process consists of using any test (whether patented or unpatented) to measure the level in a body fluid of an amino acid called homocysteine and then noticing whether its level is elevated above the norm; if so, a vitamin deficiency is likely. The lower courts held that the patent claim is valid. They also found the petitioner, Laboratory Corporation of America Holdings (LabCorp), liable for inducing infringement of the claim when it encouraged doctors to order diagnostic tests for measuring homocysteine. The courts assessed damages. And they enjoined LabCorp from using any tests that would lead the doctors it serves to find a vitamin deficiency by taking account of elevated homocysteine levels. We granted certiorari in this case to determine whether the patent claim is invalid on the ground that it improperly seeks to “claim a monopoly over a basic scientific relationship,” …the relationship between homocysteine and vitamin deficiency. The Court has dismissed the writ as improvidently granted. In my view, we should not dismiss the writ. The question presented is not unusually difficult. We have the authority to decide it. We said that we would do so. The parties and amici have fully briefed the question. And those who engage in medical research, who practice medicine, and who as patients depend upon proper health care might well benefit from this Court’s authoritative answer. The relevant principle of law “[e]xclude[s] from … patent protection … laws of nature, natural phenomena, and abstract ideas.” … This principle finds its roots in both English and American law. … The principle means that Einstein could not have “patent[ed] his celebrated law that E = mc2; nor could Newton have patented the law of gravity.” … Neither can one patent “a novel and useful mathematical formula,” … the motive power of electromagnetism or steam … “the heat of the sun, electricity, or the qualities of metals,” … The justification for the principle does not lie in any claim that “laws of nature” are obvious, or that their discovery is easy, or that they are not useful. To the contrary, research into such matters may be costly and time-consuming; monetary incentives may matter; and the fruits of those incentives and that research may prove of great benefit to the human race. Rather, the reason for the exclusion is that sometimes too much patent protection can impede rather than “promote the Progress of Science and useful Arts,” the constitutional objective of patent and copyright protection. U.S. Const., Article I, §8, cl. 8. The problem arises from the fact that patents do not only encourage research by providing monetary incentives for invention. Sometimes their presence can discourage research by impeding the free exchange of information, for example by forcing researchers to avoid the use of potentially patented ideas, by leading them to conduct

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costly and time-consuming searches of existing or pending patents, by requiring complex licensing arrangements, and by raising the costs of using the patented information, sometimes prohibitively so. Patent law seeks to avoid the dangers of overprotection just as surely as it seeks to avoid the diminished incentive to invent that underprotection can threaten. One way in which patent law seeks to sail between these opposing and risky shoals is through rules that bring certain types of invention and discovery within the scope of patentability while excluding others.… Thus, the Court has recognized that “[p]henomena of nature, though just discovered, mental processes, and abstract intellectual concepts are … the basic tools of scientific and technological work.” … It has treated fundamental scientific principles as “part of the storehouse of knowledge” and manifestations of laws of nature as “free to all men and reserved exclusively to none.” … And its doing so reflects a basic judgment that protection in such cases, despite its potentially positive incentive effects, would too often severely interfere with, or discourage, development and the further spread of useful knowledge itself. In the 1980’s three university doctors, after conducting research into vitamin deficiencies, found a correlation between high levels of homocysteine in the blood and deficiencies of two essential vitamins, folate (folic acid) and cobalamin (vitamin B [12]). They also developed more accurate methods for testing body fluids for homocysteine, using gas chromatography and mass spectrometry. They published their findings in 1985. They obtained a patent. And that patent eventually found its commercial way into the hands of Competitive Technologies, Inc. (CTI), and its licensee Metabolite Laboratories, Inc. (Metabolite), the respondents here. The patent contains several claims that cover the researchers’ new methods for testing homocysteine levels using gas chromatography and mass spectrometry. Supp. App. 30. In 1991, LabCorp (in fact, a corporate predecessor) took a license from Metabolite permitting it to use the tests described in the patent in return for 27.5% of related revenues. Their agreement permitted LabCorp to terminate the arrangement if “a more cost effective commercial alternative is available that does not infringe a valid and enforceable claim of” the patent. App. 305 (emphasis added). Until 1998, LabCorp used the patented tests and paid royalties. By that time, however, growing recognition that elevated homocysteine levels might predict risk of heart disease led to increased testing demand. Other companies began to produce alternative testing procedures. And LabCorp decided to use one of these other procedures—a test devised by Abbott Laboratories that LabCorp concluded was “far superior.” … LabCorp continued to pay royalties to respondents whenever it used the patented tests. But it concluded that Abbott’s test did not fall within the patent’s protective scope. And LabCorp consequently refused to pay royalties when it used the Abbott test. … In response, respondents brought this suit against LabCorp for patent infringement and breach of the license agreement. They did not claim that LabCorp’s use of the

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Abbott test infringed the patent’s claims describing methods for testing for homocysteine. Instead, respondents relied on a broader claim not limited to those tests, namely, claim 13, the sole claim at issue here. … Claim 13, respondents argued, created a protected monopoly over the process of “correlating” test results and potential vitamin deficiencies. The parties agreed that the words “assaying a body fluid” refer to the use of any test at all, whether patented or not patented, that determines whether a body fluid has an “elevated level of total homocysteine.” And at trial, the inventors testified that claim 13’s “correlating” step consists simply of a physician’s recognizing that a test that shows an elevated homocysteine level—by that very fact—shows the patient likely has a cobalamin or folate deficiency. … They added that, because the natural relationship between homocysteine and vitamin deficiency was now well known, such “correlating” would occur automatically in the mind of any competent physician.… The question before us is whether claim 13, as construed and applied in the way I have described in Part I-B, is invalid in light of the “law of nature” principle, described in Part I-A. I believe that we should answer that question. There is a technical procedural reason for not doing so, namely, that LabCorp did not refer in the lower courts to § 101 of the Patent Act, which sets forth subject matter that is patentable, and within the bounds of which the “law of nature” principle most comfortably fits. See 35 U.S.C. § 101 (patent may be obtained for “any new and useful process, machine, manufacture, or composition of matter”); … There is also a practical reason for not doing so, namely, that we might benefit from the views of the Federal Circuit, which did not directly consider the question.… Nonetheless, stronger considerations argue for our reaching a decision. For one thing, the technical procedural objection is tenuous. LabCorp argued the essence of its present claim below. It told the Federal Circuit that claim 13 as construed by the District Court was too “vague” because that construction would allow “anyone” to “obtain a patent on any scientific correlation;” it would permit the respondents “improperly [to] gain a monopoly over a basic scientific fact” despite “settled” law “that no such claim should be allowed.” … LabCorp explicitly stated in its petition for certiorari that, “if the Court allows the Federal Circuit opinion to stand … [respondents] would improperly gain monopolies over basic scientific facts rather than any novel inventions of their own.” … And after considering the Solicitor General’s advice not to hear the case (primarily based upon LabCorp’s failure to refer to 35 U.S.C. § 101), we rejected that advice, thereby “necessarily consider[ing] and reject[ing] that contention as a basis for denying review.” … Finally, I believe that important considerations of the public interest—including that of clarifying the law in this area sooner rather than later—argue strongly for our deciding the question presented now.… I turn to the merits. The researchers who obtained the present patent found that an elevated level of homocysteine in a warm blooded animal is correlated with folate and cobalamin deficiencies. As construed by the Federal Circuit, claim 13 provides those researchers with control over doctors’ efforts to use that correlation to diagnose vitamin deficiencies in a patient. Does the law permit such protection or does claim 13, in the circumstances, amount to an invalid effort to patent a “phenomenon of nature”?

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I concede that the category of non-patentable “[p]henomena of nature,” like the categories of “mental processes” and “abstract intellectual concepts,” is not easy to define.… After all, many a patentable invention rests upon its inventor’s knowledge of natural phenomena; many “process” patents seek to make abstract intellectual concepts workably concrete; and all conscious human action involves a mental process.… But this case is not at the boundary. It does not require us to consider the precise scope of the “natural phenomenon” doctrine or any other difficult issue. In my view, claim 13 is invalid no matter how narrowly one reasonably interprets that doctrine. There can be little doubt that the correlation between homocysteine and vitamin deficiency set forth in claim 13 is a “natural phenomenon.” That is what the petitioner argue. It is what the Solicitor General has told us.… Even were I to assume (purely for argument’s sake) that claim 13 meets certain general definitions of process patentability, however, it still fails the one at issue here: the requirement that it not amount to a simple natural correlation, i.e., a “natural phenomenon.” … At most, respondents have simply described the natural law at issue in the abstract patent language of a “process.” But they cannot avoid the fact that the process is no more than an instruction to read some numbers in light of medical knowledge.… One might, of course, reduce the “process” to a series of steps, e.g., Step 1: gather data; Step 2: read a number; Step 3: compare the number with the norm; Step 4: act accordingly. But one can reduce any process to a series of steps. The question is what those steps embody. And here, aside from the unpatented test, they embody only the correlation between homocysteine and vitamin deficiency that the researchers uncovered. In my view, that correlation is an unpatentable “natural phenomenon,” and I can find nothing in claim 13 that adds anything more of significance. If I am correct in my conclusion in Part III that the patent is invalid, then special public interest considerations reinforce my view that we should decide this case. To fail to do so threatens to leave the medical profession subject to the restrictions imposed by this individual patent and others of its kind. Those restrictions may inhibit doctors from using their best medical judgment; they may force doctors to spend unnecessary time and energy to enter into license agreements; they may divert resources from the medical task of health care to the legal task of searching patent files for similar simple correlations; they may raise the cost of health care while inhibiting its effective delivery.… Even if Part III is wrong, however, it still would be valuable to decide this case. Our doing so would help diminish legal uncertainty in the area, affecting a “substantial number of patent claims.” … It would permit those in the medical profession better to understand the nature of their legal obligations. It would help Congress determine whether legislation is needed. Compare 35 U.S.C. § 287(c) (limiting liability of medical practitioners for performance of certain medical and surgical procedures). In either event, a decision from this generalist Court could contribute to the important ongoing debate, among both specialists and generalists, as to whether the patent system, as currently administered and enforced, adequately reflects the “careful balance” that “the federal patent laws … embod[y].” … For these reasons, I respectfully dissent.

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Chapter 1: The Competition Policies of Acquiring Intellectual Property §1.02 [A]

§1.02[A]

SETTING THE STANDARDS OF DIFFERENTIATION Patents: Genuine Novelty

2. Atlantic Works is an opinion of an enormous importance in U.S. case law, not only because of the strictness it imposes on the Patent Office as regards the “quality” of patents—which should cover genuine invention only, not “every trifling device, every shadow of a shade of an idea”—but also because it had a decisive role in stopping a sort of patent wars that took place in the United States in the second half of the nineteenth century, in which inventors in the farming tool and railroad industries were frequently ambushed by litigation grounded on poor quality patents. 3. The following cases make a point about patents as tools of product differentiation: in order to be eligible for patentability, inventions must not only be significantly new, but also genuinely inventive. This may seem a pleonasm, and it is indeed. What has been set is not that inventions must be inventive, but rather that they must obey a minimum level of inventiveness (or nonobviousness). In other words, only genuinely differentiating inventions should be patentable.

3. Atlantic Works v. Brady, 107 U.S. 192 (1883) SUPREME COURT OF THE UNITED STATES Mr. Justice Bradley delivered the opinion of the Court. This case arises upon a bill in equity filed by Edwin L. Brady against the Atlantic Works, a corporation of Massachusetts, having workshops and a place of business in Boston, praying for an account of profits for building a dredge boat in violation of certain letters patent granted to the complainant bearing date December 17, 1867, and for an injunction to restrain the defendants from making, using, or selling any dredge boat in violation of said letters patent. The bill was filed on the 9th of April, 1868, and had annexed thereto a copy of the patent alleged to be infringed.… The defendants, in their answer, denied the validity of the patent and denied infringement of any valid patent of the complainant.… They further alleged by their answer (as amended) as follows: That the plans and specifications by which the said dredge boat was constructed were not, and the said dredge boat itself was not, a new invention or novel and original, but the same, and the principle of said dredge boat, had been substantially known and publicly used before, to-wit at New Orleans, on the mouth of the Mississippi River, in the year 1859, in the steam dredge boat Enoch Train, by Charles H. Hyde, by Thomas G. Mackie, and William A. Hyde, co-partners, under the firm of Hyde & Mackie, and by Henry Wright, and had also been used and applied in the construction of light draught monitors, so-called, built by the United States government during the late rebellion, and long prior to the alleged patent or invention of the said Brady, and the dates of his patent or caveat, and one of which said light draught monitors was built at the works of these defendants.” …

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The most important question, and first to be considered, is the validity of the patent. It is obvious from reading the specification that the alleged invention consists mainly in attaching a screw (which the patentee calls a mud fan) to the forward end of a propeller dredge boat, provided with tanks for settling her in the water. It is operated by sinking the boat until the screw comes in contact with the mud or sand, which, by the revolution of the screw, is thrown up and mingled with the current. The use of a series of tanks for the purpose of keeping the vessel level while she settles is an old contrivance long used in dry docks, and is shown by the evidence to have been used in many light draught monitors during the late war.… The employment of their screws by propeller ships, driven stern foremost, for the removal of sand and mud accumulated at the mouths of the Mississippi had frequently occurred years before the patentee’s invention is alleged to have been made. Several French steamers, one of which was named the Francis Arago, had used this method there prior to the year 1859. In that year, the Enoch Train, a double propeller—that is, having two screws at her stern—was used in the same way by certain contractors under the government for dredging the mouth of the Mississippi. … It may well be asked at this point where was there any invention in the device described in the patent? Was it invention to place a screw for dredging at the stem of the boat? Nothing more than this was in reality suggested by the patentee. And that was substantially what was done with the French steamers prior to 1859, and with the Enoch Train in that year. They were turned end for end, and the stern was used as the stem, and the screws went forward, working in the bottom deposit in advance of the vessels. When the Enoch Train was procured for the service that she performed, she was ready made, and the contractors, to save time and expense, simply supplied her with a tank in order to settle her to the proper depth, and they found her very serviceable. Had she been built for a dredge boat, with the design of using screws for dredging (as she did use them), can it be doubted that her dredging screw would have been placed forward, instead of turning her stern forward? Would not this have been suggested by ordinary mechanical skill? The plan and mode of operation would have been precisely the same. When, after this, the government proceeded to build a boat expressly for dredging the mouths of the Mississippi, we should naturally expect to find it built as the Essayons was built, with her dredging screws at the stem instead of the stern. The making of them with longer blades than those of the propelling screw, and sharpened at the points, would be a matter of course. No invention would be requisite for any of these arrangements. It seems to us that the whole principle of the Essayons’ construction and furnishment, as well as that of the patent in question, was anticipated by the Enoch Train, if not by the French steamers, and that a patent for that principle, though qualified by the natural incidents and adjuncts of its application, ought not to be sustained. The process of development in manufactures creates a constant demand for new appliances, which the skill of ordinary head workmen and engineers is generally adequate to devise and which, indeed, are the natural and proper outgrowth of such development. Each step forward prepares the way for the next, and each is usually taken by spontaneous trials and attempts in a hundred different places. To grant a single party a monopoly of every slight advance made, except where the exercise of

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invention somewhat above ordinary mechanical or engineering skill is distinctly shown, is unjust in principle and injurious in its consequences. The design of the patent laws is to reward those who make some substantial discovery or invention that adds to our knowledge and makes a step in advance in the useful arts. Such inventors are worthy of all favor. It was never the object of those laws to grant a monopoly for every trifling device, every shadow of a shade of an idea, which would naturally and spontaneously occur to any skilled mechanic or operator in the ordinary progress of manufactures. Such an indiscriminate creation of exclusive privileges tends rather to obstruct than to stimulate invention. It creates a class of speculative schemers who make it their business to watch the advancing wave of improvement and gather its foam in the form of patented monopolies that enable them to lay a heavy tax upon the industry of the country without contributing anything to the real advancement of the art. It embarrasses the honest pursuit of business with fears and apprehensions of concealed liens and unknown liabilities to law suits and vexatious accountings for profits made in good faith.… It is true that Bishop’s patent was not set up by way of defense in the answer, but there is no dispute as to the time it was issued, and that fact, together with Bishop’s testimony, makes it clear that his invention, which was exemplified in the Wiggins Ferry, was made as far back as 1858, anticipating Brady, according to his own showing, for at least seven or eight years. It is clear, then, that Brady did not invent the furnishing of vessels with water tanks so arranged as to sink them on an even keel, for these had been used long before in the light draught monitors; he did not invent the use of revolving screws on a dredging boat for cutting and stirring up the mud and sediment, for these had been used for that purpose on the French steamers, and on the Enoch Train in and prior to 1859; he did not invent the use of water tanks in a dredging boat for sinking the screws down to the bottom or bar to be dredged, for this plan had been adopted in the Enoch Train; he did not invent the application of screws to the forward end of a dredge boat so as to work in advance of the boat, for this had been virtually done on the Enoch Train and was formerly done on the Wiggins Ferry, the plan of which had been invented by Bishop in 1858. What, then, did he invent? Did he make a selection and combination of these elements that would not have occurred to any ordinary skilled engineer called upon, with all this previous knowledge and experience before him, to devise the construction of a strong dredge boat for use at the mouth of the Mississippi? We think not. We think that there is no reasonable ground for any such pretension.… [Brady’s] whole conduct for months, as well as his total silence on the subject of any prior invention made by himself, in all his intercourse with his associates in the contract, with the government officers in charge, and with the superintendents and owners of the foundry where the Wiggins Ferry was fitted up, is the strongest possible proof that no such invention as he claims had been projected by him. The witnesses who speak of his conversations and sketches in December, 1865 and early in 1866, as communicated to them with the utmost freedom, with no apparent object so far as they were concerned, must either be mistaken as to the time or as to the devices described. Interested as he is in the result of the suit, his own testimony cannot be allowed to prevail against a course of conduct so utterly at variance with it. It may be true, but we

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cannot give it effect against what he himself did, and did not do, without disregarding the ordinary laws that govern human conduct.… It further appears that General McAlester, in pursuance of his idea, communicated his plans to the government board of engineers, and during the spring and summer of 1867, commencing as early as April, prepared the plans and specifications according to which the Essayons was afterwards built. It is very strange that the copy of General McAlester’s letters to the department, and several other important exhibits that were put in evidence, have not been inserted in the record used on this appeal. Where the fault lies it is not for us to say. Sufficient appears, however, notwithstanding the evidence adduced to the contrary, consisting mostly of the testimony of the complainant himself, to convince us that Brady derived his those idea from the suggestions of General McAlester, and that the plans for the construction of the Essayons originated entirely with that officer. Our conclusion is that the patent sued on cannot be sustained …

4. Julia P. Hotchkiss v. Miles Greenwood, 52 U.S. 248 (1850) SUPREME COURT OF THE UNITED STATES Mr. Justice NELSON delivered the opinion of the court.… The suit was brought against the defendants for the alleged infringement of a patent for a new and useful improvement in making door and other knobs of all kinds of clay used in pottery, and of porcelain. The improvement consists in making the knobs of clay or porcelain, and in fitting them for their application to doors, locks, and furniture, and various other uses to which they may be adapted; but more especially in this, that of having the cavity in the knob in which the screw or shank is inserted, and by which it is fastened, largest at the bottom and in the form of dovetail, or wedge reversed, and a screw formed therein by pouring in metal in a fused state; and, after referring to drawings of the article thus made, the patentees conclude as follows: What we claim as our invention, and desire to secure by letters patent, is the manufacturing of knobs, as stated in the foregoing specifications, of potter’s clay, or any kind of clay used in pottery, and shaped and finished by molding, turning, burning, and glazing; and also of porcelain.

On the trial evidence was given on the part of the plaintiffs tending to prove the originality and usefulness of the invention, and also the infringement by the defendants; and on the part of the defendants, tending to show the want of originality; and that the mode of fastening the shank to the knob, as claimed by the plaintiffs, had been known and used before, and had been used and applied to the fastening of the shanks to metallic knobs. And upon the evidence being closed, the counsel for the plaintiffs prayed the court to instruct the jury that, although the clay knob, in the form in which it was patented, may have been before known and used, and also the shank and spindle by

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which it is attached may have been before known and used, yet if such shank and spindle had never before been attached in this mode to a knob of potter’s clay, and it required skill and invention to attach the same to a knob of this description, so that they would be firmly united, and make a strong and substantial article, and which, when thus made, would become an article much better and cheaper than the knobs made of metal or other materials, the patent was valid, and the plaintiffs would be entitled to recover. The court refused to give the instruction, and charged the jury that, if knobs of the same form and for the same purposes as that claimed by the patentees, made of metal or other material, had been before known and used; and if the spindle and shank, in the form used by them, had been before known and used, and had been attached to the metallic knob by means of a cavity in the form of dovetail and infusion of melted metal, the same as the mode claimed by the patentees, in the attachment of the shank and spindle to their knob; and the knob of clay was simply the substitution of one material for another, the spindle and shank being the same as before in common use, and also the mode of connecting them by dovetail to the knob the same as before in common use, and no more ingenuity or skill required to construct the knob in this way than that possessed by an ordinary mechanic acquainted with the business, the patent was invalid, and the plaintiffs were not entitled to a verdict. This instruction, it is claimed, is erroneous, and one for which a new trial should be granted. The instruction assumes, and, as was admitted on the argument, properly assumes, that knobs of metal, wood, &c., connected with a shank and spindle, in the mode and by the means used by the patentees in their manufacture, had been before known, and were in public use at the date of the patent; and hence the only novelty that could be claimed on their part was the adaptation of this old contrivance to knobs of potter’s clay or porcelain; in other words, the novelty consisted in the substitution of the clay knob in the place of one made of metal or wood, as the case might be. And in order to appreciate still more clearly the extent of the novelty claimed, it is proper to add, that this knob of potter’s clay is not new, and therefore constitutes no part of the discovery. If it was, a very different question would arise; as it might very well be urged, and successfully urged, that a knob of a new composition of matter, to which this old contrivance had been applied, and which resulted in a new and useful article, was the proper subject of a patent. The novelty would consist in the new composition made practically useful for the purposes of life, by the means and contrivances mentioned. It would be a new manufacture, and none the less so, within the meaning of the patent law, because the means employed to adapt the new composition to a useful purpose was old, or well known. But in the case before us, the knob is not new, nor the metallic shank and spindle, nor the dovetail form of the cavity in the knob, nor the means by which the metallic shank is securely fastened therein. All these were well known, and in common use; and the only thing new is the substitution of a knob of a different material from that heretofore used in connection with this arrangement.

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Now it may very well be, that, by connecting the clay or porcelain knob with the metallic shank in this well-known mode, an article is produced better and cheaper than in the case of the metallic or wood knob; but this does not result from any new mechanical device or contrivance, but from the fact, that the material of which the knob is composed happens to be better adapted to the purpose for which it is made. The improvement consists in the superiority of the material, and which is not new, over that previously employed in making the knob. But this, of itself, can never be the subject of a patent. No one will pretend that a machine, made, in whole or in part, of materials better adapted to the purpose for which it is used than the materials of which the old one is constructed, and for that reason better and cheaper, can be distinguished from the old one; or, in the sense of the patent law, can entitle the manufacturer to a patent. The difference is formal, and destitute of ingenuity or invention. It may afford evidence of judgment and skill in the selection and adaptation of the materials in the manufacture of the instrument for the purposes intended, but nothing more. I remember having tried an action in the Circuit in the District of Connecticut some years since, brought upon a patent for an improvement in manufacturing buttons. The foundation of the button was wood, and the improvement consisted in covering the face with tin, and which was bent over the rim so as to be firmly secured to the wood. Holes were perforated in the center, by which the button could be fastened to the garment. It was a cheap and useful article for common wear, and in a good deal of demand. On the trial, the defendant produced a button, which had been taken off a coat on which it had been worn before the Revolution, made precisely in the same way, except the foundation was bone. The case was given up on the part of the plaintiff. Now the new article was better and cheaper than the old one; but I did not then suppose, nor do I now, that this could make any difference, unless it was the result of some new contrivance or arrangement in the manufacture. Certainly it could not, for the reason that the materials with which it was made were of a superior quality, or between adapted to the uses to which the article is applied. It seemed to be supposed, on the argument, that this mode of fastening the shank to the clay knob produced a new and peculiar effect upon the article, beyond that produced when applied to the metallic knob, inasmuch as the fused metal by which the shank was fastened to the knob prevented the shank from acting immediately upon the knob, it being enclosed and firmly held by the metal; that for this reason the clay or porcelain knob was not so liable to crack or be broken, but was made firm and strong, and more durable. This is doubtless true. But the peculiar effect thus referred to is not distinguishable from that which would exist in the case of the wood knob, or one of bone or ivory, or of other materials that might be mentioned. Now if the foregoing view of the improvement claimed in this patent be correct, it is quite apparent that there was no error in the submission of the questions presented at the trial to the jury; for unless more ingenuity and skill in applying the old method of fastening the shank and the knob were required in the application of it to the clay or porcelain knob than were possessed by an ordinary mechanic acquainted with the

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business, there was an absence of that degree of skill and ingenuity which constitute essential elements of every invention. In other words, the improvement is the work of the skilful mechanic, not that of the inventor.…

5. Graham v. John Deere Co. of Kansas City, 383 U.S. 1 (1966) (together with No. 37, Calmar, Inc. v. Cook Chemical Co., and No. 43, Colgate-Palmolive Co. v. Cook Chemical Co., also on certiorari to the same court) SUPREME COURT OF THE UNITED STATES Mr. Justice Clark delivered the opinion of the Court. After a lapse of fifteen years, the Court again focuses its attention on the patentability of inventions under the standard of Article I, §8, cl. 8, of the Constitution and under the conditions prescribed by the laws of the United States. Since our last expression on patent validity, A. & P. Tea Co. v. Supermarket Corp., 340 U.S. 147 (1950), the Congress has for the first time expressly added a third statutory dimension to the two requirements of novelty and utility that had been the sole statutory test since the Patent Act of 1793. This is the test of obviousness, i.e., whether “the subject matter sought to be patented and the prior art are such that the subject matter as a whole would have been obvious at the time the invention was made to a person having ordinary skill in the art to which said subject matter pertains. Patentability shall not be negatived by the manner in which the invention was made.” §103 of the Patent Act of 1952, 35 U.S.C. §103 (1964 ed.). The questions, involved in each of the companion cases before us, are what effect the 1952 Act had upon traditional statutory and judicial tests of patentability and what definitive tests are now required. We have concluded that the 1952 Act was intended to codify judicial precedents embracing the principle long ago announced by this Court in Hotchkiss v. Greenwood, 11 How. 248 (1851), and that, while the clear language of §103 places emphasis on an inquiry into obviousness, the general level of innovation necessary to sustain patentability remains the same: (a) No. 11, Graham v. John Deere Co., an infringement suit by petitioners, presents a conflict between two Circuits over the validity of a single patent on a “Clamp for vibrating Shank Plows.” The invention, a combination of old mechanical elements, involves a device designed to absorb shock from plow shanks as they plow through rocky soil and thus to prevent damage to the plow. In 1955, the Fifth Circuit had held the patent valid under its rule that when a combination produces an “old result in a cheaper and otherwise more advantageous way,” it is patentable.… In 1964, the Eighth Circuit held, in the case at bar, that there was no new result in the patented combination and that the patent was, therefore, not valid.… We granted certiorari, … Although we have determined that neither Circuit applied the correct test, we conclude that

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the patent is invalid under §103 and, therefore, we affirm the judgment of the Eighth Circuit. (b) No. 37, Calmar, Inc. v. Cook Chemical Co., and No. 43, Colgate-Palmolive Co. v. Cook Chemical Co., both from the Eighth Circuit, were separate declaratory judgment actions, but were filed contemporaneously. Petitioner in Calmar is the manufacturer of a finger-operated sprayer with a “hold-down” cap of the type commonly seen on grocers’ shelves inserted in bottles of insecticides and other liquids prior to shipment. Petitioner in Colgate-Palmolive is a purchaser of the sprayers and uses them in the distribution of its products. Each action sought a declaration of invalidity and noninfringement of a patent on similar sprayers issued to Cook Chemical as assignee of Baxter I. Scoggin, Jr., the inventor. By cross-action, Cook Chemical claimed infringement. The actions were consolidated for trial and the patent was sustained by the District Court.… The Court of Appeals affirmed … and we granted certiorari … We reverse. Manifestly, the validity of each of these patents turns on the facts. The basic problems, however, are the same in each case and require initially a discussion of the constitutional and statutory provisions covering the patentability of the inventions. At the outset it must be remembered that the federal patent power stems from a specific constitutional provision that authorizes the Congress “To promote the Progress of … useful Arts, by securing for limited Times to … Inventors the exclusive Right to their … Discoveries.” Article I, §8, cl. 8. n. 1. The clause is both a grant of power and a limitation. This qualified authority, unlike the power often exercised in the sixteenth and seventeenth centuries by the English Crown, is limited to the promotion of advances in the “useful arts.” It was written against the backdrop of the practices—eventually curtailed by the Statute of Monopolies—of the Crown in granting monopolies to court favorites in goods or businesses that had long before been enjoyed by the public.… The Congress in the exercise of the patent power may not overreach the restraints imposed by the stated constitutional purpose. Nor may it enlarge the patent monopoly without regard to the innovation, advancement or social benefit gained thereby. Moreover, Congress may not authorize the issuance of patents whose effects are to remove existent knowledge from the public domain, or to restrict free access to materials already available. Innovation, advancement, and things that add to the sum of useful knowledge are inherent requisites in a patent system that by constitutional command must “promote the Progress of … useful Arts.” This is the standard expressed in the Constitution and it may not be ignored. And it is in this light that patent validity “requires reference to a standard written into the Constitution.” A. & P. Tea Co. v. Supermarket Corp., supra, at 154 (concurring opinion). Within the limits of the constitutional grant, the Congress may, of course, implement the stated purpose of the Framers by selecting the policy that in its judgment best effectuates the constitutional aim. This is but a corollary to the grant to Congress of any Article I power. … Within the scope established by the Constitution, Congress may set out conditions and tests for patentability.… It is the duty of the Commissioner of Patents and of the courts in the administration of the patent system to give effect to

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the constitutional standard by appropriate application, in each case, of the statutory scheme of the Congress. Congress quickly responded to the bidding of the Constitution by enacting the Patent Act of 1790 during the second session of the First Congress. It created an agency in the Department of State headed by the Secretary of State, the Secretary of the Department of War and the Attorney General, any two of whom could issue a patent for a period not exceeding fourteen years to any petitioner that “hath … invented or discovered any useful art, manufacture, … or device, or any improvement therein not before known or used” if the board found that “the invention or discovery [was] sufficiently useful and important .…” 1 Stat. 110. This group, whose members administered the patent system along with their other public duties, was known by its own designation as “Commissioners for the Promotion of Useful Arts.” Thomas Jefferson, who as Secretary of State was a member of the group, was its moving spirit and might well be called the “first administrator of our patent system.” … He was not only an administrator of the patent system under the 1790 Act, but was also the author of the 1793 Patent Act. In addition, Jefferson was himself an inventor of great note. His unpatented improvements on plows, to mention but one line of his inventions, won acclaim and recognition on both sides of the Atlantic. Because of his active interest and influence in the early development of the patent system, Jefferson’s views on the general nature of the limited patent monopoly under the Constitution, as well as his conclusions as to conditions for patentability under the statutory scheme, are worthy of note. Jefferson, like other Americans, had an instinctive aversion to monopolies. It was a monopoly on tea that sparked the Revolution and Jefferson certainly did not favor an equivalent form of monopoly under the new government. His abhorrence of monopoly extended initially to patents as well. From France, he wrote to Madison (July 1788) urging a Bill of Rights provision restricting monopoly, and as against the argument that limited monopoly might serve to incite “ingenuity,” he argued forcefully that “the benefit even of limited monopolies is too doubtful to be opposed to that of their general suppression,” … His views ripened, however, and in another letter to Madison (Aug. 1789) after the drafting of the Bill of Rights, Jefferson stated that he would have been pleased by an express provision in this form: “Art. 9. Monopolies may be allowed to persons for their own productions in literature & their own inventions in the arts, for a term not exceeding — years but for no longer term & no other purpose.” … And he later wrote: Certainly an inventor ought to be allowed a right to the benefit of his invention for some certain time.… Nobody wishes more than I do that ingenuity should receive a liberal encouragement.…

Jefferson’s philosophy on the nature and purpose of the patent monopoly is expressed in a letter to Isaac McPherson (Aug. 1813), a portion of which we set out in the margin. He rejected a natural-rights theory in intellectual property rights and clearly recognized the social and economic rationale of the patent system. The patent monopoly was not designed to secure to the inventor his natural right in his discoveries. Rather, it was a reward, an inducement, to bring forth new knowledge. The grant of an exclusive right

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to an invention was the creation of society—at odds with the inherent free nature of disclosed ideas—and was not to be freely given. Only inventions and discoveries that furthered human knowledge, and were new and useful, justified the special inducement of a limited private monopoly. Jefferson did not believe in granting patents for small details, obvious improvements, or frivolous devices. His writings evidence his insistence upon a high level of patentability. As a member of the patent board for several years, Jefferson saw clearly the difficulty in “drawing a line between the things which are worth to the public the embarrassment of an exclusive patent, and those which are not.” The board on which he served sought to draw such a line and formulated several rules that are preserved in Jefferson’s correspondence. Despite the board’s efforts, Jefferson saw “with what slow progress a system of general rules could be matured.” Because of the “abundance” of cases and the fact that the investigations occupied “more time of the members of the board than they could spare from higher duties, the whole was turned over to the judiciary, to be matured into a system, under which every one might know when his actions were safe and lawful.” … Apparently Congress agreed with Jefferson and the board that the courts should develop additional conditions for patentability. Although the Patent Act was amended, revised, or codified some 50 times between 1790 and 1950, Congress steered clear of a statutory set of requirements other than the bare novelty and utility tests reformulated in Jefferson’s draft of the 1793 Patent Act. The difficulty of formulating conditions for patentability was heightened by the generality of the constitutional grant and the statutes implementing it, together with the underlying policy of the patent system that “the things which are worth to the public the embarrassment of an exclusive patent,” as Jefferson put it, must outweigh the restrictive effect of the limited patent monopoly. The inherent problem was to develop some means of weeding out those inventions that would not be disclosed or devised but for the inducement of a patent. This Court formulated a general condition of patentability in 1851 in Hotchkiss v. Greenwood, … Hotchkiss, by positing the condition that a patentable invention evidence more ingenuity and skill than that possessed by an ordinary mechanic acquainted with the business, merely distinguished between new and useful innovations that were capable of sustaining a patent and those that were not. The Hotchkiss test laid the cornerstone of the judicial evolution suggested by Jefferson and left to the courts by Congress. The language in the case, and in those that followed, gave birth to “invention” as a word of legal art signifying patentable inventions. Yet, as this Court has observed, “the truth is the word [‘invention’] cannot be defined in such manner as to afford any substantial aid in determining whether a particular device involves an exercise of the inventive faculty or not.” … Its use as a label brought about a large variety of opinions as to its meaning both in the Patent Office, in the courts, and at the bar. The Hotchkiss formulation, however, lies not in any label, but in its functional approach to questions of patentability. In practice, Hotchkiss has required a comparison between the subject matter of the patent, or patent application, and the background skill of the calling. It has been from this comparison that patentability was in each case determined.

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The 1952 Patent Act. The Act sets out the conditions of patentability in three sections. An analysis of the structure of these three sections indicates that patentability is dependent upon three explicit conditions: novelty and utility as articulated and defined in §101 and §102, and nonobviousness, the new statutory formulation, as set out in §103. The first two sections, which trace closely the 1874 codification, express the “new and useful” tests that have always existed in the statutory scheme and, for our purposes here, need no clarification. The pivotal section around that the present controversy centers is §103.… The section is cast in relatively unambiguous terms. Patentability is to depend, in addition to novelty and utility, upon the “non-obvious” nature of the “subject matter sought to be patented” to a person having ordinary skill in the pertinent art. The first sentence of this section is strongly reminiscent of the language in Hotchkiss. Both formulations place emphasis on the pertinent art existing at the time the invention was made and both are implicitly tied to advances in that art. The major distinction is that Congress has emphasized “nonobviousness” as the operative test of the section, rather than the less definite “invention” language of Hotchkiss that Congress thought had led to “a large variety” of expressions in decisions and writings. In the title itself the Congress used the phrase “Conditions for patentability; nonobvious subject matter” (italics added), thus focusing upon “non-obviousness” rather than “invention.” The Senate and House Reports … reflect this emphasis in these terms: Section 103, for the first time in our statute, provides a condition that exists in the law and has existed for more than 100 years, but only by reason of decisions of the courts. An invention that has been made, and which is new in the sense that the same thing has not been made before, may still not be patentable if the difference between the new thing and what was known before is not considered sufficiently great to warrant a patent. That has been expressed in a large variety of ways in decisions of the courts and in writings. Section 103 states this requirement in the title. It refers to the difference between the subject matter sought to be patented and the prior art, meaning what was known before as described in section 102. If this difference is such that the subject matter as a whole would have been obvious at the time to a person skilled in the art, then the subject matter cannot be patented. That provision paraphrases language that has often been used in decisions of the courts, and the section is added to the statute for uniformity and definiteness. This section should have a stabilizing effect and minimize great departures that have appeared in some cases.…

It is undisputed that this section was, for the first time, a statutory expression of an additional requirement for patentability, originally expressed in Hotchkiss. It also seems apparent that Congress intended by the last sentence of §103 to abolish the test it believed this Court announced in the controversial phrase “flash of creative genius,” used in Cuno Corp. v. Automatic Devices Corp., 314 U.S. 84 (1941). It is contended, however, by some of the parties and by several of the amici that the first sentence of §103 was intended to sweep away judicial precedents and to lower the level of patentability. Others contend that the Congress intended to codify the

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essential purpose reflected in existing judicial precedents—the rejection of insignificant variations and innovations of a commonplace sort—and also to focus inquiries under §103 upon nonobviousness, rather than upon “invention,” as a means of achieving more stability and predictability in determining patentability and validity. The Reviser’s Note to this section, with apparent reference to Hotchkiss, recognizes that judicial requirements as to “lack of patentable novelty [have] been followed since at least as early as 1850.” The note indicates that the section was inserted because it “may have some stabilizing effect, and also to serve as a basis for the addition at a later time of some criteria which may be worked out.” To this same effect are the reports of both Houses, supra, which state that the first sentence of the section “paraphrases language which has often been used in decisions of the courts, and the section is added to the statute for uniformity and definiteness.” We believe that this legislative history, as well as other sources, shows that the revision was not intended by Congress to change the general level of patentable invention. We conclude that the section was intended merely as a codification of judicial precedents embracing the Hotchkiss condition, with congressional directions that inquiries into the obviousness of the subject matter sought to be patented are a prerequisite to patentability. Approached in this light, the §103 additional condition, when followed realistically, will permit a more practical test of patentability. The emphasis on nonobviousness is one of inquiry, not quality, and, as such, comports with the constitutional strictures. While the ultimate question of patent validity is one of law, A. & P. Tea Co. v. Supermarket Corp., supra, at 155, the §103 condition, which is but one of three conditions, each of that must be satisfied, lends itself to several basic factual inquiries. Under §103, the scope and content of the prior art are to be determined; differences between the prior art and the claims at issue are to be ascertained; and the level of ordinary skill in the pertinent art resolved. Against this background, the obviousness or nonobviousness of the subject matter is determined. Such secondary considerations as commercial success, long felt but unsolved needs, failure of others, etc., might be utilized to give light to the circumstances surrounding the origin of the subject matter sought to be patented. As indicia of obviousness or nonobviousness, these inquiries may have relevancy.… This is not to say, however, that there will not be difficulties in applying the nonobviousness test. What is obvious is not a question upon which there is likely to be uniformity of thought in every given factual context. The difficulties, however, are comparable to those encountered daily by the courts in such frames of reference as negligence and scienter, and should be amenable to a case-by-case development. We believe that strict observance of the requirements laid down here will result in that uniformity and definiteness that Congress called for in the 1952 Act. While we have focused attention on the appropriate standard to be applied by the courts, it must be remembered that the primary responsibility for sifting out unpatentable material lies in the Patent Office. To await litigation is—for all practical purposes—to debilitate the patent system. We have observed a notorious difference

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between the standards applied by the Patent Office and by the courts. While many reasons can be adduced to explain the discrepancy, one may well be the free rein often exercised by Examiners in their use of the concept of “invention.” In this connection we note that the Patent Office is confronted with a most difficult task. Almost 100,000 applications for patents are filed each year. Of these, about 50,000 are granted and the backlog now runs well over 200,000.… This is itself a compelling reason for the Commissioner to strictly adhere to the 1952 Act as interpreted here. This would, we believe, not only expedite disposition but bring about a closer concurrence between administrative and judicial precedent. Although we conclude here that the inquiry that the Patent Office and the courts must make as to patentability must be beamed with greater intensity on the requirements of §103, it bears repeating that we find no change in the general strictness with which the overall test is to be applied. We have been urged to find in §103 a relaxed standard, supposedly a congressional reaction to the “increased standard” applied by this Court in its decisions over the last 20 or 30 years. The standard has remained invariable in this Court. Technology, however, has advanced—and with remarkable rapidity in the last fifty years. Moreover, the ambit of applicable art in given fields of science has widened by disciplines unheard of a half century ago. It is but an evenhanded application to require that those persons granted the benefit of a patent monopoly be charged with an awareness of these changed conditions. The same is true of the less technical, but still useful arts. He who seeks to build a better mousetrap today has a long path to tread before reaching the Patent Office. We now turn to the application of the conditions found necessary for patentability to the cases involved here:

[1]

The Patent in Issue in No. 11, Graham v. John Deere Co.

This patent, No. 2,627,798 (hereinafter “‘798 patent”) relates to a spring clamp that permits plow shanks to be pushed upward when they hit obstructions in the soil, and then springs the shanks back into normal position when the obstruction is passed over.… Chisel plows, as they are called, were developed for plowing in areas where the ground is relatively free from rocks or stones. Originally, the shanks were rigidly attached to the plow frames. When such plows were used in the rocky, glacial soils of some of the Northern States, they were found to have serious defects. As the chisels hit buried rocks, a vibratory motion was set up and tremendous forces were transmitted to the shank near its connection to the frame. The shanks would break. Graham, one of the petitioners, sought to meet that problem, and in 1950 obtained a patent, U.S. No. 2,493,811 (hereinafter “‘811”), on a spring clamp that solved some of the difficulties. Graham and his companies manufactured and sold the ‘811 clamps. In 1950, Graham modified the ‘811 structure and filed for a patent. That patent, the one in issue, was granted in 1953. This suit against competing plow manufacturers resulted from charges by petitioners that several of respondents’ devices infringed the ‘798 patent.

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Five prior patents indicating the state of the art were cited by the Patent Office in the prosecution of the ‘798 application. Four of these patents, 10 other United States patents and two prior-use spring-clamp arrangements not of record in the ‘798 file wrapper were relied upon by respondents as revealing the prior art. The District Court and the Court of Appeals found that the prior art “as a whole in one form or another contains all of the mechanical elements of the 798 Patent.” One of the prior-use clamp devices not before the Patent Examiner—Glencoe—was found to have “all of the elements.” … Graham did not urge before the Patent Office the greater “flexing” qualities of the ‘798 patent arrangement that he so heavily relied on in the courts. The sole element in patent ‘798 which petitioners argue before us is the interchanging of the shank and hinge plate and the consequences flowing from this arrangement. The contention is that this arrangement—which petitioners claim is not disclosed in the prior art—permits the shank to flex under stress for its entire length.… Petitioners say that this difference in flex, though small, effectively absorbs the tremendous forces of the shock of obstructions whereas prior art arrangements failed. We cannot agree with petitioners. We assume that the prior art does not disclose such an arrangement as petitioners claim in patent ‘798. Still we do not believe that the argument on which petitioners’ contention is bottomed supports the validity of the patent. The tendency of the shank to flex is the same in all cases.… Certainly a person having ordinary skill in the prior art, given the fact that the flex in the shank could be utilized more effectively if allowed to run the entire length of the shank, would immediately see that the thing to do was what Graham did, i.e., invert the shank and the hinge plate. Petitioners’ argument basing validity on the free-flex theory raised for the first time on appeal is reminiscent of Lincoln Engineering Co. v. Stewart-Warner Corp., 303 U.S. 545 (1938), where the Court called such an effort “an afterthought. No such function … is hinted at in the specifications of the patent. If this were so vital an element in the functioning of the apparatus it is strange that all mention of it was omitted.” …

[2]

The Patent in Issue in No. 37, Calmar, Inc. v. Cook Chemical Co., and in No. 43, Colgate-Palmolive Co. v. Cook Chemical Co.

The single patent involved in these cases relates to a plastic finger sprayer with a “hold-down” lid used as a built-in dispenser for containers or bottles packaging liquid products, principally household insecticides. Only the first two of the four claims in the patent are involved here and we, therefore, limit our discussion to them.… ‘In essence the device here combines a finger-operated pump sprayer, mounted in a container or bottle by means of a container cap, with a plastic overcap that screws over the top of and depresses the sprayer … The device, called a shipper-sprayer in the industry, is sold as an integrated unit with the overcap in place enabling the insecticide manufacturer to install it on the

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container or bottle of liquid in a single operation in an automated bottling process. The ultimate consumer simply unscrews and discards the overcap, the pump plunger springs up and the sprayer is ready for use. For many years manufacturers engaged in the insecticide business had faced a serious problem in developing sprayers that could be integrated with the containers or bottles in which the insecticides were marketed. Originally, insecticides were applied through the use of tin sprayers, not supplied by the manufacturer. In 1947, Cook Chemical, an insecticide manufacturer, began to furnish its customers with plastic pump dispensers purchased from Calmar. The dispenser was an unpatented fingeroperated device mounted in a perforated cardboard holder and hung over the neck of the bottle or container. It was necessary for the ultimate consumer to remove the cap of the container and insert and attach the sprayer to the latter for use. Hanging the sprayer on the side of the container or bottle was both expensive and troublesome. Packaging for shipment had to be a hand operation, and breakage and pilferage as well as the loss of the sprayer during shipment and retail display often occurred. Cook Chemical urged Calmar to develop an integrated sprayer that could be mounted directly in a container or bottle during the automated filling process and that would not leak during shipment or retail handling. Calmar did develop some such devices but for various reasons they were not completely successful. The situation was aggravated in 1954 by the entry of Colgate-Palmolive into the insecticide trade with its product marketed in aerosol spray cans. These containers, which used compressed gas as a propellent to dispense the liquid, did not require pump sprayers. During the same year Calmar was acquired by the Drackett Company. Cook Chemical became apprehensive of its source of supply for pump sprayers and decided to manufacture its own through a subsidiary, Bakan Plastics, Inc. Initially, it copied its design from the unpatented Calmar sprayer, but an officer of Cook Chemical, Scoggin, was assigned to develop a more efficient device. By 1956, Scoggin had perfected the shipper-sprayer in suit and a patent was granted in 1959 to Cook Chemical as his assignee. In the interim Cook Chemical began to use Scoggin’s device and also marketed it to the trade. The device was well received and soon became widely used. In the meanwhile, Calmar employed two engineers, Corsette and Cooprider, to perfect a shipper-sprayer and by 1958 it began to market its SS-40, a device very much similar to Scoggin’s. When the Scoggin patent issued, Cook Chemical charged Calmar’s SS-40 with infringement and this suit followed.… Only two of the five prior art patents cited by the Patent Office Examiner in the prosecution of Scoggin’s application are necessary to our discussion, i.e., Lohse U.S. Patent No. 2,119,884 (1938) and Mellon U.S. Patent No. 2,586,687 (1952).… The Lohse patent is a shipper-sprayer designed to perform the same function as Scoggin’s device. The differences, recognized by the District Court, are found in the overcap seal that in Lohse is formed by the skirt of the overcap engaging a washer or gasket that rests upon the upper surface of the container cap. The court emphasized that in Lohse “there are no seals above the threads and below the sprayer head.” … The Mellon patent, however, discloses the idea of effecting a seal above the threads of the

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overcap. Mellon’s device, likewise a shipper-sprayer, differs from Scoggin’s in that its overcap screws directly on the container, and a gasket, rather than a rib, is used to effect the seal.… Let us first return to the fundamental disagreement between the parties. Cook Chemical, as we noted at the outset, urges that the invention must be viewed as the overall combination, or—putting it in the language of the statute—that we must consider the subject matter sought to be patented taken as a whole. With this position, taken in the abstract, there is, of course, no quibble. But the history of the prosecution of the Scoggin application in the Patent Office reveals a substantial divergence in respondent’s present position. As originally submitted, the Scoggin application contained fifteen claims that in very broad terms claimed the entire combination of spray pump and overcap. No mention of, or claim for, the sealing features was made. All fifteen claims were rejected by the Examiner because (1) the applicant was vague and indefinite as to what the invention was, and (2) the claims were met by Lohse. Scoggin canceled these claims and submitted new ones. Upon a further series of rejections and new submissions, the Patent Office Examiner, after an office interview, at last relented. It is crystal clear that after the first rejection, Scoggin relied entirely upon the sealing arrangement as the exclusive patentable difference in his combination. It is likewise clear that it was on that feature that the Examiner allowed the claims.… Cook Chemical insists, however, that the development of a workable shippersprayer eluded Calmar, who had long and unsuccessfully sought to solve the problem. And, further, that the long-felt need in the industry for a device such as Scoggin’s together with its wide commercial success supports its patentability. These legal inferences or subtests do focus attention on economic and motivational rather than technical issues and are, therefore, more susceptible of judicial treatment than are the highly technical facts often present in patent litigation.… Such inquiries may lend a helping hand to the judiciary that, as Mr. Justice Frankfurter observed, is most ill-fitted to discharge the technological duties cast upon it by patent legislation.… They may also serve to “guard against slipping into use of hindsight,” … and to resist the temptation to read into the prior art the teachings of the invention in issue. However, these factors do not, in the circumstances of this case, tip the scales of patentability. The Scoggin invention, as limited by the Patent Office and accepted by Scoggin, rests upon exceedingly small and quite nontechnical mechanical differences in a device that was old in the art. At the latest, those differences were rendered apparent in 1953 by the appearance of the Livingstone patent, and unsuccessful attempts to reach a solution to the problems confronting Scoggin made before that time became wholly irrelevant. It is also irrelevant that no one apparently chose to avail himself of knowledge stored in the Patent Office and readily available by the simple expedient of conducting a patent search—a prudent and nowadays common preliminary to well organized research. Mast, Foos & Co. v. Stover Mfg. Co., 177 U.S. 485 (1900). To us, the limited claims of the Scoggin patent are clearly evident from the prior art as it stood at the time of the invention.

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We conclude that the claims in issue in the Scoggin patent must fall as not meeting the test of §103, since the differences between them and the pertinent prior art would have been obvious to a person reasonably skilled in that art.…

[B]

Copyright: Genuine Creativity/Originality 4. Copyright protection, like patent and trademark protection, or, for that matter, any other type of intellectual property protection, is also about differentiation in order to promote and preserve competition. 5. Are originality and creativity synonymous? Feist Publications seems to take those two terms as having the same meaning. However, one might find different meanings in those two words, which are more in line with their ethimology. In this way, originality would stand for the necessary link between the work and its origin, i.e., the author. And creativity would represent the modicum of inspiration necessary for a work to be distinct from what exists in the public domain. Here, as we found in the field of patents, not any level of creativity would be sufficient, even if the level would be necessarily lower that the amount of creativity required for inventions. In other words, a work may be original—in the sense that it can be attributed to a certain origin, i.e., to an author—and yet fail to be eligible for copyright protection, for lack of creativity. These two layers of substantive requirements for copyright protection may perhaps make sense, but cours do not take them into consideration, which leads to sometimes confusing discussions on copyrightability. 6. Courts unanimously accept that the level of creativity that permits copyright protection is low. However, where copyright is expanded into technical ideas—or, at least, to expressions of technical ideas forming a sort of an amalgam, such as software and the organization of technical databases—a low level of requirement may be dangerous and generate situations of too much protection.

6. Feist Publications, Inc. v. Rural Telephone Service Co., Inc., 499 U.S. 340 (1991) SUPREME COURT OF THE UNITED STATES O’Connor, J., delivered the opinion of the Court, in which Rehnquist, C. J., and White, Marshall, Stevens, Scalia, Kennedy, and Souter, JJ., joined. Blackmun, J., concurred in the judgment. This case requires us to clarify the extent of copyright protection available to telephone directory white pages. Rural Telephone Service Company, Inc., is a certified public utility that provides telephone service to several communities in northwest Kansas. It is subject to a state regulation that requires all telephone companies operating in Kansas to issue annually an updated telephone directory. Accordingly, as a condition of its monopoly franchise, Rural publishes a typical telephone directory, consisting of white pages and yellow

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pages. The white pages list in alphabetical order the names of Rural’s subscribers, together with their towns and telephone numbers. The yellow pages list Rural’s business subscribers alphabetically by category and feature classified advertisements of various sizes. Rural distributes its directory free of charge to its subscribers, but earns revenue by selling yellow pages advertisements. Feist Publications, Inc., is a publishing company that specializes in area-wide telephone directories. Unlike a typical directory, which covers only a particular calling area, Feist’s area-wide directories cover a much larger geographical range, reducing the need to call directory assistance or consult multiple directories. The Feist directory that is the subject of this litigation covers 11 different telephone service areas in 15 counties and contains 46,878 white pages listings—compared to Rural’s approximately 7,700 listings. Like Rural’s directory, Feist’s is distributed free of charge and includes both white pages and yellow pages. Feist and Rural compete vigorously for yellow pages advertising. As the sole provider of telephone service in its service area, Rural obtains subscriber information quite easily. Persons desiring telephone service must apply to Rural and provide their names and addresses; Rural then assigns them a telephone number. Feist is not a telephone company, let alone one with monopoly status, and therefore lacks independent access to any subscriber information. To obtain white pages listings for its area-wide directory, Feist approached each of the eleven telephone companies operating in northwest Kansas and offered to pay for the right to use its white pages listings. Of the eleven telephone companies, only Rural refused to license its listings to Feist. Rural’s refusal created a problem for Feist, as omitting these listings would have left a gaping hole in its area-wide directory, rendering it less attractive to potential yellow pages advertisers. In a decision subsequent to that which we review here, the District Court determined that this was precisely the reason Rural refused to license its listings. The refusal was motivated by an unlawful purpose “to extend its monopoly in telephone service to a monopoly in yellow pages advertising.” … Unable to license Rural’s white pages listings, Feist used them without Rural’s consent. Feist began by removing several thousand listings that fell outside the geographic range of its area-wide directory, then hired personnel to investigate the 4,935 that remained. These employees verified the data reported by Rural and sought to obtain additional information. As a result, a typical Feist listing includes the individual’s street address; most of Rural’s listings do not. Notwithstanding these additions, however, 1,309 of the 46,878 listings in Feist’s 1983 directory were identical to listings in Rural’s 1982-1983 white pages.… Four of these were fictitious listings that Rural had inserted into its directory to detect copying. Rural sued for copyright infringement in the District Court for the District of Kansas taking the position that Feist, in compiling its own directory, could not use the information contained in Rural’s white pages. Rural asserted that Feist’s employees were obliged to travel door-to-door or conduct a telephone survey to discover the same information for themselves. Feist responded that such efforts were economically

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impractical and, in any event, unnecessary because the information copied was beyond the scope of copyright protection. The District Court granted summary judgment to Rural, explaining that “courts have consistently held that telephone directories are copyrightable” and citing a string of lower court decisions.… In an unpublished opinion, the Court of Appeals for the Tenth Circuit affirmed “for substantially the reasons given by the district court.” … We granted certiorari … to determine whether the copyright in Rural’s directory protects the names, towns, and telephone numbers copied by Feist. This case concerns the interaction of two well-established propositions. The first is that facts are not copyrightable; the other, that compilations of facts generally are. Each of these propositions possesses an impeccable pedigree. That there can be no valid copyright in facts is universally understood. The most fundamental axiom of copyright law is that “no author may copyright his ideas or the facts he narrates.” Harper & Row, Publishers, Inc. v. Nation Enterprises, 471 U.S. 539, 556 (1985). Rural wisely concedes this point, noting in its brief that “facts and discoveries, of course, are not themselves subject to copyright protection.” … At the same time, however, it is beyond dispute that compilations of facts are within the subject matter of copyright. Compilations were expressly mentioned in the Copyright Act of 1909, and again in the Copyright Act of 1976. There is an undeniable tension between these two propositions. Many compilations consist of nothing but raw data—i.e., wholly factual information not accompanied by any original written expression. On what basis may one claim a copyright in such a work? Common sense tells us that 100 uncopyrightable facts do not magically change their status when gathered together in one place. Yet copyright law seems to contemplate that compilations that consist exclusively of facts are potentially within its scope. The key to resolving the tension lies in understanding why facts are not copyrightable. The sine qua non of copyright is originality. To qualify for copyright protection, a work must be original to the author. See Harper & Row, supra, at 547-549. Original, as the term is used in copyright, means only that the work was independently created by the author (as opposed to copied from other works), and that it possesses at least some minimal degree of creativity.… To be sure, the requisite level of creativity is extremely low; even a slight amount will suffice. The vast majority of works make the grade quite easily, as they possess some creative spark, “no matter how crude, humble or obvious” it might be.… Originality does not signify novelty; a work may be original even though it closely resembles other works so long as the similarity is fortuitous, not the result of copying. To illustrate, assume that two poets, each ignorant of the other, compose identical poems. Neither work is novel, yet both are original and, hence, copyrightable. See Sheldon v. Metro-Goldwyn Pictures Corp., 81 F.2d 49, 54 (CA2 1936). Originality is a constitutional requirement. The source of Congress’ power to enact copyright laws is Article I, §8, cl. 8, of the Constitution, which authorizes Congress to “secure for limited Times to Authors … the exclusive Right to their

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respective Writings.” In two decisions from the late 19th century—The Trade-Mark Cases, 100 U.S. 82 (1879); and Burrow-Giles Lithographic Co. v. Sarony, 111 U.S. 53 (1884)—this Court defined the crucial terms “authors” and “writings.” In so doing, the Court made it unmistakably clear that these terms presuppose a degree of originality. In The Trade-Mark Cases, the Court addressed the constitutional scope of “writings.” For a particular work to be classified “under the head of writings of authors,” the Court determined, “originality is required.” 100 U.S. at 94. The Court explained that originality requires independent creation plus a modicum of creativity: “While the word writings may be liberally construed, as it has been, to include original designs for engraving, prints, &c., it is only such as are original, and are founded in the creative powers of the mind. The writings that are to be protected are the fruits of intellectual labor, embodied in the form of books, prints, engravings, and the like.” Ibid. (emphasis in original). In Burrow-Giles, the Court distilled the same requirement from the Constitution’s use of the word “authors.” The Court defined “author,” in a constitutional sense, to mean “he to whom anything owes its origin; originator; maker.” 111 U.S. at 58 (internal quotation marks omitted). As in The Trade-Mark Cases, the Court emphasized the creative component of originality. It described copyright as being limited to “original intellectual conceptions of the author,” 111 U.S. at 58, and stressed the importance of requiring an author who accuses another of infringement to prove “the existence of those facts of originality, of intellectual production, of thought, and conception.” Id. at 59-60. The originality requirement articulated in The Trade-Mark Cases and BurrowGiles remains the touchstone of copyright protection today. See Goldstein v. California, 412 U.S. 546, 561-562 (1973). It is the very “premise of copyright law.” Miller v. Universal City Studios, Inc., 650 F.2d 1365, 1368 (CA5 1981). Leading scholars agree on this point.… It is this bedrock principle of copyright that mandates the law’s seemingly disparate treatment of facts and factual compilations. “No one may claim originality as to facts.” … This is because facts do not owe their origin to an act of authorship. The distinction is one between creation and discovery: The first person to find and report a particular fact has not created the fact; he or she has merely discovered its existence. To borrow from Burrow-Giles, one who discovers a fact is not its “maker” or “originator.” 111 U.S. at 58. “The discoverer merely finds and records.” … Census takers, for example, do not “create” the population figures that emerge from their efforts; in a sense, they copy these figures from the world around them.… Census data therefore do not trigger copyright because these data are not “original” in the constitutional sense.… The same is true of all facts—scientific, historical, biographical, and news of the day. “They may not be copyrighted and are part of the public domain available to every person.” Miller, supra, at 1369. Factual compilations, on the other hand, may possess the requisite originality. The compilation author typically chooses which facts to include, in what order to place

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them, and how to arrange the collected data so that they may be used effectively by readers. These choices as to selection and arrangement, so long as they are made independently by the compiler and entail a minimal degree of creativity, are sufficiently original that Congress may protect such compilations through the copyright laws.… Thus, even a directory that contains absolutely no protectible written expression, only facts, meets the constitutional minimum for copyright protection if it features an original selection or arrangement. See Harper & Row, 471 U.S. at 547.… This protection is subject to an important limitation. The mere fact that a work is copyrighted does not mean that every element of the work may be protected. Originality remains the sine qua non of copyright; accordingly, copyright protection may extend only to those components of a work that are original to the author.… Thus, if the compilation author clothes facts with an original collocation of words, he or she may be able to claim a copyright in this written expression. Others may copy the underlying facts from the publication, but not the precise words used to present them. In Harper & Row, for example, we explained that President Ford could not prevent others from copying bare historical facts from his autobiography, see 471 U.S. at 556-557, but that he could prevent others from copying his “subjective descriptions and portraits of public figures.” Id. at 563. Where the compilation author adds no written expression but rather lets the facts speak for themselves, the expressive element is more elusive. The only conceivable expression is the manner in which the compiler has selected and arranged the facts. Thus, if the selection and arrangement are original, these elements of the work are eligible for copyright protection. … No matter how original the format, however, the facts themselves do not become original through association.… This inevitably means that the copyright in a factual compilation is thin. Notwithstanding a valid copyright, a subsequent compiler remains free to use the facts contained in another’s publication to aid in preparing a competing work, so long as the competing work does not feature the same selection and arrangement.… It may seem unfair that much of the fruit of the compiler’s labor may be used by others without compensation. As Justice Brennan has correctly observed, however, this is not “some unforeseen byproduct of a statutory scheme.” Harper & Row, 471 U.S. at 589 (dissenting opinion). It is, rather, “the essence of copyright,” ibid., and a constitutional requirement. The primary objective of copyright is not to reward the labor of authors, but “to promote the Progress of Science and useful Arts.” Article I, § 8, cl. 8. Accord, Twentieth Century Music Corp. v. Aiken, 422 U.S. 151, 156 (1975). To this end, copyright assures authors the right to their original expression, but encourages others to build freely upon the ideas and information conveyed by a work. Harper & Row, supra, at 556-557. This principle, known as the idea/expression or fact/expression dichotomy, applies to all works of authorship. As applied to a factual compilation, assuming the absence of original written expression, only the compiler’s selection and arrangement may be protected; the raw facts may be copied at will. This

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result is neither unfair nor unfortunate. It is the means by which copyright advances the progress of science and art. This Court has long recognized that the fact-expression dichotomy limits severely the scope of protection in fact-based works. More than a century ago, the Court observed: “The very object of publishing a book on science or the useful arts is to communicate to the world the useful knowledge which it contains. But this object would be frustrated if the knowledge could not be used without incurring the guilt of piracy of the book.” Baker v. Selden, 101 U.S. 99, 103 (1880). We reiterated this point in Harper & Row: No author may copyright facts or ideas. The copyright is limited to those aspects of the work—termed “expression”—that display the stamp of the author’s originality. Copyright does not prevent subsequent users from copying from a prior author’s work those constituent elements that are not original—for example … facts, or materials in the public domain—as long as such use does not unfairly appropriate the author’s original contributions. 471 U.S. at 547-548 (citation omitted).

This, then, resolves the doctrinal tension: Copyright treats facts and factual compilations in a wholly consistent manner. Facts, whether alone or as part of a compilation, are not original and therefore may not be copyrighted. A factual compilation is eligible for copyright if it features an original selection or arrangement of facts, but the copyright is limited to the particular selection or arrangement. In no event may copyright extend to the facts themselves. As we have explained, originality is a constitutionally mandated prerequisite for copyright protection. The Court’s decisions announcing this rule predate the Copyright Act of 1909, but ambiguous language in the 1909 Act caused some lower courts temporarily to lose sight of this requirement.… Congress took another step to minimize confusion by deleting the specific mention of “directories … and other compilations” in §5 of the 1909 Act. As mentioned, this section had led some courts to conclude that directories were copyrightable per se and that every element of a directory was protected. In its place, Congress enacted two new provisions. First, to make clear that compilations were not copyrightable per se, Congress provided a definition of the term “compilation.” Second, to make clear that the copyright in a compilation did not extend to the facts themselves, Congress enacted §103. The definition of “compilation” is found in §101 of the 1976 Act. It defines a “compilation” in the copyright sense as “a work formed by the collection and assembling of preexisting materials or of data that are selected, coordinated, or arranged in such a way that the resulting work as a whole constitutes an original work of authorship” (emphasis added). The purpose of the statutory definition is to emphasize that collections of facts are not copyrightable per se.… As discussed earlier, however, the originality requirement is not particularly stringent. A compiler may settle upon a selection or arrangement that others have used;

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novelty is not required. Originality requires only that the author make the selection or arrangement independently (i.e., without copying that selection or arrangement from another work), and that it display some minimal level of creativity. Presumably, the vast majority of compilations will pass this test, but not all will. There remains a narrow category of works in which the creative spark is utterly lacking or so trivial as to be virtually nonexistent.… Such works are incapable of sustaining a valid copyright.… Even if a work qualifies as a copyrightable compilation, it receives only limited protection. This is the point of §103 of the Act. Section 103 explains that “the subject matter of copyright … includes compilations,” §103(a), but that copyright protects only the author’s original contributions—not the facts or information conveyed: The copyright in a compilation … extends only to the material contributed by the author of such work, as distinguished from the preexisting material employed in the work, and does not imply any exclusive right in the preexisting material.” §103(b).

As §103 makes clear, copyright is not a tool by which a compilation author may keep others from using the facts or data he or she has collected. “The most important point here is one that is commonly misunderstood today: copyright … has no effect one way or the other on the copyright or public domain status of the preexisting material.” H. R. Rep. at 57; S. Rep. at 55. The 1909 Act did not require, as “sweat of the brow” courts mistakenly assumed, that each subsequent compiler must start from scratch and is precluded from relying on research undertaken by another. See, e.g., Jeweler’s Circular Publishing Co., 281 F. at 88-89. Rather, the facts contained in existing works may be freely copied because copyright protects only the elements that owe their origin to the compiler—the selection, coordination, and arrangement of facts. In summary, the 1976 revisions to the Copyright Act leave no doubt that originality, not “sweat of the brow,” is the touchstone of copyright protection in directories and other fact-based works. Nor is there any doubt that the same was true under the 1909 Act. The 1976 revisions were a direct response to the Copyright Office’s concern that many lower courts had misconstrued this basic principle, and Congress emphasized repeatedly that the purpose of the revisions was to clarify, not change, existing law. The revisions explain with painstaking clarity that copyright requires originality, §102(a); that facts are never original, §102(b); that the copyright in a compilation does not extend to the facts it contains, §103(b); and that a compilation is copyrightable only to the extent that it features an original selection, coordination, or arrangement, §101.… There is no doubt that Feist took from the white pages of Rural’s directory a substantial amount of factual information. At a minimum, Feist copied the names, towns, and telephone numbers of 1,309 of Rural’s subscribers. Not all copying, however, is copyright infringement. To establish infringement, two elements must be proven: (1) ownership of a valid copyright, and (2) copying of constituent elements of the work that are original. See Harper & Row, 471 U.S. at 548. The first element is not at issue here; Feist appears to concede that Rural’s directory, considered as a whole, is

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subject to a valid copyright because it contains some foreword text, as well as original material in its yellow pages advertisements.… The question is whether Rural has proved the second element. In other words, did Feist, by taking 1,309 names, towns, and telephone numbers from Rural’s white pages, copy anything that was “original” to Rural? Certainly, the raw data does not satisfy the originality requirement. Rural may have been the first to discover and report the names, towns, and telephone numbers of its subscribers, but this data does not “owe its origin” to Rural. Burrow-Giles, 111 U.S. at 58. Rather, these bits of information are uncopyrightable facts; they existed before Rural reported them and would have continued to exist if Rural had never published a telephone directory. The originality requirement “rules out protecting … names, addresses, and telephone numbers of which the plaintiff by no stretch of the imagination could be called the author.” … Rural essentially concedes the point by referring to the names, towns, and telephone numbers as “preexisting material.” … Section 103(b) states explicitly that the copyright in a compilation does not extend to “the preexisting material employed in the work.” The question that remains is whether Rural selected, coordinated, or arranged these uncopyrightable facts in an original way. As mentioned, originality is not a stringent standard; it does not require that facts be presented in an innovative or surprising way. It is equally true, however, that the selection and arrangement of facts cannot be so mechanical or routine as to require no creativity whatsoever. The standard of originality is low, but it does exist.… The selection, coordination, and arrangement of Rural’s white pages do not satisfy the minimum constitutional standards for copyright protection. As mentioned at the outset, Rural’s white pages are entirely typical. Persons desiring telephone service in Rural’s service area fill out an application and Rural issues them a telephone number. In preparing its white pages, Rural simply takes the data provided by its subscribers and lists it alphabetically by surname. The end product is a garden-variety white pages directory, devoid of even the slightest trace of creativity. Rural’s selection of listings could not be more obvious: It publishes the most basic information—name, town, and telephone number—about each person who applies to it for telephone service. This is “selection” of a sort, but it lacks the modicum of creativity necessary to transform mere selection into copyrightable expression. Rural expended sufficient effort to make the white pages directory useful, but insufficient creativity to make it original.… Nor can Rural claim originality in its coordination and arrangement of facts. The white pages do nothing more than list Rural’s subscribers in alphabetical order. This arrangement may, technically speaking, owe its origin to Rural; no one disputes that Rural undertook the task of alphabetizing the names itself. But there is nothing remotely creative about arranging names alphabetically in a white pages directory. It is an age-old practice, firmly rooted in tradition and so commonplace that it has come to be expected as a matter of course. See Brief for Information Industry Association et al. as Amici Curiae 10 (alphabetical arrangement “is universally observed in directories

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published by local exchange telephone companies”). It is not only unoriginal, it is practically inevitable. This time-honored tradition does not possess the minimal creative spark required by the Copyright Act and the Constitution. We conclude that the names, towns, and telephone numbers copied by Feist were not original to Rural and therefore were not protected by the copyright in Rural’s combined white and yellow pages directory. As a constitutional matter, copyright protects only those constituent elements of a work that possess more than a de minimis quantum of creativity. Rural’s white pages, limited to basic subscriber information and arranged alphabetically, fall short of the mark. As a statutory matter, 17 U.S.C. §101 does not afford protection from copying to a collection of facts that are selected, coordinated, and arranged in a way that utterly lacks originality. Given that some works must fail, we cannot imagine a more likely candidate. Indeed, were we to hold that Rural’s white pages pass muster, it is hard to believe that any collection of facts could fail. Because Rural’s white pages lack the requisite originality, Feist’s use of the listings cannot constitute infringement. This decision should not be construed as demeaning Rural’s efforts in compiling its directory, but rather as making clear that copyright rewards originality, not effort. As this Court noted more than a century ago, “great praise may be due to the plaintiffs for their industry and enterprise in publishing this paper, yet the law does not contemplate their being rewarded in this way.” Baker v. Selden, 101 U.S. at 105.…

7. American Dental Association v. Delta Dental Plans Association, 126 F.3d 977 (7th Cir. 1997) UNITED STATES COURT OF APPEALS FOR THE SEVENTH CIRCUIT Opinion by Easterbrook, Circuit Judge. This case presents the question whether a taxonomy is copyrightable. The American Dental Association has created the Code on Dental Procedures and Nomenclature. The first edition was published in 1969; the Code has been revised frequently since, in response to changes in dental knowledge and technology. All dental procedures are classified into groups; each procedure receives a number, a short description, and a long description. For example, number 04267 has been assigned to the short description “guided tissue regeneration—nonresorbable barrier, per site, per tooth (includes membrane removal),” which is classified with other surgical periodontic services. The Code made its first appearance in the Journal of the American Dental Association, covered by a general copyright notice; the 1991 and 1994 versions were submitted for copyright registration, which was granted by the Register of Copyrights. Delta Dental Association has published a work entitled Universal Coding and Nomenclature that includes most of the numbering system and short descriptions from the ADA’s Code. In this suit for copyright infringement, Delta contends that it is entitled to

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reprint modified versions of the Code under an express or implied license, as a joint author (Delta participated in the groups that drafted the Code), and as fair use. It contends that by distributing pamphlets containing some of the Code’s older versions without copyright notices the ADA has forfeited its copyright. Delta also argues that the Code is not copyrightable subject matter, and the district court granted summary judgment in its favor on this ground without reaching Delta’s other arguments. The district court held that the Code cannot be copyrighted because it catalogs a field of knowledge—in other words, that no taxonomy may be copyrighted. A comprehensive treatment cannot be selective in scope or arrangement, the judge believed, and therefore cannot be original either. Taxonomies are designed to be useful. The judge wrote that if “nothing remains after the ‘useful’ is taken away—if the primary function is removed from the form—the work is devoid of even that modicum of creativity required for protection, and hence is uncopyrightable.” … No one would read the ADA’s Code for pleasure; it was designed and is used for business (for records of patients’ dental history or making insurance claims) rather than aesthetic purposes. The district court added that, as the work of a committee, the Code could not be thought original. Creation by committee is an oxymoron, the judge wrote.… Any original literary work may be copyrighted. The necessary degree of “originality” is low, and the work need not be aesthetically pleasing to be “literary.” Feist Publications, Inc. v. Rural Telephone Service Co., 499 U.S. 340, 345-46 (1991). Term papers by college sophomores are as much within the domain of copyright as Saul Bellow’s latest novel. See Bleistein v. Donaldson Lithographing Co., 188 U.S. 239 (1903). Scholarship that explicates important facts about the universe likewise is well within this domain. Einstein’s articles laying out the special and general theories of relativity were original works even though many of the core equations, such as the famous E = mc2, express “facts” and therefore are not copyrightable. Einstein could have explained relativity in any of a hundred different ways; another physicist could expound the same principles differently. So too with a taxonomy—of butterflies, legal citations, or dental procedures. Facts do not supply their own principles of organization. Classification is a creative endeavor. Butterflies may be grouped by their color, or the shape of their wings, or their feeding or breeding habits, or their habitats, or the attributes of their caterpillars, or the sequence of their DNA; each scheme of classification could be expressed in multiple ways. Dental procedures could be classified by complexity, or by the tools necessary to perform them, or by the parts of the mouth involved, or by the anesthesia employed, or in any of a dozen different ways. The Code’s descriptions don’t “merge with the facts” any more than a scientific description of butterfly attributes is part of a butterfly. Compare Nash v. CBS, Inc., 899 F.2d 1537 (7th Cir. 1990) (discussing the fact/ expression dichotomy). There can be multiple, and equally original, biographies of the same person’s life, and multiple original taxonomies of a field of knowledge. Creativity marks the expression even after the fundamental scheme has been devised. This is clear enough for the long description of each procedure in the ADA’s Code. The long description is part of the copyrighted work, and original long descriptions make the work as a whole copyrightable. But we think that even the short description and the number are original works of authorship.…

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Every number in the ADA’s Code begins with zero, assuring a large supply of unused numbers for procedures to be devised or reclassified in the future; an author could have elected instead to leave wide gaps inside the sequence. A catalog that initially assigns 04266, 04267, 04268 to three procedures will over time depart substantively from one that initially assigns 42660, 42670, and 42680 to the same three procedures. So all three elements of the Code—numbers, short descriptions, and long descriptions, are copyrightable subject matter under 17 U.S.C. § 102(a). The Maroon Book and the Bluebook offer different taxonomies of legal citations; Wotquenne and Helm devised distinct catalogs of C.P.E. Bach’s oeuvre; Delta Dental Association could have written its own classification of dental procedures. Note that we do not conclude that the Code is a compilation covered by 17 U.S.C. §103. It could be a compilation only if its elements existed independently and the ADA merely put them in order. A taxonomy is a way of describing items in a body of knowledge or practice; it is not a collection or compilation of bits and pieces of “reality.” The 1991 and 1994 versions of the Code may be recompilations of earlier editions, but the original Code is covered by §102(a) as an “original work of authorship,” and its amendments by §106(2) as derivative works. The district court’s contrary conclusion instantiates the adage that where you come out depends on where you go in. The court asked whether the Code would be copyrightable if it were a lamp. This is not quite as foolish as it sounds. Congress permits works of art, including sculptures, to be copyrighted, but does not extend the copyright to industrial design, which in the main falls into the province of patent, trademark, or trade dress law. See 17 U.S.C. §§101, 102(a)(5), 113; W.T. Rogers Co. v. Keene, 778 F.2d 334 (7th Cir. 1985). When the maker of a lamp—or any other three-dimensional article that serves some utilitarian office—seeks to obtain a copyright for the item as a sculpture, it becomes necessary to determine whether its artistic and utilitarian aspects are separable. If yes, the artistic elements of the design may be copyrighted; if no, the designer must look outside copyright law for protection from imitation. Compare Hart v. Dan Chase Taxidermy Supply Co., 86 F.3d 320 (2d Cir. 1996), which holds that fish mannequins may be copyrighted if they possess artistic features separable from their utilitarian aspects, with Carol Barnhart Inc. v. Economy Cover Corp., 773 F.2d 411 (2d Cir. 1985), which holds that mannequins of human torsos may not be copyrighted. Judge Zagel applied to the ADA’s Code the same approach courts use for three-dimensional articles, found that the Code has no expression separable from its utilitarian aspects, and held that it therefore may not be copyrighted. Such an inquiry mixes two distinct issues: originality and functionality. A lamp may be entirely original, but if the novel elements are also functional the lamp cannot be copyrighted. This is not a line between intellectual property and the public domain; it is a line among bodies of intellectual-property law. An article with intertwined artistic and utilitarian ingredients may be eligible for a design patent, or the artistic elements may be trade dress protected by the Lanham Act or state law. Yet the district court did not set out to mark the boundaries among copyright, patent, trademark, and state law. Anyway, to restate the obvious, the Code is not a sculpture. The ADA does not make any claim to its protection as a “pictorial, graphic, [or] sculptural” work under §102(a)(5), and the unique limitations on the protection of that category of works do

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not extend to the written word. Not only are the issues different—original is not an antonym for utilitarian—but the special question under §102(a)(5) and §113 is not one that should be extended.… Whether a literary work is original ought to be a question easy to pose and easy to answer, so that people know the status of their intellectual property; it ought not be complicated with a test designed for a completely different problem. Delta asks us to affirm the judgment on a ground that the district judge did not reach: that the Code is not copyrightable because it is a “system.” Section 102(b) tells us that copyright protection even of an original work does not cover “any idea, procedure, process, system, method of operation, concept, principle, or discovery, regardless of the form in which it is described, explained, illustrated, or embodied in such work.” But what could it mean to call the Code a “system”? This taxonomy does not come with instructions for use, as if the Code were a recipe for a new dish. Compare Publications International, Ltd. v. Meredith Corp., 88 F.3d 473 (7th Cir. 1996) (holding that recipes are not copyrightable). A dictionary cannot be called a “system” just because new novels are written using words, all of which appear in the dictionary. Nor is word-processing software a “system” just because it has a command structure for producing paragraphs. The Code is a taxonomy, which may be put to many uses. These uses may be or include systems; the Code is not. Section 102(b) codifies the fact-expression dichotomy, which we have already considered, as well as the holding of Baker v. Selden, 101 U.S. 99, 25 L. Ed. 841 (1879), that blank forms are not copyrightable, even if the structure of the forms captures the essence of an original work of literature. The book was protected as original literary expression, the Court held, but the form was a means of putting the book’s ideas into practice—and copyright law, unlike patent law, covers only expression. Someone who buys a book full of ideas for new machines may build and sell one of the machines without infringing the author’s copyright; Baker thought that the use of an accounting system described in a book is pretty much the same thing, even if practice of the system entails use of the author’s forms. Baker rearranged Selden’s forms, but if the original forms were copyrightable then the rearrangements were derivative works, which the original author had an exclusive right to produce. Protecting variations on the forms could have permitted the author of an influential accounting treatise to monopolize the practice of double-entry bookkeeping. Yet copyright law does not permit the author to monopolize the revenues to be derived from an improved system of accounting—or of reporting dental procedures.… Few “how-to” works are “systems” in Baker’s sense. If they were, architectural blueprints could be freely copied, although the Berne Convention Implementation Act of 1988, Pub. L. 100-567, 102 Stat. 2854, adds protection for “architectural plans” to the statute. Descriptions of how to build or do something do not facilitate monopoly of the subject-matter being described, so the concern of Baker is not activated. Again consider blueprints: other architects can imitate the style of the completed building; they just can’t copy the plans. What is more, a form that contains instructions for its completion is copyrightable in part (the instructions) and in the public domain in part (the lines and boxes). Edwin K. Williams & Co. v. Edwin K. Williams & Co.-East, 542 F.2d 1053, 1061 (9th Cir. 1976); … So far as the ADA is concerned, any dentist, any insurer,

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anyone at all, may devise and use forms into which the Code’s descriptions may be entered. The ADA encourages this use; standardization of language promotes interchange among professionals. (The fact that Delta used most of the Code but made modifications is the reason ADA objects, for variations salted through a convention impede communication.) Section 102(b) precludes the ADA from suing, for copyright infringement, a dentist whose office files record treatments using the Code’s nomenclature. No field of practice has been or can be monopolized, given this constraint. Section 102(b) permits Delta Dental to disseminate forms inviting dentists to use the ADA’s Code when submitting bills to insurers. But it does not permit Delta to copy the Code itself, or make and distribute a derivative work based on the Code, any more than Baker could copy Selden’s book.…

[C]

Trademarks: Distinctiveness 7. The Tub Happy opinion not only makes a very important point that a trademark may be distinctive based on intuitive reactions by consumers, but also adds to the debate on alternativess (see next section). Trademarks may be formed of any words of a distinctive nature, or that may acquire such nature by use (or by advertisement), provided that they do not appropriate words in a way that extracts them from the common use. This is about the economics of language. Registration of common words so as to make them exclusive for designating the products or services they identify in common language has that destructive effect. The same happens with “genericizing,” with the difference that genericizing, in those jursdictions that deal with that fenomenon, is sanctioned when associated with the trademark owner’s neglect or incapacity in teaching the public about the sign’s differentiating nature.

8. Mark Foy’s Ltd. v. Davies Coop & Co. Ltd. (“Tub Happy case”) [1956] HCA 41; (1956) 95 CLR 190 (9 August 1956) HIGH COURT OF AUSTRALIA 1. Dixon C.J. I have had the advantage of reading the judgment prepared by considerations that Kitto J. has marshaled with so much force against the view that the words “tub happy” are words having no direct reference to the character or quality of the goods within the meaning of par. (d) of s. 16 (1) of the Trade Marks Act 1905-1948. But nevertheless I am unable to adopt the conclusion that these words are disqualified from forming a registrable trade mark under s. 16(1)(d) because they directly refer to the character or quality of the goods. 2. It is, I think, a mistake first to assume that words like “Tub Happy” do convey a meaning either to people in general or to a particular class of persons and then on that assumption to inquire what exactly the meaning is. Indeed to institute a search for a meaning almost necessarily implies that in ordinary English speech the words do not

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possess a connotation sufficiently definite to amount to a direct reference to the character or quality of the goods. And that is true even when to standard English usage is added all the figurative idiomatic and slang phraseology that may be currently in use. Once, however, the question is asked what do the words mean and there is started a search for a meaning, a process of analysis and of reasoning by exclusion of alternatives is begun. No doubt such a search may, without any sacrifice of logic, end in construing the words as meaning that the garments will emerge happily from the washtub. But if they are so interpreted, the interpretation is chiefly the consequence of failure to find another meaning. I venture to think, however, that a man, or for that matter a woman, hearing for the first time the words used in combination and in connection with cotton garments, would not so understand the words at once. Certainly such a person would not so understand them intuitively and without stopping to reflect and ask himself or herself what meaning the words could really possess. 3. The fallacy of asking what is the meaning of the phrase lies in the basal assumption that the words are intended to convey some definite meaning and perhaps the further assumption that the meaning has reference to the garments or the cottons. The assumption is fallacious because it overlooks the fact that language is not always used to convey an idea. Many uses of words are purely emotive. A word or words are often employed for no purpose but to evoke in the reader or hearer some feeling, some mood, some mental attitude. This is true of much advertising, which common experience shows to be full of meaningless but emotive expressions supposedly capable of inducing a generally favorable inclination in the almost subconscious thought of the passing auditor or hasty reader. Words put forward as trademarks are very likely indeed to be chosen in the same way. 4. Though Mr. Holmes for the respondent did of course put forward the claim that “tub happy” means washable, it was a meaning it was necessary to suggest. It was not a meaning that had sprung unaided to the mind and it was not one that he was able to establish by reference to instances of known usage.… 7. I cannot think that the words now in question go further than, if as far as, suggesting in a vague and indefinable way a gladsome carelessness a propos of the tub. They may have an emotive tendency, but they do not appear to me to convey any meaning or idea sufficiently tangible to amount to a direct reference to the character or quality of the goods. 8. I agree in the judgment of Williams J. and I have added the foregoing only in an endeavor to make clear why I remain unconvinced by the judgment of Kitto J.: 1. Williams J. This is an appeal by the plaintiff company from a decree of the Supreme Court of New South Wales in Equity (McLelland J.) dismissing with costs a suit brought by the plaintiff appellant against the defendantsrespondents to restrain the alleged infringement by the defendants of its registered trade mark No. 103308. This trade mark was registered under the provisions of the Trade Marks Act 1905-1948 on 25th July 1950 in class 38 in

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respect of articles of clothing and consists of the words “tub happy.” The plaintiff owns a large retail store at 143-147 Liverpool Street, Sydney where it has for more than forty years carried on an extensive retail business. This business consists principally of retailing clothing for men, women, and children, materials for such clothing and draper’s manchester and household requisites. The plaintiff also owns and operates in the vicinity woolen mills, a knitting mill and shirt factory and a clothing factory. Since the date of registration the plaintiff has used and advertised the trade mark extensively upon and in connection with articles of clothing, particularly cotton frocks of various designs and good quality, manufactured by itself for which there is a ready sale. Each frock has attached to it by sewing a label bearing in bright colors the words “Tub Happy Cottons by Mark Foy’s Limited, Sydney.” The plaintiff has also extensively advertised its cotton frocks under the trade mark in newspapers published in Sydney and has, in each summer since 1950, exclusively displayed “Tub Happy” frocks in one of its largest show windows and has used show cards in such windows and in its departments carrying these words in large type. 2. The defendant Davies Coop (N.S.W.) Pty. Ltd., a New South Wales company that carries on business at Marrickville, is a subsidiary of the defendant Davies Coop & Co. Ltd., a Victorian company that carries on business at Swanston Street, Melbourne. In August or September 1953 the plaintiff received a letter from the Victorian company advising it of a projected 1954 sales promotion campaign of “Exacto Cotton Garments—Tub Happy Cotton Fresh Budget Wise” manufactured by this defendant. The circular stated that the weight of advertising would tell the public the story of “Exacto Cotton Garments—Tub Happy Cotton Fresh Budget Wise” and would ensure an immediate demand for Exacto products. One suggested advertisement was “Buy Tub Happy Windcheaters Skimps etc.” The plaintiff immediately drew this defendant’s attention to the existence of its trade mark “Tub Happy” and claimed that any use by the defendant or any of its traders of these words in connection with any line of clothing would be an infringement. But the defendants through their patent attorney replied that they were not using the words “Tub Happy” as a trade mark and that the words “Tub Happy Cotton Fresh and Budget Wise” were being used “in a modern descriptive sense,” whatever this may mean, and that these words when used in relation to Exacto garments referred to their good washing properties, freshness and economy. The defendants pointed out that their garments were in every instance prominently branded as Exacto goods, that this was their trade mark, and that it was this mark that was distinctive of their goods. Considerable correspondence followed, the plaintiff being desirous of avoiding litigation in the trade and hoping that the defendants would abandon the use of the controversial words. But they refused to do so, continuing to claim that the words “tub happy” were merely descriptive of a quality of their cotton goods and finally, in October 1954, the plaintiff commenced this suit … .

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4. The plaintiff filed a statement of claim and moved for an interlocutory injunction and by consent the motion was turned into a motion for a decree. His Honour dismissed the suit on the ground that the words were being used by the defendant as a bona fide description of the character or quality of the goods within the meaning of s. 53A of the Trade Marks Act. He said: “In my opinion, the facts in this case bring the defendants within s. 53A, assuming otherwise a valid trade mark and facts showing an infringement. I have examined all the advertisements very carefully, but, in my opinion, each must be read as a whole, even bearing in mind the various elements to which Mr. Hardie directed my attention, and all must be read, I think, in the light of the evidence of Mr. Furphey, which I accept. Reading the advertisements in the manner I have indicated, I am of opinion that the use up to this point of time by the defendants of the words ‘Tub Happy’ has been a use by the defendants of a bona fide description of the character or quality of the goods of the defendants.” We were informed by counsel for the defendants that his Honour said that he was prepared to dismiss the motion either on this ground or on the ground that the defendants had not used the words “tub happy” as a trade mark, that it was only if they were so doing that the plaintiff’s rights in the trade mark would be infringed, and that his Honour only adopted the former ground after he had given counsel for the plaintiff the option to choose between them.… 6. The first question is whether the words “tub happy” are registrable as a trade mark under s. 16(1)(d) of the Trade Marks Act. To qualify they must be words having no direct reference to the character or quality of articles of clothing. In his speech in Eastman Photographic Materials Co. Ltd. v. Comptroller-General of Patents, Designs and Trade Marks (Solio case) (1898) AC 571 Lord Herschell explained the meaning of this qualification. He said: “any word in the English language may serve as a trade-mark—the commonest word in the language might be employed. In these circumstances it would obviously have been out of the question to permit a person by registering a trade-mark in respect of a particular class of goods to obtain a monopoly of the use of a word having reference to the character or quality of those goods. The vocabulary of the English language is common property: it belongs alike to all; and no one ought to be permitted to prevent the other members of the community from using for purposes of description a word that has reference to the character or quality of goods” (1898) AC at 580.… Any reference that the words “Tub Happy” have to the character or quality of articles of clothing is very remote. They are in the nature of a coined phrase. Inanimate objects including articles of clothing cannot have the character or quality of happiness whether they are in a tub or not. But the defendants’ case is that the common metaphorical use of the adjective would convey to prospective buyers of the fabrics that the cotton emerged from the wash tub more attractive than ever in appearance with fibers and colors as good if not better than ever. Therefore, so it is said, the words are a description of the character or quality of the goods and moreover are not entitled to registration. This claim gives far too specific a meaning to

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the vague figurative use of the word “happy” in connection with “tub.” Like so many expressions used in advertisements no definite or actual meaning seems to belong to the combination “Tub Happy.” There is a cloudy suggestion only about it that all will be well in a wash tub but that is all. The attitude of mind of those who glance at such advertisements may be affected favorably by some sort of vague association of ideas but it falls a long way short of conveying any meaning to them. To say that articles of clothing are tub happy is in the ordinary use of English meaningless. The words contain at most a “covert and skilful allusion” to the quality of washability that is characteristic of articles of clothing made of some kinds of material including cotton. At most they create an impression that this is what they are intended to convey. They do not trespass upon the rights of other traders to use any ordinary English words or phrases referring to the washable qualities of their goods. They do not attempt to “enclose and appropriate as private property certain little strips of the great open common of the English language.” No doubt the words are intended to “contain a meaning—a meaning is wrapped up in them if you can only find it out.” … And it may not be hard to find out that meaning but the words do not refer in any ordinary sense, laudatory or otherwise, to any character or quality of articles of clothing, still less do they do so directly. 7. The conclusion that the words “Tub Happy” are registrable under s. 16(1)(d) of the Trade Marks Act because they have no direct reference to the character or quality of articles of clothing goes a long way towards deciding the ground on which his Honour ruled against the defendants. There is nothing in the registration of these words to prevent the defendants describing their cotton goods as having the qualities of washability, freshness and cheapness, and in particular the first of these qualities. The whole English language is open to them, even the most up to date English, if the defendants wish to refer to these qualities “in a modern descriptive sense.” In J. B. Stone & Co. Ltd. v. Steelace Manufacturing Co. Ltd. (1929) 46 RPC 406 Lawrence L.J. said: “In my opinion the object of s. 44” (of the English Trade Marks Act 1905, which corresponds to s. 53A of the Commonwealth Act) “was to safeguard traders in cases where the registered trade mark consisted of more or less descriptive words forming part of the ordinary English language, without the use of which other traders would find some difficulty in describing certain qualities of their goods; but was never intended and does not operate to enable a trader to make use of a rival trader’s registered trade mark consisting of a fancy word having no reference to the character and quality of the goods in order more readily to sell his own goods” (1929) 46 RPC at 417.… Section 53A of the Trade Marks Act protects the use by any person of any bona fide description of the character or quality of his goods. But that means a description and not a mere suggestion in fanciful language. It does not protect an attempt by the defendants to usurp a metaphorical phrase like “Tub Happy” however magnetic the force of its public appeal may be.…

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Alternativeness 8. Alternativeness is at the core of the interface intellectual property-competition. The reason is that, given that it is about differentiation, intellectual property may not block competitors from creating their own competing assets—and have them also covered by intellectual property. This basic notion has a fundamental implication across the whole spectrum of intellectual property. No one should obtain a patent that is so broadly claimed that competitors are barred from creating their own competing inventions. No one should register as a trademark a sign in a manner that prevents competitors from identifying and distinguishing their own products. And so on. 9. The notion of alternativeness may not be perceived by many courts, in view of the fact that invariably statutes do not mention it as a substantive criterion for protection, like novelty, sufficient non-obviousness, utility, distinctiveness, originality, creativity, secrecy, etc. However, as the next cases show, some courts have relied—perhaps subconsciously—on alternativeness as a fundamental requirement for substantive intellectual property protection. Moreover, alternativeness is a horizontal condition that applies across the whole spectrum of intellectual property, and not only to patents.

9. Le Roy v. Tatham, 55 U.S. 156 (1852) SUPREME COURT OF THE UNITED STATES Mr. Justice McLean delivered the opinion of the court.… The action was brought in the Circuit Court, to recover damages for an alleged infringement of a patent for new and useful improvements in machinery for making pipes and tubes from metallic substances.… The schedule, which is annexed to the patent, and forms a part of it, states that the invention consists “in certain improvements upon, and additions to, the machinery used for manufacturing pipes and tubes from lead or tin, or an alloy of soft metals capable of being forced, by great pressure, from out of a receiver, through or between apertures, dies, and cores, when in a set or solid state, set forth in the specification of a patent granted to Thomas Burr, of Shrewsbury, in Shropshire, England, dated the 11th of April, 1820.” After describing Burr’s machine, its defects, and the improvements made on it as claimed, the patentees say, “Pipes thus made are found to possess great solidity and unusual strength, and a fine uniformity of thickness and accuracy of bore is arrived at, such as, it is believed, has never before been attained by any other machinery.” The essential difference in the character of this pipe, which distinguishes it, as well as that contemplated by Thomas Burr, from all other heretofore known or attempted, is that it is wrought under heat, by pressure and constriction, from set metal; and that it is not a casting formed in a mould.

And they declare, “We do not claim as our invention and improvement, any of the parts of the above-described machinery, independently of its arrangement and combination

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above set forth. What we do claim as our invention, and desire to secure, is, the combination of the following parts above described, to wit: the core and bridge, or guide-piece, with the cylinder, the piston, the chamber and the die, when used to form pipes of metal, under heat and pressure, in the manner set forth, or in any other manner substantially the same.” … In their charge to the jury, the court said, “They, the plaintiffs, also state, that they do not claim any of the parts of the machinery, the cylinder, core, die, or bridge, but that they claimed the combination when used to form pipes of metal, under heat and pressure, in the way they have described. There can be no doubt that if this combination is new, and produces a new and useful result, it is the proper subject of a patent.” “The result is a new manufacture. And even if the mere combination of machinery in the abstract is not new, still, if used and applied in connection with the practical development of a principle, newly discovered, producing a new and useful result, the subject is patentable. In this view, the improvement of the plaintiffs is the application of a combination of machinery to a new end; to the development and application of a new principle, resulting in a new and useful manufacture. That the discovery of a new principle is not patentable, but it must be embodied and brought into operation by machinery, so as to produce a new and a useful result. Upon this view of the patent, it is an important question for the jury to determine, from the evidence, whether the fact is established, on which the alleged improvement is founded, that lead in a set, or semi-solid state, can thus be reunited or welded, after separation.” To this instruction the defendants excepted. It was also objected, that the plaintiffs’ patent was invalid for want of originality; that the invention had been before described in public works, and Bramah, Hague, Titus, Fox, and Potter, were relied on by the defendants. To this it was replied, by the court, “That in the view taken by the court in the construction of the patent, it was not material whether the mere combinations of machinery referred to were similar to the combination used by the Hansons, because the originality did not consist in the novelty of the machinery, but in bringing a newly discovered principle into practical application, by which a useful article of manufacture is produced, and wrought pipe made as distinguished from cast pipe.” To this charge there was also an exception. The word principle is used by elementary writers on patent subjects, and sometimes in adjudications of courts, with such a want of precision in its application, as to mislead. It is admitted, that a principle is not patentable. A principle, in the abstract, is a fundamental truth; an original cause; a motive; these cannot be patented, as no one can claim in either of them an exclusive right. Nor can an exclusive right exist to a new power, should one be discovered in addition to those already known. Through the agency of machinery a new steam power may be said to have been generated. But no one can appropriate this power exclusively to himself, under the patent laws. The same may be said of electricity, and of any other power in nature, which is alike open to all, and may be applied to useful purposes by the use of machinery. In all such cases, the processes used to extract, modify, and concentrate natural agencies, constitute the invention. The elements of the power exist; the invention is not in discovering them, but in applying them to useful objects. Whether the machinery

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used be novel, or consist of a new combination of parts known, the right of the inventor is secured against all who use the same mechanical power, or one that shall be substantially the same. A patent is not good for an effect, or the result of a certain process, as that would prohibit all other persons from making the same thing by any means whatsoever. This, by creating monopolies, would discourage arts and manufactures, against the avowed policy of the patent laws.… In the case before us, the court instructed the jury that the invention did not consist “in the novelty of the machinery, but in bringing a newly discovered principle into practical application, by which a useful article of manufacture is produced, and wrought pipe made as distinguished from cast pipe.” A patent for leaden pipes would not be good, as it would be for an effect, and would, consequently, prohibit all other persons from using the same article, however manufactured. Leaden pipes are the same, the metal being in no respect different. Any difference in form and strength must arise from the mode of manufacturing the pipes. The new property in the metal claimed to have been discovered by the patentees, belongs to the process of manufacture, and not to the thing made.…

10. O’Reilly v. Morse, 56 U.S. 62 (1853) SUPREME COURT OF THE UNITED STATES Mr. Chief Justice Taney delivered the opinion of the court. In proceeding to pronounce judgment in this case, the court is sensible, not only of its importance, but of the difficulties in some of the questions that it presents for decision. The case was argued at the last term, and continued over by the court for the purpose of giving it a more deliberate examination. And since the continuance, we have received from the counsel on both sides printed arguments, in which all of the questions raised on the trial have been fully and elaborately discussed. The appellants take three grounds of defense. In the first place they deny that Professor Morse, was the first and original inventor of the Electro-Magnetic Telegraphs described in his two reissued patents of 1848. Secondly, they insist that if he was the original inventor, the patents under which he claims have not been issued conformably to the acts of Congress, and do not confer on him the right to the exclusive use. And thirdly, if these two propositions are decided against them, they insist that the Telegraph of O’Reilly is substantially different from that of Professor Morse, and the use of it, therefore, no infringement of his rights. In determining these questions we shall, in the first instance, confine our attention to the patent that Professor Morse obtained in 1840, and which was reissued in 1848. The main dispute between the parties is upon the validity of this patent; and the decision upon it will dispose of the chief points in controversy in the other.… Waiving, for the present, any remarks upon the identity or similitude of these inventions, the court is of opinion that the first branch of the objection cannot be

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maintained, and that Morse was the first and original inventor of the telegraph described in his specification, and preceded the three European inventions relied on by the defendants. The evidence is full and clear that, when he was returning from a visit to Europe, in 1832, he was deeply engaged upon this subject during the voyage; and that the process and means were so far developed and arranged in his own mind, that he was confident of ultimate success. It is in proof that he pursued these investigations with unremitting ardor and industry, interrupted occasionally by pecuniary embarrassments; and we think that it is established, by the testimony of Professor Gale and others that, early in the spring of 1837, Morse had invented his plan for combining two or more electric or galvanic circuits, with independent batteries for the purpose of overcoming the diminished force of electro-magnetism in long circuits, although it was not disclosed to the witness until afterwards; and that there is reasonable ground for believing that he had so far completed his invention, that the whole process, combination, powers, and machinery, were arranged in his mind, and that the delay in bringing it out arose from his want of means. For it required the highest order of mechanical skill to execute and adjust the nice and delicate work necessary to put the telegraph into operation, and the slightest error or defect would have been fatal to its success. He had not the means at that time to procure the services of workmen of that character; and without their aid no model could be prepared that would do justice to his invention. And it moreover required a large sum of money to procure proper materials for the work. He, however, filed his caveat on the 6th of October, 1837, and, on the 7th of April, 1838, applied for his patent, accompanying his application with a specification of his invention, and describing the process and means used to produce the effect. It is true that O’Reilly, in his answer, alleges that the plan by which he now combines two or more galvanic or electric currents, with independent batteries, was not contained in that specification, but discovered and interpolated afterwards; but there is no evidence whatever to support this charge. And we are satisfied, from the testimony, that the plan, as it now appears in his specification, had then been invented, and was actually intended to be described.… Now, we suppose no one will doubt that Morse believed himself to be the original inventor, when he applied for his patent in April 1838. Steinheil’s discovery does not appear to have been ever patented, nor to have been described in any printed publication until July of that year. And neither of the English inventions are shown by the testimony to have been patented until after Morse’s application for a patent, nor to have been so described in any previous publication as to embrace any substantial part of his invention. And if his application for a patent was made under such circumstances, the patent is good, even if in point of fact he was not the first inventor. In this view of the subject, it is unnecessary to compare the telegraph of Morse with these European inventions, to ascertain whether they are substantially the same or not. If they were the same in every particular, it would not impair his rights. But it is impossible to examine them, and look at the process and the machinery and results of each, so far as the facts are before us, without perceiving at once the substantial and essential difference between them and the decided superiority of the one invented by Professor Morse.…

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Regarding Professor Morse as the first and original inventor of the Telegraph, we come to the objections that have been made to the validity of his patent. We do not think it necessary to dwell upon the objections taken to the proceedings upon which the first patent was issued, or to the additional specifications of the reissued patent of 1848.… And this brings us to the exceptions taken to the specification and claims of the patentee in the reissued patent of 1848. We perceive no well-founded objection to the description that is given of the whole invention and its separate parts, nor to his right to a patent for the first seven inventions set forth in the specification of his claims. The difficulty arises on the eighth. It is in the following words: Eighth. I do not propose to limit myself to the specific machinery or parts of machinery described in the foregoing specification and claims; the essence of my invention being the use of the motive power of the electric or galvanic current, which I call electro-magnetism, however developed for marking or printing intelligible characters, signs, or letters, at any distances, being a new application of that power of which I claim to be the first inventor or discoverer.

It is impossible to misunderstand the extent of this claim. He claims the exclusive right to every improvement where the motive power is the electric or galvanic current, and the result is the marking or printing intelligible characters, signs, or letters at a distance. If this claim can be maintained, it matters not by what process or machinery the result is accomplished. For aught that we now know some future inventor, in the onward march of science, may discover a mode of writing or printing at a distance by means of the electric or galvanic current, without using any part of the process or combination set forth in the plaintiff’s specification. His invention may be less complicated—less liable to get out of order—less expensive in construction, and in its operation. But yet if it is covered by this patent the inventor could not use it, nor the public have the benefit of it without the permission of this patentee. Nor is this all, while he shuts the door against inventions of other persons, the patentee would be able to avail himself of new discoveries in the properties and powers of electro-magnetism that scientific men might bring to light. For he says he does not confine his claim to the machinery or parts of machinery, which he specifies; but claims for himself a monopoly in its use, however developed, for the purpose of printing at a distance. New discoveries in physical science may enable him to combine it with new agents and new elements, and by that means attain the object in a manner superior to the present process and altogether different from it. And if he can secure the exclusive use by his present patent he may vary it with every new discovery and development of the science, and need place no description of the new manner, process, or machinery, upon the records of the patent office. And when his patent expires, the public must apply to him to learn what it is. In fine he claims an exclusive right to use a manner and process that he has not described and indeed had not invented, and therefore could not describe when he obtained his patent. The court is of opinion that the claim is too broad, and not warranted by law.

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No one, we suppose will maintain that Fulton could have taken out a patent for his invention of propelling vessels by steam, describing the process and machinery he used, and claimed under it the exclusive right to use the motive power of steam, however developed, for the purpose of propelling vessels. It can hardly be supposed that under such a patent he could have prevented the use of the improved machinery that science has since introduced; although the motive power is steam, and the result is the propulsion of vessels. Neither could the man who first discovered that steam might, by a proper arrangement of machinery, be used as a motive power to grind corn or spin cotton, claim the right to the exclusive use of steam as a motive power for the purpose of producing such effects. Again, the use of steam as a motive power in printing-presses is comparatively a modern discovery. Was the first inventor of a machine or process of this kind entitled to a patent, giving him the exclusive right to use steam as a motive power, however developed, for the purpose of marking or printing intelligible characters? Could he have prevented the use of any other press subsequently invented where steam was used? Yet so far as patentable rights are concerned both improvements must stand on the same principles. Both use a known motive power to print intelligible marks or letters; and it can make no difference in their legal rights under the patent laws, whether the printing is done near at hand or at a distance. Both depend for success not merely upon the motive power, but upon the machinery with which it is combined. And it has never, we believe, been supposed by any one, that the first inventor of a steam printing-press, was entitled to the exclusive use of steam, as a motive power, however developed, for marking or printing intelligible characters. Indeed, the acts of the patentee himself are inconsistent with the claim made in his behalf. For in 1846 he took out a patent for his new improvement of local circuits, by means of which intelligence could be printed at intermediate places along the main line of the telegraph; and he obtained a reissued patent for this invention in 1848. Yet in this new invention the electric or galvanic current was the motive power, and writing at a distance the effect. The power was undoubtedly developed, by new machinery and new combinations. But if his eighth claim could be sustained, this improvement would be embraced by his first patent. And if it was so embraced, his patent for the local circuits would be illegal and void. For he could not take out a subsequent patent for a portion of his first invention, and thereby extend his monopoly beyond the period limited by law. Many cases have been referred to in the argument, which have been decided upon this subject, in the English and American courts. We shall speak of those only which seem to be considered as leading ones. And those most relied on, and pressed upon the court, in behalf of the patentee, are the cases which arose in England upon Neilson’s patent for the introduction of heated air between the blowing apparatus and the furnace in the manufacture of iron. The leading case upon this patent, is that of Neilson and others v. Harford and others in the English Court of Exchequer. It was elaborately argued and appears to have been carefully considered by the court. The case was this:

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Neilson, in his specification, described his invention as one for the improved application of air to produce heat in fires, forges, and furnaces, where a blowing apparatus is required. And it was to be applied as follows: The blast or current of air produced by the blowing apparatus was to be passed from it into an air-vessel or receptacle made sufficiently strong to endure the blast; and through or from that vessel or receptacle by means of a tube, pipe, or aperture into the fire, the receptacle be kept artificially heated to a considerable temperature by heat externally applied. He then described in rather general terms the manner in which the receptacle might be constructed and heated, and the air conducted through it to the fire: stating that the form of the receptacle was not material, nor the manner of applying heat to it. In the action above-mentioned for the infringement of this patent, the defendant among other defenses insisted—that the machinery for heating the air and throwing it hot into the furnace was not sufficiently described in the specification, and the patent void on that account—and also, that a patent for throwing hot air into the furnace, instead of cold, and thereby increasing the intensity of the heat, was a patent for a principle, and that a principle was not patentable.

Upon the first of these defenses, the jury found that a man of ordinary skill and knowledge of the subject, looking at the specification alone, could construct such an apparatus as would be productive of a beneficial result, sufficient to make it worthwhile to adapt it to the machinery in all cases of forges, cupolas, and furnaces, where the blast is used. And upon the second ground of defense, Baron Parke, who delivered the opinion of the court, said: It is very difficult to distinguish it from the specification of a patent for a principle, and this at first created in the minds of the court much difficulty; but after full consideration we think that the plaintiff does not merely claim a principle, but a machine, embodying a principle, and a very valuable one. We think the case must be considered as if the principle being well known, the plaintiff had first invented a mode of applying it by a mechanical apparatus to furnaces, and his invention then consists in this: by interposing a receptacle for heated air between the blowing apparatus and the furnace. In this receptacle he directs the air to be heated by the application of heat externally to the receptacle, and thus he accomplishes the object of applying the blast, which was before cold air, in a heated state to the furnace.

We see nothing in this opinion differing in any degree from the familiar principles of law applicable to patent cases. Neilson claimed no particular mode of constructing the receptacle, or of heating it. He pointed out the manner in which it might be done, but admitted that it might also be done in a variety of ways; and at a higher or lower temperature; and that all of them would produce the effect in a greater or less degree, provided the air was heated by passing through a heated receptacle. And hence it seems that the court at first doubted, whether it was a patent for anything more than the discovery that hot air would promote the ignition of fuel better than cold. And if this had been the construction, the court, it appears, would have held his patent to be void; because the discovery of a principle in natural philosophy or physical science, is not patentable.… Undoubtedly, the principle that hot air will promote the ignition of fuel better than cold, was embodied in this machine. But the patent was not supported because

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this principle was embodied in it. He would have been equally entitled to a patent, if he had invented an improvement in the mechanical arrangements of the blowing apparatus, or in the furnace, while a cold current of air was still used. But his patent was supported, because he had invented a mechanical apparatus, by which a current of hot air, instead of cold, could be thrown in. And this new method was protected by his patent. The interposition of a heated receptacle, in any form, was the novelty he invented. We do not perceive how the claim in the case before us, can derive any countenance from this decision. If the Court of Exchequer had said that Neilson’s patent was for the discovery, that hot air would promote ignition better than cold, and that he had an exclusive right to use it for that purpose, there might, perhaps, have been some reason to rely upon it. But the court emphatically denied his right to such a patent. And his claim, as the patent was construed and supported by the court, is altogether unlike that of the patentee before us. For Neilson discovered, that by interposing a heated receptacle between the blower and the furnace, and conducting the current of air through it, the heat in the furnace was increased. And this effect was always produced, whatever might be the form of the receptacle, or the mechanical contrivances for heating it, or for passing the current of air through it, and into the furnace. But Professor Morse has not discovered, that the electric or galvanic current will always print at a distance, no matter what may be the form of the machinery or mechanical contrivances through which it passes. You may use electro-magnetism as a motive power, and yet not produce the described effect, that is, print at a distance intelligible marks or signs. To produce that effect, it must be combined with, and passed through, and operate upon, certain complicated and delicate machinery, adjusted and arranged upon philosophical principles, and prepared by the highest mechanical skill. And it is the high praise of Professor Morse that he has been able, by a new combination of known powers, of which electro-magnetism is one, to discover a method by which intelligible marks or signs may be printed at a distance. And for the method or process thus discovered, he is entitled to a patent. But he has not discovered that the electro-magnetic current, used as motive power, in any other method, and with any other combination, will do as well. We have commented on the case in the Court of Exchequer more fully, because it has attracted much attention in the courts of this country, as well as in the English courts, and has been differently understood. And perhaps a mistaken construction of that decision has led to the broad claim in the patent now under consideration. We do not deem it necessary to remark upon the other decisions, in relation to Nielson’s patent, nor upon the other cases referred to, which stand upon similar principles. The observations we have made on the case in the Court of Exchequer, will equally apply to all of them. We proceed to the American decisions. And the principles herein stated, were fully recognized by this court in the case of Leroy et al. v. Tatham and others, decided at the last term, 14 How. 156.…

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Now whether the Telegraph is regarded as an art or machine, the manner and process of making or using it must be set forth in exact terms. The act of Congress makes no difference in this respect between an art and a machine. An improvement in the art of making bar iron or spinning cotton must be so described; and so must the art of printing by the motive power of steam. And in all of these cases it has always been held, that the patent embraces nothing more than the improvement described and claimed as new, and that anyone who afterwards discovered a method of accomplishing the same object, substantially and essentially differing from the one described, had a right to use it. Can there be any good reason why the art of printing at a distance, by means of the motive power of the electric or galvanic current, should stand on different principles? Is there any reason why the inventor’s patent should cover broader ground? It would be difficult to discover anything in the act of Congress that would justify this distinction. The specification of this patentee describes his invention or discovery, and the manner and process of constructing and using it; and his patent, like inventions in the other arts above mentioned, covers nothing more. The provisions of the acts of Congress in relation to patents may be summed up in a few words. Whoever discovers that a certain useful result will be produced, in any art, machine, manufacture, or composition of matter, by the use of certain means, is entitled to a patent for it; provided he specifies the means he uses in a manner so full and exact, that any one skilled in the science to which it appertains, can, by using the means he specifies, without any addition to, or subtraction from them, produce precisely the result he describes. And if this cannot be done by the means he describes, the patent is void. And if it can be done, then the patent confers on him the exclusive right to use the means he specifies to produce the result or effect he describes, and nothing more. And it makes no difference, in this respect, whether the effect is produced by chemical agency or combination; or by the application of discoveries or principles in natural philosophy known or unknown before his invention; or by machinery acting altogether upon mechanical principles. In either case he must describe the manner and process as above mentioned, and the end it accomplishes. And any one may lawfully accomplish the same end without infringing the patent, if he uses means substantially different from those described. Indeed, if the eighth claim of the patentee can be maintained, there was no necessity for any specification, further than to say that he had discovered that, by using the motive power of electro-magnetism, he could print intelligible characters at any distance. We presume it will be admitted on all hands, that no patent could have issued on such a specification. Yet this claim can derive no aid from the specification filed. It is outside of it, and the patentee claims beyond it. And if it stands, it must stand simply on the ground that the broad terms above-mentioned were a sufficient description, and entitled him to a patent in terms equally broad. In our judgment the act of Congress cannot be so construed.…

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11. Wallace Int’l Silversmiths, Inc. v. Godinger Silver Art Co., Inc., 916 F.2d 76 (2d Cir. 1990) UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT Opinion, Winter, Circuit Judge Wallace International Silversmiths (“Wallace”) appeals from Judge Haight’s denial of its motion for a preliminary injunction under section 43(a) of the Lanham Act, 15 U.S.C. §1125(a) (1988), prohibiting Godinger Silver Art Co., Inc. (“Godinger”) from marketing a line of silverware with ornamentation that is substantially similar to Wallace’s Grande Baroque line. Judge Haight held that the Grande Baroque design is “a functional feature of ‘Baroque’ style silverware” and thus not subject to protection as a trademark. We affirm. Wallace, a Delaware corporation, has sold sterling silver products for over one hundred years. Its Grande Baroque pattern was introduced in 1941 and is still one of the best-selling silverware lines in America. Made of fine sterling silver, a complete place setting costs several thousand dollars. Total sales of Grande Baroque silverware have exceeded fifty million dollars. The Grande Baroque pattern is fairly described as “ornate, massive and flowery [with] indented, flowery roots and scrolls and curls along the side of the shaft, and flower arrangements along the front of the shaft.” Wallace owns a trademark registration for the Grande Baroque name as applied to sterling silver flatware and hollowware. The Grande Baroque design is not patented, but on December 11, 1989, Wallace filed an application for trademark registration for the Grande Baroque pattern. This application is still pending. Godinger, a New York corporation, is a manufacturer of silver-plated products. The company has recently begun to market a line of baroque-style silver-plated serving pieces. The suggested retail price of the set of four serving pieces is approximately twenty dollars. Godinger advertised its new line under the name 20th Century Baroque and planned to introduce it at the Annual New York Tabletop and Accessories Show, the principal industry trade show at which orders for the coming year are taken. Like Wallace’s silverware, Godinger’s pattern contains typical baroque elements including an indented root, scrolls, curls, and flowers. The arrangement of these elements approximates Wallace’s design in many ways, although their dimensions are noticeably different. The most obvious difference between the two designs is that the Godinger pattern extends further down the handle than the Wallace pattern does. The Wallace pattern also tapers from the top of the handle to the stem while the Godinger pattern appears bulkier overall and maintains its bulk throughout the decorated portion of the handle. Although the record does not disclose the exact circumstances under which Godinger’s serving pieces were created, Godinger admits that its designers were “certainly inspired by and aware of [the Wallace] design when [they] created [the 20th Century Baroque] design.” On the afternoon of April 23, 1990, Leonard Florence of Wallace learned from a wholesale customer, Michael C. Fina Company, that Godinger had placed an advertisement for its 20th Century Baroque serving pieces in an industry trade magazine.

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George Fina, the company’s president, said that he was “confused” when he saw what he believed to be a pattern identical to Grande Baroque being advertised by another company. He asked Mr. Florence whether Wallace had licensed the design to Godinger or whether “the Godinger product was simply a ‘knock-off.’” Two days after this conversation, Wallace filed the complaint in the instant matter stating various federal trademark and state unfair competition claims. Wallace also filed a motion for a temporary restraining order and sought a preliminary injunction prohibiting Godinger from using the mark 20th Century Baroque or infringing the trade dress of Wallace’s Grande Baroque product. Due to the imminence of the trade show, the district court held a hearing on Wallace’s application for preliminary relief the day after Wallace had filed its complaint. The record consisted of affidavits from Florence and Fina reciting the facts described supra, samples of the Wallace and Godinger pieces, and various photographs and catalogue illustrations of silverware from other manufacturers. Later that day, Judge Haight issued a Memorandum Opinion and Order in which he concluded that the Grande Baroque design was a “functional” feature of baroque-style silverware and thus ineligible for trade dress protection under section 43(a) of the Lanham Act. In so holding, he stated: In the case at bar, the “Baroque” curls and flowers are not “arbitrary embellishments” adopted to identify plaintiff’s product. Instead, all the “Baroque” style silverware use essentially the same scrolls and flowers as a way to compete in the free market. The “Baroque” style is a line of silverware which many manufacturers produce. Just like the patterns on the chinaware in Pagliero v. Wallace China Co., 198 F.2d 339 (9th Cir. 1952)], the “Grande Baroque” design is a functional feature of “Baroque” style silverware.

Wallace may well have developed secondary meaning in the market of “Baroque”styled silverware. In fact, I assume for purposes of this motion that anyone that sees, for instance, five lines of Baroque silverware will single out the Wallace line as being the “classiest” or the most handsome looking and will immediately exclaim “Oh! That’s the Wallace line. They make the finest looking ‘Baroque’ forks!” That is secondary meaning. However, that does not mean that plaintiff’s design is subject to protection. The “Baroque” curls, roots and flowers are not “mere indicia of source.” Instead, they are requirements to compete in the silverware market. This is a classic example of the proposition that “to imitate is to compete.” Pagliero, supra, at 344. The designs are aesthetically functional. Accordingly, I conclude that plaintiff does not have a trade dress subject to the protection of the Lanham Act.… The core purpose of trademark law is to prevent competitors from copying those aspects of a product or its trade dress that identify the source of the product to prospective consumers.… By giving the first user of a trademark exclusive rights in that mark, the law protects trademark owners’ investments in creating goodwill and affords consumers a low-cost means of identifying the source of goods.… Although the paradigmatic trademark is a distinctive name, the “trade dress” of a product may also serve as a trademark. A product’s trade dress ordinarily consists of its packaging.

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However, the design given a product by its manufacturer also may serve to distinguish it from the products of other manufacturers and hence be protectible trade dress.… In order to maintain an action for trade dress infringement under section 43(a) of the Lanham Act, the plaintiff must show that its trade dress has acquired secondary meaning—that is, the trade dress identifies the source of the product—and that there is a likelihood of confusion between the original trade dress and the trade dress of the allegedly infringing product.… Even if the plaintiff establishes these elements, the defendant may still avoid liability on a variety of grounds, including the so-called functionality doctrine. Our present view of that doctrine is derived from the Supreme Court’s dictum in Inwood Laboratories, stating that “in general terms, a product feature is functional if it is essential to the use or purpose of the article or if it affects the cost or quality of the article.” 456 U.S. at 850 n. 10.… Turning to the instant case, Judge Haight found that the similarities between the Godinger and Wallace designs involved elements common to all baroque-style designs used in the silverware market. He noted that many manufacturers compete in that market with such designs and found that “the ‘Baroque’ curls, roots and flowers are not ‘mere indicia of source.’ Instead, they are requirements to compete in the silverware market.” Judge Haight concluded that “the ‘Grande Baroque’ design is a functional feature of ‘Baroque’ style silverware,” relying on Pagliero v. Wallace China Co., 198 F.2d 339 (9th Cir. 1952). Although we agree with Judge Haight’s decision, we do not endorse his reliance upon Pagliero. That decision allowed a competitor to sell exact copies of china bearing a particular pattern without finding that comparably attractive patterns were not available to the competitor. It based its holding solely on the ground that the particular pattern was an important ingredient in the commercial success of the china. Id. at 343-44. We rejected Pagliero in LeSportsac, supra, at 77, and reiterate that rejection here. Under Pagliero, the commercial success of an aesthetic feature automatically destroys all of the originator’s trademark interest in it, notwithstanding the feature’s secondary meaning and the lack of any evidence that competitors cannot develop noninfringing, attractive patterns. By allowing the copying of an exact design without any evidence of market foreclosure, the Pagliero test discourages both originators and later competitors from developing pleasing designs.… See Keene Corp. v. Paraflex Industries, Inc., 653 F.2d 822, 824-25, 211 U.S.P.Q. (BNA) 201 (3d Cir. 1981). Our rejection of Pagliero, however, does not call for reversal. Quite unlike Pagliero, Judge Haight found in the instant matter that there is a substantial market for baroque silverware and that effective competition in that market requires “use [of] essentially the same scrolls and flowers” as is found on Wallace’s silverware. Based on the record at the hearing, that finding is not clearly erroneous and satisfies the requirement of Stormy Clime that a design feature not be given trade dress protection where use of that feature is necessary for effective competition. 809 F.2d at 976-77. Stormy Clime is arguably distinguishable, however, because it involved a design that had both aesthetic and utilitarian features. If read narrowly, Stormy Clime might be limited to cases in which trademark protection of a design would foreclose competitors from incorporating utilitarian features necessary to compete in the market for the particular product. In the instant case, the features at issue are strictly ornamental

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because they neither affect the use of the silverware nor contribute to its efficient manufacture. The question, therefore, is whether the doctrine of functionality applies to features of a product that are purely ornamental but that are essential to effective competition. Our only hesitation in holding that the functionality doctrine applies is based on nomenclature. “Functionality” seems to us to imply only utilitarian considerations and, as a legal doctrine, to be intended only to prevent competitors from obtaining trademark protection for design features that are necessary to the use or efficient production of the product. See Keene, supra, at 825 (“inquiry should focus on the extent to which the design feature is related to the utilitarian function of the product or feature”). Even when the doctrine is referred to as “aesthetic” functionality, it still seems an apt description only of pleasing designs of utilitarian features. Nevertheless, there is no lack of language in case law endorsing use of the defense of aesthetic functionality where trademark protection for purely ornamental features would exclude competitors from a market. See, e.g., Rogers, supra, at 347 (“Though a producer does not lose a design trademark just because the public finds it pleasing, there may come a point where the design feature is so important to the value of the product to consumers that continued trademark protection would deprive them of competitive alternatives[.]”) (Posner, J.). Indeed, the “continuum” in Judge Newman’s Stormy Clime opinion carefully limited the “distinctive and arbitrary arrangements of predominantly ornamental features” entitled to trademark protection to only those features “that do not hinder competitors from entering the same market.” Id. at 977. We put aside our quibble over doctrinal nomenclature, however, because we are confident that whatever secondary meaning Wallace’s baroque silverware pattern may have acquired, Wallace may not exclude competitors from using those baroque design elements necessary to compete in the market for baroque silverware. It is a first principle of trademark law that an owner may not use the mark as a means of excluding competitors from a substantial market. Where a mark becomes the generic term to describe an article, for example, trademark protection ceases.… Where granting trademark protection to the use of certain colors would tend to exclude competitors, such protection is also limited.… Finally, as discussed supra, design features of products that are necessary to the product’s utility may be copied by competitors under the functionality doctrine. In the instant matter, Wallace seeks trademark protection, not for a precise expression of a decorative style, but for basic elements of a style that is part of the public domain. As found by the district court, these elements are important to competition in the silverware market. We perceive no distinction between a claim to exclude all others from use on silverware of basic elements of a decorative style and claims to generic names, basic colors or designs important to a product’s utility. In each case, trademark protection is sought, not just to protect an owner of a mark in informing the public of the source of its products, but also to exclude competitors from producing similar products. We therefore abandon our quibble with the aesthetic functionality doctrine’s nomenclature and adopt the Restatement’s view that, where an ornamental feature is claimed as a trademark and trademark protection would

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significantly hinder competition by limiting the range of adequate alternative designs, the aesthetic functionality doctrine denies such protection.… Of course, if Wallace were able to show secondary meaning in a precise expression of baroque style, competitors might be excluded from using an identical or virtually identical design. In such a case, numerous alternative baroque designs would still be available to competitors. Although the Godinger design at issue here was found by Judge Haight to be “substantially similar,” it is not identical or virtually identical, and the similarity involves design elements necessary to compete in the market for baroque silverware. Because according trademark protection to those elements would significantly hinder competitors by limiting the range of adequate alternative designs, we agree with Judge Haight’s denial of a preliminary injunction.…

12. Koninklijke Philips Electronics NV v. Remington Consumer Products Ltd, Case C-299/99 (2002) COURT OF JUSTICE OF THE EUROPEAN UNION … 2. Those questions have arisen in a dispute between Koninklijke Philips Electronics NV (“Philips”) and Remington Consumer Products Ltd. (“Remington”) concerning an action for infringement of a trade mark that Philips had registered on the basis of use under the [United Kingdom] Trade Marks Act 1938.… 11. In 1966, Philips developed a new type of three-headed rotary electric shaver. In 1985, Philips filed an application to register a trade mark consisting of a graphic representation of the shape and configuration of the head of such a shaver, comprising three circular heads with rotating blades in the shape of an equilateral triangle. That trade mark was registered on the basis of use under the Trade Marks Act 1938. 12. In 1995, Remington, a competing company, began to manufacture and sell in the United Kingdom the DT 55, which is a shaver with three rotating heads forming an equilateral triangle, shaped similarly to that used by Philips. 13. Philips accordingly sued Remington for infringement of its trade mark. Remington counter-claimed for revocation of the trade mark registered by Philips.… 23. By its first question the referring court seeks to know whether there is a category of marks that is not excluded from registration by Article 3(1)(b), (c), and (d) and Article 3(3) of the Directive that is none the less excluded from registration by Article 3(1)(a) thereof on the ground that such marks are incapable of distinguishing the goods of the proprietor from those of other undertakings.… 29. In this connection, it should be recalled to begin with that, as stated in the tenth recital in the preamble to the Directive, the purpose of the protection afforded by a trade mark is inter alia to guarantee the trade mark as an indication of origin.

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30. Moreover, according to the case-law of the Court, the essential function of a trade mark is to guarantee the identity of the origin of the marked product to the consumer or end-user by enabling him, without any possibility of confusion, to distinguish the product or service from others that have another origin, and for the trade mark to be able to fulfill its essential role in the system of undistorted competition that the Treaty seeks to establish, it must offer a guarantee that all the goods or services bearing it have originated under the control of a single undertaking that is responsible for their quality (see, in particular, Case C-349/95 Loendersloot [1997] ECR I-6227, paragraphs 22 and 24, and Case C-39/97 Canon [1998] ECR I-5507, paragraph 28). 31. That essential function of the trade mark is also clear from the wording and the structure of the various provisions of the Directive concerning the grounds for refusal of registration. 32. First of all, Article 2 of the Directive provides that all signs may constitute trademarks provided that they are capable both of being represented graphically and of distinguishing the goods or services of one undertaking from those of other undertakings. 33. Second, under the rule laid down by Article 3(1)(b), (c), and (d), trademarks that are devoid of any distinctive character, descriptive marks, and marks that consist exclusively of indications that have become customary in the current language or in the bona fide and established practices of the trade are to be refused registration or declared invalid if registered (Windsurfing Chiemsee, cited above, paragraph 45). 34. Finally, Article 3(3) of the Directive adds a significant qualification to the rule laid down by Article 3(1)(b), (c), and (d) in that it provides that a sign may, through use, acquire a distinctive character that it initially lacked and thus be registered as a trade mark. It is therefore through the use made of it that the sign acquires the distinctive character that is a prerequisite for its registration (see Windsurfing Chiemsee, paragraph 44). 35. As the Court observed at paragraph 46 of its judgment in Windsurfing Chiemsee, just as distinctive character is one of the general conditions for registering a trade mark under Article 3(1)(b), distinctive character acquired through use means that the mark must serve to identify the product in respect of which registration is applied for as originating from a particular undertaking, and thus to distinguish that product from goods of other undertakings. 36. It is true that Article 3(1)(a) of the Directive provides that signs that cannot constitute a trade mark are to be refused registration or if registered are liable to be declared invalid. 37. However, it is clear from the wording of Article 3(1)(a) and the structure of the Directive that that provision is intended essentially to exclude from registration signs that are not generally capable of being a trade mark and thus cannot be represented graphically and/or are not capable of distinguishing the goods or services of one undertaking from those of other undertakings.

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38. Accordingly, Article 3(1)(a) of the Directive, like the rule laid down by Article 3(1)(b), (c), and (d), precludes the registration of signs or indications that do not meet one of the two conditions imposed by Article 2 of the Directive, that is to say, the condition requiring such signs to be capable of distinguishing the goods or services of one undertaking from those of other undertakings. 39. It follows that there is no class of marks having a distinctive character by their nature or by the use made of them that is not capable of distinguishing goods or services within the meaning of Article 2 of the Directive. 40. In the light of those considerations, the answer to the first question must be that there is no category of marks that is not excluded from registration by Article 3(1)(b), (c), and (d) and Article 3(3) of the Directive that is none the less excluded from registration by Article 3(1)(a) thereof on the ground that such marks are incapable of distinguishing the goods of the proprietor of the mark from those of other undertakings. 41. By its second question, the national court seeks to know whether the shape of an article (being the article in respect of which the sign is registered) is capable of distinguishing for the purposes of Article 2 of the Directive only if it contains some capricious addition, such as an embellishment that has no functional purpose.… 47. First, it is clear from Article 2 of the Directive that a trade mark has distinctive character if it serves to distinguish, according to their origin, the goods or services in respect of which registration has been applied for. It is sufficient, as is clear from paragraph 30 of this judgment, for the trade mark to enable the public concerned to distinguish the product or service from others that have another commercial origin, and to conclude that all the goods or services bearing it have originated under the control of the proprietor of the trade mark to whom responsibility for their quality can be attributed. 48. Second, Article 2 of the Directive makes no distinction between different categories of trade marks. The criteria for assessing the distinctive character of three-dimensional trademarks, such as that at issue in the main proceedings, are thus no different from those to be applied to other categories of trade mark. 49. In particular, the Directive in no way requires that the shape of the article in respect of which the sign is registered must include some capricious addition. Under Article 2 of the Directive, the shape in question must simply be capable of distinguishing the product of the proprietor of the trade mark from those of other undertakings and thus fulfill its essential purpose of guaranteeing the origin of the product. 50. In the light of those considerations, the answer to the second question must be that, in order to be capable of distinguishing an article for the purposes of Article 2 of the Directive, the shape of the article in respect of which the sign is registered does not require any capricious addition, such as an embellishment that has no functional purpose. 51. By its third question, the referring court essentially seeks to know whether, where a trader has been the only supplier of particular goods to the market, extensive use of

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a sign that consists of the shape of those goods is sufficient to give the sign a distinctive character for the purposes of Article 3(3) of the Directive in circumstances where, as a result of that use, a substantial proportion of the relevant class of persons associates the shape with that trader, and no other undertaking, or believes that goods of that shape come from that trader in the absence of a statement to the contrary.… 57. In that regard, it must first be observed that if a shape is refused registration pursuant to Article 3(1)(e) of the Directive, interpretation of which is the subject of the fourth question, it can in no circumstances be registered by virtue of Article 3(3). 58. However, Article 3(3) of the Directive provides that a mark that is refused registration under Article 3(1)(b), (c), or (d) may acquire, following the use made of it, a distinctive character that it did not have initially and can thus be registered as a trade mark. It is thus through use that the mark acquires the distinctive character that is the precondition of registration. 59. The distinctive character of a mark, including that acquired by use, must be assessed in relation to the goods or services in respect of which registration is applied for. 60. As is clear from paragraph 51 of the judgment in Windsurfing Chiemsee, in assessing the distinctive character of a mark in respect of which registration has been applied for, the following may inter alia also be taken into account: the market share held by the mark; how intensive, geographically widespread and long-standing use of the mark has been; the amount invested by the undertaking in promoting the mark; the proportion of the relevant class of persons who, because of the mark, identify goods as originating from a particular undertaking; and statements from chambers of commerce and industry or other trade and professional associations. 61. The Court has also held that if, on the basis of those factors, the competent authority finds that the relevant class of persons, or at least a significant proportion thereof, identify goods as originating from a particular undertaking because of the trade mark, it must in any event hold that the requirement for registering the mark laid down in Article 3(3) of the Directive is satisfied (Windsurfing Chiemsee, paragraph 52). 62. However, it must first be pointed out that the Court has made clear that the circumstances in which the requirement under Article 3(3) of the Directive may be regarded as satisfied cannot be shown to exist solely by reference to general, abstract data, such as predetermined percentages (Windsurfing Chiemsee, paragraph 52). 63. Second, the distinctive character of a sign consisting in the shape of a product, even that acquired by the use made of it, must be assessed in the light of the presumed expectations of an average consumer of the category of goods or services in question, who is reasonably well-informed and reasonably observant and circumspect (see, to that effect, the judgment in Case C-210/96 Gut Springenheide and Tusky [1998] ECR I-4657, paragraph 31). 64. Finally, the identification, by the relevant class of persons, of the product as originating from a given undertaking must be as a result of the use of the mark as a

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trade mark and thus as a result of the nature and effect of it, which make it capable of distinguishing the product concerned from those of other undertakings. 65. In the light of those considerations, the answer to the third question must be that, where a trader has been the only supplier of particular goods to the market, extensive use of a sign that consists of the shape of those goods may be sufficient to give the sign a distinctive character for the purposes of Article 3(3) of the Directive in circumstances where, as a result of that use, a substantial proportion of the relevant class of persons associates that shape with that trader and no other undertaking or believes that goods of that shape come from that trader. However, it is for the national court to verify that the circumstances in which the requirement under that provision is satisfied are shown to exist on the basis of specific and reliable data, that the presumed expectations of an average consumer of the category of goods or services in question, who is reasonably well-informed and reasonably observant and circumspect, are taken into account and that the identification, by the relevant class of persons, of the product as originating from a given undertaking is as a result of the use of the mark as a trade mark. 66. By its fourth question the referring court is essentially asking whether Article 3(1)(e), second indent, of the Directive must be interpreted to mean that a sign consisting exclusively of the shape of a product is unregistrable by virtue of that provision if it is established that the essential functional features of the shape are attributable only to the technical result. It also seeks to know whether the ground for refusal or invalidity of the registration imposed by that provision can be overcome by establishing that there are other shapes that can obtain the same technical result.… 73. It must first be observed in this regard that, under Article 2 of the Directive, a trade mark may, as a rule, consist of any sign capable both of being represented graphically and of distinguishing the goods or services of one undertaking from those of other undertakings. 74. Second, it must also be borne in mind that the grounds for refusal to register signs consisting of the shape of a product are expressly listed in Article 3(1)(e) of the Directive. Under that provision, signs that consist exclusively of the shape that results from the nature of the goods themselves, or the shape of the goods that is necessary to obtain a technical result, or the shape that gives substantial value to the goods cannot be registered or if registered are liable to be declared invalid. According to the seventh recital in the preamble to the Directive, those grounds for refusal have been listed in an exhaustive manner. 75. Finally, the marks that may be refused registration on the grounds listed in Article 3(1)(b), (c) or (d) of the Directive may under Article 3(3) acquire a distinctive character through the use made of them. However, a sign that is refused registration under Article 3(1)(e) of the Directive can never acquire a distinctive character for the purposes of Article 3(3) by the use made of it. 76. Article 3(1)(e) thus concerns certain signs that are not such as to constitute trademarks and is a preliminary obstacle liable to prevent a sign consisting exclusively of the shape of a product from being registrable. If any one of the criteria listed in

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Article 3(1)(e) is satisfied, a sign consisting exclusively of the shape of the product or of a graphic representation of that shape cannot be registered as a trade mark. 77. The various grounds for refusal of registration listed in Article 3 of the Directive must be interpreted in the light of the public interest underlying each of them (see, to that effect, Windsurfing Chiemsee, paragraphs 25 to 27). 78. The rationale of the grounds for refusal of registration laid down in Article 3(1)(e) of the Directive is to prevent trade mark protection from granting its proprietor a monopoly on technical solutions or functional characteristics of a product that a user is likely to seek in the products of competitors. Article 3(1)(e) is thus intended to prevent the protection conferred by the trade mark right from being extended, beyond signs that serve to distinguish a product or service from those offered by competitors, so as to form an obstacle preventing competitors from freely offering for sale products incorporating such technical solutions or functional characteristics in competition with the proprietor of the trade mark. 79. As regards, in particular, signs consisting exclusively of the shape of the product necessary to obtain a technical result, listed in Article 3(1)(e), second indent, of the Directive, that provision is intended to preclude the registration of shapes whose essential characteristics perform a technical function, with the result that the exclusivity inherent in the trade mark right would limit the possibility of competitors supplying a product incorporating such a function or at least limit their freedom of choice in regard to the technical solution they wish to adopt in order to incorporate such a function in their product. 80. As Article 3(1)(e) of the Directive pursues an aim that is in the public interest, namely that a shape whose essential characteristics perform a technical function and were chosen to fulfill that function may be freely used by all, that provision prevents such signs and indications from being reserved to one undertaking alone because they have been registered as trade marks (see, to that effect, Windsurfing Chiemsee, paragraph 25). 81. As to the question whether the establishment that there are other shapes that could achieve the same technical result can overcome the ground for refusal or invalidity contained in Article 3(1)(e), second indent, there is nothing in the wording of that provision to allow such a conclusion. 82. In refusing registration of such signs, Article 3(1)(e), second indent, of the Directive reflects the legitimate aim of not allowing individuals to use registration of a mark in order to acquire or perpetuate exclusive rights relating to technical solutions. 83. Where the essential functional characteristics of the shape of a product are attributable solely to the technical result, Article 3(1)(e), second indent, precludes registration of a sign consisting of that shape, even if that technical result can be achieved by other shapes. 84. In the light of those considerations, the answer to the fourth question must be that Article 3(1)(e), second indent, of the Directive must be interpreted to mean that a sign

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consisting exclusively of the shape of a product is unregistrable by virtue thereof if it is established that the essential functional features of that shape are attributable only to the technical result. Moreover, the ground for refusal or invalidity of registration imposed by that provision cannot be overcome by establishing that there are other shapes that allow the same technical result to be obtained.…

[E]

New Uses, Equivalents, Materials, and Advantages 10. The Smith opinion opens a consistent line of opinions that express the United States Supreme Court’s view that new uses of known machines and materials are not patentable.2 The competition policy implications of this is that, with the first patent, the inventor has already received the right to oppose any uses whatsoever, even those that he does not not about. But this only during the life of the patent. After the patent expires, the invention is free to be used, both for previously known uses as well as for new uses. 11. This idea is not shared in other jurisdictions, namely in the European Union, where new uses, in particular in the pharmaceutical field (where they are normally referred to as “second medical uses”), may be eligible as patentable subject matter. The argument is that second uses cost an enormous amount of money and time, and, even if their discovery normally results from accident, significant research and inventive work are necessary to bring the discovery from the laboratory to the market. As an answer to this, it can be said—and it has been said indeed—that intellectual property is not aimed at protecting raw results of hard work or investment, but genuinely differentiating results of work, no matter how hard or costly the work was. 12. Anyway, this is an open matter, and parliaments may be tempted to make protection requirements loose, so as to encourage creative efforts and discoveries in certain technological fields, even if that has a price on differentiation. But here we are already in the realm of policies of intellectual property in regulated markets, a topic that will be visited in Chapter 3.

13. Smith v. Nichols, 88 U.S. 112 (1875) SUPREME COURT OF THE UNITED STATES Mr. Justice Swayne delivered the opinion of the court. The bill is founded upon a patent, and was filed by the appellant. It charges infringement. Its object and prayer are to have the defendant enjoined from infringing further, and required to account for the profits he has wrongfully made.… In the specification the loom and process for weaving corded elastic India-rubber fabrics are described, and the excellence of such fabrics so woven, and the points in which they are superior to fabrics not so woven, are pointed out and insisted upon.…

2. Actually, the idea that new uses are not patentable was first exposed in the case Boulton and Watt v. Bull (1795). See infra case no. 17.

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The substance of the specification as limited by the disclaimers may be thus summarized: The elastic cords are placed side by side, equidistant from each other. They are stretched several times their normal length. In the spaces between the cords warp threads are placed parallel with the cords, and of less size. The cords remain stationary. The warp threads are thrown open by the machinery of the loom. Every alternate thread is thrown upwards and the intermediate one downwards. What is termed a “shed” is thus formed above the cords and one under them. Through each of these sheds a weft thread is passed by means of a shuttle. One of the shuttles is thus passed above and the other below all the rubber cords. After both the weft threads have been driven home by the lathe, the position of the warp threads is inverted by the treadle. Sheds are thus formed on the opposite sides of the cords. Weft threads are then again passed across the fabric. This process is continued until the weaving is completed. The weft threads form the only covering on the upper and under side of the cords. When their tension ceases after the weaving is done the cords contract in length and increase proportionately in thickness. The weft threads are necessarily brought into proximity with each other. They partially imbed themselves in the cords, holds them firmly, and prevent them from slipping back, if cut anywhere, while at the tension that subsisted when the weaving took place. So the weft threads cling tightly to the rubber cords in every degree of tension to which they may be subjected. Each of the former grasps firmly each of the latter half round. The points with respect to this litigation, which the complainant claims as covered by his patent, we understand, are that fewer warp threads are used, that the tightness of the weaving is greater, that the rubber cords in all stages of tension are more firmly and effectually held in his fabric than in any that preceded it—and especially, the manner in which the weft threads, one above and the other below, grasp each of the rubber cords half round.… The defense mainly relied upon is want of novelty; in other words, the prior public use of the things patented. The counsel for the appellant admits expressly that an elastic fabric with silk on one side and cotton on the other, one woven with two shuttles, one woven with stationary elastic cords, and one with elastic cords covered above and below solely by weft threads, were known and in public use by themselves separately before the alleged invention of the complainant. It is also admitted that suspended webbing of different kinds, some provided with elastic cords having strips of cloth interwoven between them, and another class without the strips of cloth and similar to the complainant’s, “except that the weft threads in pairs were not made to grasp the elastic cords in the manner described in the complainant’s specification,” also in like manner preceded his invention. The proof to the same effect, less the exception named, is voluminous and conclusive. It is unnecessary particularly to refer to it. The testimony is equally full as to webbing for shoe gores. That, made in the same way as the suspender webbing, also came into public use and was largely sold at as early a period. The testimony of Hotchkiss establishes conclusively that—also prior to the defendant’s invention—he made and sold suspender webbing with what were called binding warps between the rubber warps, with weft threads that “went over all the

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rubber warps, and under all the rubber warps,” and that the fabric was woven while the rubber cords were in a state of tension. He says further, that he had never known suspender webbing made by American manufacturers in any other way. There is a large mass of other testimony relative to the case in this aspect, but it is deemed unnecessary to pursue the subject further. The evidence before us leaves to the complainant none of the particulars claimed as of his invention, except perhaps greater tightness of the weaving, a firmer grasping of the elastic cords by the weft threads half round, above and below, and greater beauty and value of the fabric. The entire ground of the controversy between the parties is reduced to this narrow isthmus, and the question presented for our determination is one rather of law than of fact. A patentable invention is a mental result. It must be new and shown to be of practical utility. Everything within the domain of the conception belongs to him who conceived it. The machine, process, or product is but its material reflex and embodiment. A new idea may be engrafted upon an old invention, be distinct from the conception that preceded it, and be an improvement. In such case it is patentable. The prior patentee cannot use it without the consent of the improver, and the latter cannot use the original invention without the consent of the former. But a mere carrying forward or new or more extended application of the original thought, a change only in form, proportions, or degree, the substitution of equivalents, doing substantially the same thing in the same way by substantially the same means with better results, is not such invention as ill sustain a patent. These rules apply alike, whether what preceded was covered by a patent or rested only in public knowledge and use. In neither case can there be an invasion of such domain and an appropriation of anything found there. In one case everything belongs to the prior patentee, in the other, to the public at large. The question before us must be considered in the light of these rules. All the particulars claimed by the complainant, if conceded to be his, are within the category of degree. Many textile fabrics, especially those of cotton and wool, are constantly improved. Sometimes the improvement is due to the skill of the workmen, and sometimes to the perfection of the machinery employed. The results are higher finish, greater beauty of surface, and increased commercial value. A patent for the better fabric in such cases would, we apprehend, be unprecedented. The patent in the present case rests upon no other or better foundation.…

14. Roberts v. Ryer, 91 U.S. 150 (1875) SUPREME COURT OF THE UNITED STATES Mr. Chief Justice Waite delivered the opinion of the court. In order that we may proceed intelligently in our inquiries as to the validity of the patent presented for our consideration in this case, it is important to ascertain at the outset what it is that has been patented.

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Looking to the original patent, issued Nov. 13, 1855, we find the invention is there described as consisting “of an improvement in refrigerators, whereby the whole of the contained air is kept in continual rotation, purification, desiccation, and refrigeration, and with economy of ice;” and that the inventor claimed and obtained a patent for “the arrangement set forth for causing the perpetual rotation of the whole of the air contained within the refrigerating apartments, said arrangement consisting, when the refrigerator is closed, of an endless passage or chamber, the walls, shelves, and ice receptacle of which are so placed and constructed that the air is compelled to circulate through the entire apartment or apartment, and from which the water of the melting ice is discharged immediately from the refrigerator, instead of flowing between its walls.” Mention is nowhere made in the specifications attached to this patent of any advantage that the descending current of air has over the ascending. The whole apparent object of the inventor was to produce a circulation of the confined air without the introduction of external air. The drawings exhibit shelves perforated so as to permit the passage of the air in its downward and upward progress; but the shelves seem only to be alluded to in the specifications, for the purpose of indicating the necessity of their perforation, or of some equivalent arrangement, so as to allow the free transit of the air. They appear as part of the refrigerator to be improved, and are in no respect necessary for the accomplishment of the object the inventor had in view. Being in the refrigerator, they are perforated, or otherwise so arranged as to permit the circulation that the inventor is attempting by his device to create. But for this, they would prevent, or at least interfere with, the accomplishment of his object. The shelves themselves form no part of his improvement; but their perforation or its equivalent, when they are used, does. In the reissued patent, the invention is described precisely the same as in the old; and then the following is added: “It is well known that mould will not generate in a current of air; and it is known, that, when once formed, it propagates itself, and spreads with rapidity: therefore, if any one part of the refrigerator be out of the direct course of the circulation, the air will stagnate there, and will develop mould, which will contaminate the whole apartment. The apartment D may vary in width, and it may be … so narrow as to serve merely as a passage for the ascending current of air, the greatest benefit being always derived from the downward current in apartment C.” This last paragraph certainly has much the appearance of an expansion of the original invention.… The patent is, therefore, for a combination of three elements; to wit: 1. An open-bottom ice-box, or its equivalent, so constructed that the air may pass freely down through it, while, at the same time, the drip of the water from the melting ice is prevented by collecting the water, and taking it in an escape-pipe outside of the refrigerator; 2. A dividing partition, open above and below, separating the refrigerator into two apartments; and, 3. A chamber directly under the open-bottom ice-box, in which articles to be refrigerated may be placed in such manner as to receive the descending current of air from the ice-box directly upon them. There is no doubt of the utility of this combination. If the patentee was its original and first inventor, the device was patentable to him.

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It will be observed that no particular form of the opening in the bottom of the ice-box is essential. In fact, an equivalent may be used. It is so expressly stated. Any device that will allow of the passage of the cooled air out from among the ice, or cooling surfaces, into the chamber below, will come within the specifications. Hence the bottom may be in the form of a grate, or it may be constructed of bars running only longitudinally, or it may have one or many open spaces of any form. In this respect, all is left to the judgment of the builder. He may adopt any arrangement that he considers the best suited to the accomplishment of the object to be attained; which is the cooling of the air by the ice, and its discharge into the chamber below. Neither is there any special requirement as to the manner in which the water from the melted ice is to be collected and conducted outside the refrigerator. It is said in the specifications, that the bottom of the ice-box was made funnel-shaped; but this was so that the water might be conducted to the central discharge, and from thence fall into the escape-pipe. This particular shape, however, is not made an essential ingredient. Any device that will collect the water in the discharge-pipe and prevent the drip will meet this requirement of the invention. So, too, of the escape-pipe: it may be of any desirable form. As little space as possible should be occupied, so that it may not obstruct the downward passage of the air; but even this is left as a matter of judgment alone. Neither is any particular form of partition made essential. It need not even be vertical. All that is required is that it shall be open at the top and bottom, and divide the refrigerator into two apartments. There are no specifications as to the size of the openings or their form, or as to the comparative size or form of the two apartments. It is said that the apartment for the ascending current may be so narrow, that it will serve only as a passage for the air; but there is nothing to prevent that for the descending current being narrow also, if the purposes of the refrigerator are such as to make that desirable. As the greatest benefit is generally to be derived from the use of the descending current, it is probable that this chamber will ordinarily be made as large as is consistent with a steady and continuous flow of the air; but, if a rapid descent is considered essential for any of the purposes of refrigeration, there is nothing to prevent a suitable contrivance for that purpose. If that can be accomplished by a larger chamber above leading into a smaller one below, for the purpose of concentrating the cold-air current as it descends, a proper structure may be employed. If, in any place, the air descending from the ice-box can strike directly upon the articles to be refrigerated, the structure will be within the limits of the patent. It may be desirable to preserve the temperature at a lower degree until it strikes the article than it would be if permitted to remain in a chamber extending the whole size of the ice-box to the bottom of the refrigerator. In such case, a proper contrivance for that purpose may be employed. Shelves or other fixtures for holding the articles to be refrigerated are not necessary, as the articles themselves may be placed in the descending current without the aid of any fixtures. But, if they were, their particular form is not specified. A nail driven into the wall of the chamber would be a fixture within the meaning of this call of the specifications. All the specifications do require is that, if shelves or fixtures are used, they shall be so constructed or placed as to interfere as little as possible with the free passage of the air.

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Such being the patent, we now proceed to consider the defense; which is, that the invention patented had been anticipated by Asel S. Lyman and others. Sanford, the patentee, does not carry his invention back of the summer of 1855, when, it perhaps sufficiently appears, his application was filed. On the 21st September, 1854, Lyman filed his application for a patent for “a new and improved mode of cooling, drying, and disinfecting air for ventilators and refrigerators.” His improvement in refrigerators consisted “in so arranging them, that, as fast as the air became warm and moist and impure by contact with the meat, it is drawn off and passed through the material, where it is cooled, dried, and disinfected, and then returned to use again in the refrigerator, collecting moisture and impurities, which it deposits in the receptacle intended for that purpose; thus keeping up a full circulation, and thoroughly ventilating the refrigerator with dry, pure, cold air.” His device consisted of a receptacle for ice, with a grate for its bottom, on which the ice rested. This receptacle was placed in the upper part of the refrigerator, and on one side. Below it was a cold-air chamber, into which the air flowed from the ice through the grate. The water from the melting ice was collected in this chamber, and conducted by a pipe to the outside of the refrigerator. From the cold-air chamber was a conduit leading downwards, but which did not extend to the bottom of the refrigerator. At the top of the ice receptacle, and on its side, was an opening into the refrigerator.… He then claimed as his invention “the combination of the reservoir of cooling, drying, and disinfecting material with the descending tube or conduit, so that the cold and condensed air in this conduit shall, on account of its increased weight, cause the warmer air to pass more rapidly through the material, where it is cooled, dried, and disinfected, and in its turn fall down the conduit, being by its sides kept separate from the other air until it mingles with the lower strata, substantially as described for the purposes aforesaid.” … Undoubtedly Lyman expected to use the ascending air principally for the purposes of refrigeration, and he therefore supposed the greatest benefit would be derived from that current; but there was nothing in his specifications to prevent the use of the descending air, or from so constructing his refrigerator as to make that available. If it should be thought advisable to extend the size of the chamber for the descending air, there was nothing to prevent it. It would still operate as a conduit in which the cold air would fall down and be kept separate by the sides from the other air until it mingled with the lower strata. It being, then, certain that Lyman contrived a machine that would produce the desired circulation, and could be used for refrigeration in the ascending current, it remains only to consider, whether, if one desired to make use of the descending current for the same purpose, he could claim such use as a new invention. It is no new invention to use an old machine for a new purpose. The inventor of a machine is entitled to the benefit of all the uses to which it can be put, no matter whether he had conceived the idea of the use or not. Lyman had the descending current. True, he concentrated the air as it fell, and sent it downwards through a space smaller than that which would be contained in a chamber extending the full size of the bottom of the ice-box to the bottom of the

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refrigerator; but he did have a space large enough to expose in it some articles to the effect of that current. If it should be found desirable to utilize that current to a greater extent than was at first contemplated, all that need be done is to enlarge the conduit. If the circulation is kept up, the device will be within the specifications. In fact, the proof is abundant, that in his experiments, while perfecting his invention, Lyman did, in more cases than one, utilize the descending current. With both the inventors, the circulation by means of an ascending and descending current was the principal object to be obtained. One considered the greatest benefit for the purposes of refrigeration was to be derived from the use of the descending current, while the other had his attention directed more particularly to the advantages of the ascending. They each had both, and could utilize both. It is no invention, therefore, to make use of one rather than the other.… Lyman had conceived the idea of his invention as early as Aug. 19, 1852; for he then filed his caveat in the Patent Office. His ideas were, at that time, undoubtedly crude; but it is clear that he kept steadily at this work. He built many refrigerators upon his general plan; and, in some at least, the descending current was made use of. A part had shelves arranged in such a manner as to expose the articles in that current; and in some the articles were placed on the bottom of the refrigerator, immediately under the outlet of the conduit. In some the conduit was large, and in others it was small. The size was made in all cases to depend upon the judgment of the builder, and the purposes to which the machine, when completed, was to be applied. As has been seen, Lyman, after having, as he thought, perfected his invention, applied for his patent, September 21, 1854. Technical objections were made; and on the 19th April, 1855, he withdrew the application. He, however, still kept up his correspondence with the department, vigorously pushing his claim. On the 28th November, 1855, only thirteen days after the grant of the patent to Sanford, he filed a new application, and, in doing so, distinctly connected it with the first. There certainly is no material difference between the old and the new. On the 25th March, 1856, a patent was in due form issued to him. Down to this time, it is impossible to discover any material difference between the two patented inventions. Clearly Lyman was the oldest inventor, and his patent was consequently the best, although that of Sanford antedated his. His last application was rejected December 5, because it had been anticipated by Sanford; but afterwards the subject was reconsidered, and a patent issued to him. After this grant of a patent to Lyman, Sanford surrendered his original patent, and obtained his reissue upon the amended specifications and claim. These have already been stated. All that can possibly be claimed for this amendment is a combination of the use of the descending current with the device for the circulation. There was no change in the machine: it was only put to a new use. If there was any change of construction suggested, it was only to increase its capacity for usefulness. It was “a mere carrying forward or new or more extended application of the original thought, a change only in form, proportions, or degree, doing substantially the same thing in the same way, by substantially the same means, with better results.” This is not such an invention as will sustain a patent. We so decided no longer ago than the last term, in

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Smith v. Nichols, 21 Wall. 112. Clearly, we think, therefore, the invention of Sanford was anticipated by Lyman; and his patent is, on that account, void.… Upon the evidence submitted to us, we think a clear case is made in favor of the defendants, and that the bill was properly dismissed. The decree of the Circuit Court is affirmed.

15. General Electric Co. v. Jewel Incandescent Lamp Co., 326 U.S. 242 (1945) SUPREME COURT OF THE UNITED STATES Mr. Justice Douglas delivered the opinion of the Court. … The Circuit Court of Appeals for the Sixth Circuit in General Electric Co. v. Save Sales Co., 82 F.2d 100, and the Circuit Court of Appeals for the Second Circuit in General Electric Co. v. Wabash Appliance Corp., 93 F.2d 671, held the patent valid. The corresponding Canadian Pipkin Patent No. 289,379 was held invalid by the Supreme Court of Canada. Fuso Electric Works v. Canadian General Electric Co., 1940 Can. L. Rep. 371. The British Pipkin patent, No. 228,907, was held invalid by the High Court of Justice. British Thomson-Houston Co., Ltd. v. Tungstalite, Ltd., 57 Pat. Journ. 271 (1940). The patent relates to a frosted glass bulb for electric lamps. It is defended here as a product not a process patent. The product is described in the first claim as follows: A glass electric lamp bulb having its interior surface frosted by etching so that the maximum brightness of an ordinary incandescent lamp comprising such a bulb will be less than twenty-five per cent of that of said lamp with a clear bulb, said interior bulb surface being characterized by the presence of rounded as distinguished from sharp angular crevices to such an extent that the strength to resist breakage by impact is greater than twenty per cent of that of the clear bulb.

Many years prior to the Pipkin patent, efforts had been made to reduce the glare produced by the brilliant filament of an incandescent lamp having a clear bulb. The most common method of reducing the glare was to frost the outside surface with an acid frosting solution. While bulbs so treated reduced the glare, the rough outside surface collected dirt and was difficult to clean, with the result that the light output was further reduced. Twenty-five years before Pipkin, Kennedy (patent No. 733,972 issued July 21, 1903) had showed an inside frosted bulb. But a difficulty appeared. When the outside surface of a bulb was frosted the strength of the bulb was not materially affected. When the inside surface, however, was frosted, the strength of the bulb was substantially reduced, making it unfit for practical use. Pipkin recited these facts in his specifications and stated, “The object of my invention is to produce an inside frosted glass bulb which will be much stronger than those heretofore produced.” He went on to state that the preferred method of frosting was by use of a chemical medium that, when applied so as to produce the proper light diffusion, made the bulb extremely fragile. And he added: “I have found, however, that if the bulb is given a further treatment, which I term a strengthening treatment, in which it is subjected to an

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etching or frosting treatment of lower degree than that to which it was first subjected, it becomes quite strong. Indeed, it may be made practically as strong as the original clear glass bulb.” He gave as the probable explanation the fact that the first treatment produced sharp, angular crevices or pits in the glass, while the second or strengthening treatment ate away additional glass and rounded out the angular crevices into saucer-shaped pits. The fact that the bulb was strengthened when additional glass was dissolved was referred to by the court below as “Pipkin’s paradox.” The patent contains charts showing the relative extent to which the strength of the bulb is weakened by the first frosting treatment and its strength restored by the second treatment. The patent also shows that while the bulb of the patent materially reduced the glare obtained in a clear bulb, the lighting efficiency of the two is substantially the same for any given wattage. As the first claim of the patent indicates, the characteristic feature of the patented bulb is the fact that the interior surface is “characterized by the presence of rounded as distinguished from sharp angular crevices.” It is that feature that is responsible for the bulb’s strength. Now, an electric bulb frosted on the inside was old in the art. Kennedy had disclosed such a product twenty-five years earlier. Moreover, it had long been known in the art that successive acid treatments of glass rounded out the sharp angular crevices produced by the first etching. That was shown in particularity by Reinitzer in 1887 and by Tillotson in 1917. And it was shown in Sprechsaal of 1907 (a German trade paper) that if hollow glass was subjected to a second etching, the surface would have a silk-like appearance, the finish being called satin etching or silk mat. It is true that these prior publications were concerned with frosting for the purpose of obtaining a decorative finish in glass ware or desired optical effects in focusing screens for cameras and the like. But Sprechsaal in 1912 specifically described the application of successive etchings to electric bulbs. And that publication recommended, as Pipkin did years later, that a weaker or diluted etching solution be used for the second etching. Moreover, Wood (patent No. 1,240,398 issued September 18, 1917) observed that successive acid treatments of glass rounded out the sharp angular crevices produced by the first etching, and he applied that idea to electric bulbs as well as to other glass articles. His patent covered the making of light-diffusing screens. He noted that if glass was etched once, the surface was cut into irregular crevices, pits and grooves, with the result that only a portion of the light was transmitted. But if after the first etching (which he accomplished by a blast of air charged with a fine dust of flour emery or carborundum) the surface was flowed with acid, the crevices and pits were enlarged and smoothed out into minute concave lenses. These microscopical lenses diffused the light perfectly and transmitted practically all of it. He noted that his process was especially valuable in the case of certain types of cameras. But he added, “Such a screen is also useful for rendering the bulbs of incandescent lamps diffusing without at the same time causing the very marked loss in the efficiency of the lamp, which results from frosting the bulbs in the usual manner.” Wood, to be sure, did not describe frosting the inside of the bulb. Kennedy, however, had shown that. Moreover, prior to Wood it was well known in the art, as we have noted, that successive acid treatments of glass produced a surface characterized by the presence of rounded as distinguished from sharp angular crevices or pits. If there was novelty in applying that process to electric bulbs, Wood achieved

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it. At least since Kennedy, it was known that inside-frosted electric bulbs were preferable to outside-frosted bulbs. Wood, of course, was concerned only with light diffusion and transmission primarily of screens, secondarily of electric bulbs. Neither he nor any other before Pipkin appears to have given any indication that the second treatment resulted in any strengthening of the glass. But strengthening was inherent in the method he proposed. And it appears that an electric bulb, which had been frosted inside pursuant to his method, would have inevitably obtained the rounded pits and hence the attendant strength characteristic of the Pipkin bulb. If A without mentioning the element of strength patented a bulb that was extra strong, B could not obtain a patent on the bulb because of its strength, though he was the first to recognize that feature of it. That is the import of Ansonia Brass & Copper Co. v. Electrical Supply Co., 144 U.S. 11. That case involved the question of the validity of a patent for an insulated electric conductor. The prior art disclosed a similar method of insulation that was used in connection with the wiring of burglar alarms. Such use involved no problem of combustibility of the insulating material that emerged on the introduction of electric lighting. The insulator disclosed by the prior art was not intended to be, and perhaps was not known to be incombustible. But in fact the earlier insulator had approximately the same degree of incombustibility as that described in the patent. The Court ruled that “the application of an old process to a new and analogous purpose does not involve invention, even if the new result had not before been contemplated.” 144 U.S. at 18. Since the two insulators were practically the same in their method of construction, the patentee was not allowed to claim the feature of incombustibility as his invention. The benefits of the “potencies and values more important than the uses that were immediately apparent” belong to him who establishes priority of discovery. Radio Corporation of America v. Radio Engineering Laboratories, 293 U.S. 1, 14. Petitioner, however, insists that this is not a case where the patentee merely observed the advantageous properties of an old article of manufacture. It says that Pipkin created a new article of manufacture, an inside-frosted bulb having an etched inner surface characterized by rounded rather than sharp angular crevices—an article that never existed before. It points out that prior to Pipkin no one knew why inside frosted bulbs were weak nor knew how to remedy the weakness. Pipkin indeed seems to be the first to have recognized that the form of the pitting had an effect on the strength of the glass. The prior art appears to have made no such disclosure. And it is true that the Pipkin bulb met with commercial success. The question remains, however, whether the Pipkin patent was invalid because of anticipation. It is true that there is a difference between the Ansonia case and the present one. There a prior product had been created having qualities that were unrecognized at the time and that later were sought to be patented. On the other hand, it does not appear in the present case that prior to Pipkin electric bulbs had been frosted on the interior with rounded rather than sharp angular crevices or pits. But Wood, as well as the art that preceded him, showed how to produce such a surface on electric bulbs as well as on other articles of glass. Kennedy showed how to frost the inside of an electric bulb. In view of these disclosures it is difficult to see how there could be invention in frosting

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either the outside or inside of an electric bulb so as to produce saucer-shaped rather than sharp, angular crevices or pits. A product claim describes an article, new and useful. The principle of the Ansonia case plainly would deny validity to the Pipkin patent if the prior art disclosed an electric bulb so frosted on the inside as to round out the angular crevices produced by the first etching, whether the full utility of the bulb had been previously recognized or not. The same result is indicated where, as in the present case, the prior art discloses the method of making an article having the characteristics of the patented product, though all the advantageous properties of the product had not been fully appreciated. Lovell Mfg. Co. v. Cary, 147 U.S. 623. Pipkin found latent qualities in an old discovery and adapted it to a useful end. But that did not advance the frontiers of science in this narrow field so as to satisfy the exacting standards of our patent system. Where there has been use of an article or where the method of its manufacture is known, more than a new advantage of the product must be discovered in order to claim invention. See DeForest Radio Co. v. General Electric Co., 283 U.S. 664, 682. It is not invention to perceive that the product that others had discovered had qualities they failed to detect. See Corona Cord Tire Co. v. Dovan Chemical Corp., 276 U.S. 358, 369.…

16. Great Atlantic & Pacific Tea Co. v. Supermarket Equipment Corp., 340 U.S. 147 (1950) Supreme Court of the United States Mr. Justice Jackson delivered the opinion of the Court. … Stated without artifice, the claims assert invention of a cashier’s counter equipped with a three-sided frame, or rack, with no top or bottom, which, when pushed or pulled, will move groceries deposited within it by a customer to the checking clerk and leave them there when it is pushed back to repeat the operation. It is kept on the counter by guides. That the resultant device works as claimed, speeds the customer on his way, reduces checking costs for the merchant, has been widely adopted and successfully used, appear beyond dispute. The District Court explicitly found that each element in this device was known to prior art. “However,” it found, “the conception of a counter with an extension to receive a bottomless self-unloading tray with which to push the contents of the tray in front of the cashier was a decidedly novel feature and constitutes a new and useful combination.” The Court of Appeals regarded this finding of invention as one of fact, sustained by substantial evidence, and affirmed it as not clearly erroneous. It identified no other new or different element to constitute invention and overcame its doubts by consideration of the need for some such device and evidence of commercial success of this one. Since the courts below perceived invention only in an extension of the counter, we must first determine whether they were right in so doing. We think not. In the first place, the extension is not mentioned in the claims, except, perhaps, by a construction

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too strained to be consistent with the clarity required of claims that define the boundaries of a patent monopoly.… In the second place, were we to treat the extension as adequately disclosed, it would not amount to an invention. We need not go so far as to say that invention never can reside in mere change of dimensions of an old device, but certainly it cannot be found in mere elongation of a merchant’s counter—a contrivance that, time out of mind, has been of whatever length suited the merchant’s needs. In the third place, if the extension itself were conceded to be a patentable improvement of the counter, and the claims were construed to include it, the patent would nevertheless be invalid for overclaiming the invention by including old elements, unless, together with its other old elements, the extension made up a new combination patentable as such.… Thus, disallowing the only thing designated by the two courts as an invention, the question is whether the combination can survive on any other basis. What indicia of invention should the courts seek in a case where nothing tangible is new, and invention, if it exists at all, is only in bringing old elements together? While this Court has sustained combination patents, it never has ventured to give a precise and comprehensive definition of the test to be applied in such cases. The voluminous literature that the subject has excited discloses no such test. It is agreed that the key to patentability of a mechanical device that brings old factors into cooperation is presence or lack of invention. In course of time the profession came to employ the term “combination” to imply its presence and the term “aggregation” to signify its absence, thus making antonyms in legal art of words that in ordinary speech are more nearly synonyms. However useful as words of art to denote in short form that an assembly of units has failed or has met the examination for invention, their employment as tests to determine invention results in nothing but confusion. The concept of invention is inherently elusive when applied to combination of old elements. This, together with the imprecision of our language, have counseled courts and text writers to be cautious in affirmative definitions or rules on the subject. The negative rule accrued from many litigations was condensed about as precisely as the subject permits in Lincoln Engineering Co. v. Stewart-Warner Corp., 303 U.S. 545, 549: “The mere aggregation of a number of old parts or elements which, in the aggregation, perform or produce no new or different function or operation than that theretofore performed or produced by them, is not patentable invention.” … The conjunction or concert of known elements must contribute something; only when the whole in some way exceeds the sum of its parts is the accumulation of old devices patentable. Elements may, of course, especially in chemistry or electronics, take on some new quality or function from being brought into concert, but this is not a usual result of uniting elements old in mechanics. This case is wanting in any unusual or surprising consequences from the unification of the elements here concerned, and there is nothing to indicate that the lower courts scrutinized the claims in the light of this rather severe test. Neither court below has made any finding that old elements that made up this device perform any additional or different function in the combination than they perform out of it. This counter does what a store counter always has done—it supports merchandise at a convenient height while the customer makes his purchases and the

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merchant his sales. The three-sided rack will draw or push goods put within it from one place to another—just what any such a rack would do on any smooth surface—and the guide rails keep it from falling or sliding off from the counter, as guide rails have ever done. Two and two have been added together, and still they make only four. Courts should scrutinize combination patent claims with a care proportioned to the difficulty and improbability of finding invention in an assembly of old elements. The function of a patent is to add to the sum of useful knowledge. Patents cannot be sustained when, on the contrary, their effect is to subtract from former resources freely available to skilled artisans. A patent for a combination that only unites old elements with no change in their respective functions, such as is presented here, obviously withdraws what already is known into the field of its monopoly and diminishes the resources available to skillful men. This patentee has added nothing to the total stock of knowledge, but has merely brought together segments of prior art and claims them in congregation as a monopoly. The Court of Appeals and the respondent both lean heavily on evidence that this device filled a long-felt want and has enjoyed commercial success. But commercial success without invention will not make patentability.… The courts below concurred in finding that every element here claimed (except extension of the counter) was known to prior art. When, for the first time, those elements were put to work for the supermarket type of stores, although each performed the same mechanical function for them that it had been known to perform, they produced results more striking, perhaps, than in any previous utilization. To bring these devices together and apply them to save the time of customer and checker was a good idea, but scores of progressive ideas in business are not patentable, and we conclude on the findings below that this one was not.… Mr. Justice Douglas, with whom Mr. Justice Black agrees, concurring. It is worth emphasis that every patent case involving validity presents a question that requires reference to a standard written into the Constitution. Article I, § 8, contains a grant to the Congress of the power to permit patents to be issued. But, unlike most of the specific powers that Congress is given, that grant is qualified. The Congress does not have free rein, for example, to decide that patents should be easily or freely given. The Congress acts under the restraint imposed by the statement of purpose in Article I, §8. The purpose is “To promote the Progress of Science and useful Arts….” The means for achievement of that end is the grant for a limited time to inventors of the exclusive right to their inventions. Every patent is the grant of a privilege of exacting tolls from the public. The Framers plainly did not want those monopolies freely granted. The invention, to justify a patent, had to serve the ends of science—to push back the frontiers of chemistry, physics, and the like; to make a distinctive contribution to scientific knowledge. That is why through the years the opinions of the Court commonly have taken “inventive genius” as the test. It is not enough that an article is new and useful. The Constitution never sanctioned the patenting of gadgets. Patents serve a higher end—the advancement of science. An invention need not be as startling as an atomic bomb to be patentable. But it has to be of such quality and distinction that masters of the scientific field in which it falls will recognize it as an advance. …

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The attempts through the years to get a broader, looser conception of patents than the Constitution contemplates have been persistent. The Patent Office, like most administrative agencies, has looked with favor on the opportunity that the exercise of discretion affords to expand its own jurisdiction. And so it has placed a host of gadgets under the armor of patents—gadgets that obviously have had no place in the constitutional scheme of advancing scientific knowledge. A few that have reached this Court show the pressure to extend monopoly to the simplest of devices: … [door knobs] made of clay rather than metal or wood, where different shaped door knobs had previously been made of clay.… Rubber caps put on wood pencils to serve as erasers.… Making collars of parchment paper where linen paper and linen had previously been used.… A method for preserving fish by freezing them in a container operating in the same manner as an ice cream freezer.… Inserting a piece of rubber in a slot in the end of a wood pencil to serve as an eraser.… Fine thread placed across open squares in a regular hairnet to keep hair in place more effectively.… Putting a metal washer on a wire staple.… A stamp for impressing initials in the side of a plug of tobacco.… A hose reel of large diameter so that water may flow through hose while it is wound on the reel.… Putting rollers on a machine to make it moveable.… Revolving cue rack.… Using flat cord instead of round cord for the loop at the end of suspenders.… Putting elastic gussets in corsets.… A shirt bosom or dickey sewn onto the front of a shirt.… A lantern lid fastened to the lantern by a hinge on one side and a catch on the other.… Bridging a strip of cloth across the fly of pantaloons to reinforce them against tearing.… Placing rubber hand grips on bicycle handlebars.… Applying the principle of the umbrella to a skirt form.… An oval rather than cylindrical toilet paper roll, to facilitate tearing off strips.… An envelope flap that could be fastened to the envelope in such a fashion that the envelope could be opened without tearing. The patent involved in the present case belongs to this list of incredible patents that the Patent Office has spawned. The fact that a patent as flimsy and as spurious as this one has to be brought all the way to this Court to be declared invalid dramatically illustrates how far our patent system frequently departs from the constitutional standards that are supposed to govern.

[F]

Excluding Abstract Ideas from Patent Protection

13. Parliaments and courts around the world are in agreement as far as this topic is concerned: only inventions that imply the handling of concrete, material goods, be they products or processes, deserve patent protection. Therefore, abstract ideas, such as algorithms, methods of doing businesses, financial schemes and insurance plans, just to mention a few, are not patentable in spite of the genuine inventive activity that is behind many of them and their economic utility. This notion has be inherited from the beginnings of the modern patent system, which was designed by British courts in the seventeenth and eighteenth centuries, in their reading of section VI the Statute of Monopolies, of 1624, as stated in the Boulton opinion (case no. 17). 14. This understanding has survived the passing of time and it still presides over the patent system in the beginning of the twenty-first century. We should not, of course, be surprised with the views of eighteenth century English judges. New factories, incorporating new technologies, were built and delievered new consumer goods at

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an amazingly increasing speed. Factories’ outputs were making the lives of people more comfortable (and consumer goods more affordable). The landscape around cities all over the country was dominated by high chimneys and large plant and warehouse buildings. Therefore, when addressing a legal tool that was aimed at promoting inventions, judges would naturally link those inventions to the prevailing economic, technological and social scenario. What we should be admired with is that twenty-first century judges keep the same bias against patenting abstract ideas. This bias was strongly stated by the United States Supreme Court in the Bilski opinion (see case no. 19), and confirmed in Alice Corp. Pty. Ltd. v. CLS Bank International, 134 S. Ct. 2347 (2014) (not included in this book). 15. In the Bilski opinion some Justices expressed a subconscious anti-patent bias when they said that, because new methods of doing business had been invented since the days of Assyrian merchants without patent protection, it followed that patent protection was not needed. If this same view had prevailed in the eighteenth century, the United States would not have included the Patent Clause in the Constitution. After all, since the dawn of civilization, inventors have invented new and useful devices in the absence of a patent system. Just think of the numerous shapes of plows and hammers invented in the thousands of years that preceded History. Actually, patents are not granted because without them inventions would not have been made, but because they promote differentiation and reduce transaction costs in new technology. This is true both for tangible devices and abstract ideas. And the fact that it is not easy to describe and claim an abstract idea is not an unsurpassable obstacle, as plant and gene patents show. All the patent system would require in order to accomodate useful abstract ideas would be some fine tuning adjustments to the notions of nonobviousness and utility. But that would not be too difficult. More difficult is to overcome a two-century old bias, as the Bilski court reveals.3

17. Boulton and Watt v. Bull, 17954 UNITED KINGDOM, COURT OF COMMON PLEAS This was an action on the case for infringing a patent. The first count of the declaration stated that the King, by letters patent, under the great seal, dated 5th January, 9 Geo. III. Granted to the petitioner, James Watt, the sole benefit and advantage of making, exercising, and vending a certain invention of him the said James Watt; being a method by him invented, of lessening the consumption of steam and fuel in fire-engines, for the term of fourteen years, with a proviso for a specification, &c., in the usual manner.… This cause came before the Court on this special case after a verdict in favor of the patent. The questions submitted were, first, whether the said patent was good in law, and continued by the Act of Parliament before mentioned.…

3. See Nuno Pires de Carvalho, Patently Outdated: Patents in Post-industrial Economy—The Case for Service Patents (Wolters Kluwer, Alphen aan den Rijn, 2012). 4. William Carpmael, Law Reports of Patent Cases, vol. 1 (A. Macintosh, London, 1843), 117 et seq.

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Their Lordships took time to consider their judgment, and delivered it as follows: Mr. Justice Rook, after stating the special case at length, thus proceeded. From this state of the case, and from the admission of counsel on both sides, I assume the following facts, namely, that the plaintiff Watt is the inventor of a new and useful improvement in fire-engines, whereby the consumption of steam, and consequently of fuel, is considerably lessened; that the improvement is of such a nature, that it may legally be the object of protection by Royal patent; that a patent has been granted to the inventor, on the condition of a specification of the nature of the invention; that a specification has been made, sufficient to enable a mechanic to construct fire-engines containing the improvement invented by the patentee; and that the Legislature, six years after the patent had been granted, thought proper to extend the duration of it from the eight years then to come, to twenty-five years; the patent having been granted in the ninth, and the statute having passed in the fifteenth year of the reign of the present King.

Under these circumstances, I think I conform to the spirit of the statute 21 Jac. I, c.3, s.6, if I incline to support this patent, provided it may be supported without violating any rule of law; and I think so for two reasons; first, because the patentee is substantially entitled to the protection of the patent; and secondly, because the public are sufficiently instructed, and will be duly benefited by the specification. Against the claim of the patentee, certain objections have been made, which, it is contended, deprive him of all legal right to that protection. First, it is objected that the patent is not for fire-engines upon the particular construction that contains this new improvement, but for a new invented method of lessening the consumption of steam and fuel; secondly, it is objected that no particular engine is described in this specification, but that it only sets forth the principles; and the last objection is that the statute has not duly prolonged the patent, because the patent is for a method, and the statute for an engine. It is obvious that these objections are merely formal; they do not affect the substantial merits of the patentee, nor the meritorious consideration that the public have the right to receive, in return for the protection that the patentee claims. With regard to the first objection, it is, that the patent is not for a fire-engine of a particular construction, but for a new invented method. It pre-supposes the existence of a fire-engine, and gives a monopoly of lessening the consumption of steam and fuel in fire-engines. The obvious meaning of these words is that he has made an improvement in the construction of fire-engines; for what does method mean, but mode or manner of effecting? What method can there be of saving steam or fuel in engines, but by some variation in the construction of them? A new invented method, therefore, conveys to my understanding the idea of a new mode of construction. I think those words are tantamount to fire-engines of a newly invented construction; at least I think they will bear this meaning, if they do not necessarily exclude every other. The specification shows that this was the meaning of the words, as understood by the patentee; for he has specified a new and particular mode of constructing fire-engines. If he has so understood the words, and they will bear this interpretation, then I think this objection, which is merely verbal, is answered. To that I add that patents for a method or art of doing particular things have been so numerous, according to the lists left with us, that method may be considered as a common expression in instruments of this kind.… It is

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objected that [the patentee] professes to set forth principles only; but we are not bound by what he professes to do, but by what he has really done.… The term principle is equivocal; it may denote either the radical elementary truths of a science, or those consequential axioms that are founded on radical truths, but which are used as fundamental truths by those who do not find it expedient to have recourse to first principles.… As to the specification, some part of it, so much as represents the future intentions of the patentee, may be considered, according to the language of the specification, as merely theoretical; but the greater part describes a practical use of improved mechanism, the basis on which the improvement is founded. The object of the patentee was to condense the steam without cooling the cylinder; the means to effectuate this were to enclose the cylinder in a case that will confine the heat or transmit it slowly, to surround it with steam or other heated bodies, and to suffer neither water nor any other substance colder than the steam, to enter or touch it during that time. These means are set forth. The objection is that there is no drawing or model of a particular engine; and where is the necessity of such drawing or model, if the specification is intelligible without it? Had a drawing or model been made, and any man copied the improvement, and made a machine in a different form, no doubt this would have been an infringement of the patent: why? because the mechanical improvement would have been introduced into the machine, though the form was varied. It follows from thence that the mechanical improvement, and not the form of the machine, is the object of the patent … Mr. Justice Heath — This patent is expressly for a new invented method for lessening the consumption of steam and fuel in fire-engines. It appears that the invention of the patentee is original, and may be the subject of a patent: but the question is, inasmuch as this invention is to be put in practice by means of machinery, whether the patent ought not to have been for one or more machines, and whether this is such a specification as entitles him to the monopoly of a method? … The statute of 21 Jac. I prohibits all monopolies, reserving to the King, by an express proviso, so much of his ancient prerogative as shall enable him to grant letters patent, and grants of privilege, for the term of fourteen years or under, of the sole working or making of any manner of new manufactures within this realm, to the true and first inventor and inventors of such manufactures. What, then, falls within the scope of the proviso? Such manufactures as are reducible to two classes. The first class includes machinery, the second substances (such as medicines) formed by chemical and other processes, where the vendible substance is the thing produced, and that which operates preserves no permanent form. In the first class the machine, and in the second the substance produced, is the subject of the patent. I approve of the term manufacture, in the statute, because it precludes all nice refinements, it gives us to understand the reason of the proviso, that it was introduced for the benefit of trade. That which is the subject of a patent ought to be specified, and it ought to be that which is vendible, otherwise it cannot be a manufacture: this is a species of new manufacture, and novelty of the language is sufficient to excite alarm. It has been urged that other patents have been litigated and established; for instance, Dollond’s, which was for a refracting telescope. I consider that as substantially an improved machine. A patent for an improvement of a refracting telescope, and a patent for an improved refracting telescope, are in

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substance the same. The same specification would serve for both patents; the new organization of parts is the same in both. I asked in the argument for an instance of a patent for a method, and none such could be produced. I was then pressed with patents for chemical processes, many of which are for a method, but that is from an inaccuracy of expression, because the patent in truth is for a vendible substance. To pursue this train of reasoning still further, I shall consider how far the arguments in support of this patent will apply to the invention of original machinery, founded on a new principle. The steam-engine furnishes an instance. The Marquis of Worcester discovered in the last century the expansive force of steam, and first applied it to machinery. As the-original inventor, he was clearly entitled to a patent. Would the patent have been good applied to all machinery, or to the machines that he had discovered? The patent decides the question. It must be for the vendible matter, and not the principle. Another objection may be urged against the patent, upon the application of the principle to an old machine, which is, that whatever machinery may be hereafter invented, would be an infringement of the patent, if it be founded on the same principle. If this were so, it would reverse the clearest positions of law respecting patents for machinery, by which it has always been holden, that the organization of a machine may be the subject of a patent, but principles cannot. If the argument for the patentee were correct, it would follow that where a patent was obtained for the principle, the organization would be of no consequence. Therefore, the patent for the application of the principle must be as bad as the patent for the principle itself. It has been urged for the patentee, that he could not specify all the cases to which his machinery could be applied. The answer seems obvious, that what he cannot specify he has not invented. The finding of the jury that steam-engines may be made upon the principle stated by the patentee, by a mechanic acquainted with the fire-engines previously in use, is not conclusive. This patent extends to all machinery that may be made on this principle, so that he has taken a patent for more than he has specified; and as the subject of his patent is an entire thing, the want of a full specification is a breach of the conditions, and avoids the patent. Indeed, it seems impossible to specify a principle and its application to all cases, which furnishes an argument that it cannot be the subject of a patent. It has been usual to examine the specification, as a condition on which the patent was granted. I shall now consider it in another point of view. It is a clear principle of law that the subject of every grant must be certain. The usual mode has been for the patentee to describe the subject of it by a specification; the patent and the specification must contain a full description: then in this, as in most other cases, the patent would be void, for the uncertain description of the thing granted if it were not aided by the statute. The grant of a method is not good, because uncertain; the specification o£ a method, or the application of a principle, is equally so, for the reasons I have alleged. Mr. Justice Buller — Few men possess more ingenuity, or have greater merit with the public, than the plaintiffs on this record; and if their patent can be sustained in point of law, no man ought to envy them the profits and advantages arising from it. Even if it cannot be supported, no man ought to envy them the profits that they have received, because the world has undoubtedly derived great advantages from their ingenuity. We are called upon to deliver our opinions on the dry question of law, whether, upon the case disclosed to us, this patent can or cannot be sustained? I shall deliver my opinion

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first, upon the case itself, and secondly, on the arguments that have been urged at the bar.… The very statement of what a principle is proves it not to be a ground for a patent: it is the first ground and rule for arts and sciences, or in other words, the elements and rudiments of them. A patent must be for some new production from those elements, and not for the elements themselves.… There is one short observation arising on this part of the case, which seems to me to be unanswerable, and that is, that if the principle alone be the foundation of the patent, it cannot possibly stand, with that knowledge and discovery that the world were in possession of before. The effect, the power, and the operation of steam were known long before the date of this patent; all machines that are worked by steam are worked by the same principle. The principle was known before and therefore if the principle alone be the foundation of the patent, though the addition may be a great improvement (as it certainly is) yet the patent must be void ab initio. But then it was said that though an idea or principle alone would not support the patent, yet that an idea reduced into practice, or a practical application of a principle, was a good foundation for a patent, and was the present case. The method and the mode of doing a thing are the same, and I think it impossible to support a patent for a method only, without having carried it into effect, and produced some new substance. But here it is necessary to inquire, what is meant by a principle reduced into practice? It can only mean a practice founded on principle, and that practice is the thing done or made, or in other words, the manufacture that is invented. This brings us to the true foundation of all patents, which must be the manufacture itself, and so says the statute, 21 James I. c. 3. All monopolies, except those that are allowed by that statute, are declared to be illegal and void. They were so at common law, and the sixth section excepts only those of the sole working or making any manner of new manufacture; and whether the manufacture be with or without principle, produced by accident or by art, is immaterial. Unless this patent can be supported for the manufacture, it cannot be supported at all. I am of opinion that the patent is granted for the manufacture, and I agree with my brother Adair, that verbal criticisms ought not to avail, but that “principle” in the patent, and the “engine” in the Act of Parliament, mean, and are the same thing. Besides, the declaration is founded on a right to the engine, and therefore unless the plaintiffs can make out their right to that extent, they must fail. In most of the instances of the different patents, mentioned by my brother Adair, the patents were for the manufacture, and the specification rightly stated the method by which the manufacture was made; but none of them go the length of proving, that a method of doing a thing without the thing being done, or actually reduced into practice, is a good foundation for a patent. When the thing is done or produced, then it becomes the manufacture, which is the proper subject for a patent.… Mechanical and chemical discoveries all come within the description of manufactures, and it is no objection to either of them, that the articles of which they are composed were known, and were in use before, provided the compound article, which is the object of the invention, is new. But then the patent must be for the specific compound, and not for all the articles or ingredients of which it is made. The first inventor of a fire-engine could never have supported a patent for the method and principle of using iron; nor could Dr. James (supposing his patent had been clear of

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other objections) have sustained a patent for the method and principle of using antimony. In the first case, the patent must have been for the fire-engine, eo nomine; and in the second, for the specific compound powder. Suppose the world were better informed than it is how to prepare Dr. James’s fever powder, and an ingenious physician should find out that it was a specific cure for consumption, if given in particular quantities: could he have a patent for the sole use of James’s powder in consumptions, or to be given in particular quantities? I think it must be conceded that such a patent would be void; and yet the use of the patent be new, and the effect of it would be as materially different from what it is now as life is from death. So in the case of a late discovery, which, as far as experience has hitherto gone, is said to have proved efficacious, that of the medical properties of arsenic in curing agues; could a patent be supported for the sole use of arsenic in aguish complaints? The medicine is the manufacture, and the only object of a patent; and as the medicine is not new, any patent for it, or for the use of it, would be void.… The true question in this case is, whether the plaintiffs’ patent can be supported for the engine. I have already said, I consider it as granted for the engine, and if that be the right construction of the patent, that alone lays all the arguments about ideas and principles out of the case. The objections to this patent as a patent for the engine are two; first, that the fire-engine was known before; and, secondly, though the plaintiffs’ invention consisted only of an improvement of the old machine, they have taken the patent for the whole machine, and not for the improvement alone. As to the first, the fact that the plaintiffs’ counsel were forced to admit, and did repeatedly admit in the terms that I mentioned, viz., that there was nothing new in the machine, is decisive against the patent. And the second objection is equally fatal.… Lord Chief Justice Eyre — … Upon this case two questions are reserved for the opinion of the Court; … As those two questions are framed, there are three points for the consideration of the Court. First, whether the patent was, in its original creation, good or bad? Secondly, taking it to be good, whether it was continued by the Act of Parliament? And thirdly, taking it to be good in its original creation, and to have been continued by the Act of Parliament, subject to an objection for the want of a specification, whether there has been a sufficient specification? Though we have had many cases upon patents, yet I think we are here upon groand that is yet untrodden, at least was untrodden till this cause was instituted, and till the discussions were entered into which we have heard from the bar, and now from the Court. Patent rights are nowhere, that I can find, accurately discussed in our books.… Deriving so little assistance from our books, let us resort to the statute itself, 21 Jac. 1, c. 3. We shall there find a monopoly to be “the privilege of the sole buying, selling, making, working, or using any thing within this realm;” and this is generally condemned as contrary to the fundamental law of the land. But the 5th and 6th sections of that statute save letters patent, and grants of privileges, of the sole working or making of any manner of new manufacture within this realm, to the first and true inventor and inventors of such manufactures; with this qualification, “so that they be not contrary to the law, nor mischievous to the state;” in these three respects, first, “by raising the prices of commodities at home; secondly, by being hurtful to trade;” or, thirdly, by being “generally inconvenient.” According to the letter of the statute, the saving goes only to

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the sole working and making; the sole buying, selling, and using, remain under the general prohibition, and with apparent good reason for so remaining; for the exclusive privilege of buying, selling, and using, could hardly be brought within the qualification of not being contrary to law, and mischievous to the state, in the respects that I have mentioned. I observe also that according to the letter of the statute, the words, “any manner of new manufacture” in the saving, fall very short of the words “any thing,” in the first section; but most certainly the exposition of the statute, as far as usage will expound it, has gone very much beyond the letter. In the case of Edgeberry v. Stephens, the words “new devices” are substituted and used as synonymous with the words “new manufacture.” It was admitted in the argument at the bar that the word “manufacture” in the statute was of extensive signification; that it applied not only to things made but to the practice of making, to principles carried into practice in a new manner, to new results of principles carried into practice. Let us pursue this admission. Under things made, we may class, in the first place, new compositions of things, such as manufactures in the most ordinary sense of the word; secondly, all mechanical inventions, whether made to produce old or new effects, for a new piece of mechanism is certainly a thing made. Under the practice of making we may class all new artificial manners of operating with the hand, or with instruments in common use, new processes in any art producing effects useful to the public. When the effect produced is some new substance, or composition of things, it should seem that the privilege of the sole working or making ought to be for such new substance or composition, without regard to the mechanism or process by which it has been produced, which, though perhaps also new, will be only useful, as producing the new substance. Upon this ground Dollond’s patent was perhaps exceptionable, for that was for a method of producing a new object-glass, instead of being for the object-glass produced. If Dr. James’s patent had been for his method of preparing his powders, instead of the powders themselves, that patent would hare been exceptionable upon the same ground. When the effect produced is no substance or composition of things, the patent can only be for the mechanism, if new mechanism is used, or for the process, if it be a new method of operating with or without old mechanism by which the effect is produced. To illustrate this: the effect produced by Mr. David Hartley’s invention for securing buildings from fire, is no substance or composition of things; it is a mere negative quality, the absence of fire: this effect is produced by a new method of disposing iron plates in buildings. In the nature of things, the patent could not be for the effect produced; I think it could not be for the making the plates of iron, which, when disposed in a particular manner, produce the effect, for those are things in common use. But the invention consisting in the method of disposing those plates of iron so as to produce their effect, and that effect being a useful and meritorious one, the patent seems to have been very properly granted to him for his method of securing buildings from fire. And this compendious analysis of new manufactures mentioned in the statute satisfies my doubt, whether anything could be the subject of a patent but something organized and capable of precise specification. But for the more satisfactory solution of the other points that are made in this case, I shall pursue this subject a little

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further. In Mr. Hartley’s method, plates of iron are the means that he employs, but he did not invent those means; the invention wholly consisted in the new method of using, or I would rather say, of disposing a thing in common use, and that thing every man might make at his pleasure, and that therefore, I repeat, could not in my judgment be the subject of the patent. In the nature of things, it must be that in the carrying into execution any new invention, use must be made of certain means proper for the operation. Manual labor, to a certain degree, must always be employed, the tools of artists frequently, often things manufactured but not newly invented, such as Hartley’s iron plates, all the common utensils used in conducting any process, and so up to the most complicated machinery that the art of man ever devised. Now let the merit of the invention be what it may, it is evident that the patent in almost all these cases cannot be granted for the means by which it acts, for in them there is nothing new, and in some of them nothing capable of appropriation. Even where the most complicated machinery is used, if the machinery itself is not newly invented, but only conducted by the skill of the inventor, so as to produce a new effect, the patent cannot be for the machinery. In Hartley’s case, it could not be for the effect produced, because the effect, as I have already observed, is merely negative, though it was meritorious. In the list of patents with which I have been furnished, there are several for new methods of manufacturing articles in common use, where the sole merit and the whole effect produced are the saving of time and expense, and thereby lowering the price of the article and introducing it into more general use. Now I think these methods may be said to be new manufactures, in one of the common acceptations of the word, as we speak of the manufacture of glass, or any other thing of that kind. The advantages to the public from improvements of this kind are, beyond all calculation, important to a commercial country, and the ingenuity of artists who turn their thoughts towards such improvements is in itself deserving of encouragement; and, in my apprehension, it is strictly agreeable to the spirit and meaning of the Stat. 21 Jac. 1, that it should be encouraged; and yet the validity of these patents, in point of law, must rest upon the same foundation as that of Mr. Hartley’s. The patent cannot be for the effect produced, for it is either no substance at all, or, what is exactly the same thing as to the question upon a patent, no new substance, but an old one produced advantageously for the public. It cannot be for the mechanism, for there is no new mechanism employed: it must, then, be for the method and I would say, in the very significant words of Lord Mansfield, in the great case of the copyright (4 Burr. 2397), it must be for method detached from all physical existence whatever; and I think we should well consider what we do in this case, that we may not shake the foundation upon which these patents stand. Probably I do not overrate it when I state that two-thirds, I believe I might say, three-fourths of all patents granted since the statute passed, are for methods of operating and of manufacturing, producing no new substances and employing no new machinery. If the list were examined, I dare say there might be found fifty patents for methods of producing all the known salts, either the simple salt, or the old compounds. The different sorts of ashes used in manufactures are many of them inventions of great merit, many of them probably mere speculations of wild projectors; the latter ought to fall, the former to stand. If we wanted an illustration of the possible merit of a new method of operating with old machinery, we might look to the identical case now in

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judgment before the Court. If we consider into what general use fire-engines are come, that our mines cannot be worked without them, that they are essentially necessary to the carrying on many of our principal manufactures, that these engines are worked at an enormous expense in coals, which in some parts of the kingdom can with difficulty be procured at all in large quantities, it is most manifest, that any method found out for lessening the consumption of steam in the engines, which, by necessary consequence, lessens the consumption of coals expended in working them, will be of great benefit to the public, as well as to the individual who thinks fit to adopt it. And shall it now be said, after we have been in the habit of seeing patents granted in the immense number in which they have been granted for methods of using old machinery, to produce substances that were old, but in a more beneficial manner, and also for producing negative qualities by which benefits result to the public, by a narrow construction of the word “manufacture” in this statute, that there can be no patent for methods producing this new and salutary effect, connected, and intimately connected as it is, with the trade and manufactures of the country? This, I confess, I am not prepared to say. An improper use of the word “principle” in the specification set forth in this case, has, I think, served to puzzle it. Undoubtedly, there can be no patent for a mere principle; but for a principle so far embodied and connected with corporeal substances as to be in a condition to act and to produce effects in any art, trade, mystery, or manual occupation, I think there may be a patent. Now this is, in my judgment, the thing for which the patent stated in the case was granted, and this is what the specification describes, though it miscalls it a principle. It is not that the patentee has conceived an abstract notion that the consumption of steam in fire-engines may be lessened, but he has discovered a practical manner of doing it, and for that practical manner of doing it he has taken his patent. Surely, this is a very different thing from taking a patent for a principle; it is not for a principle, but for a process. I have dwelt the more largely upon this part of the case, because, in my apprehension, this is the foundation upon which the whole argument will be found to rest. If, upon the true construction of the statute, there may be a patent for a new method of manufacturing or conducting chemical processes, or of working machinery so as to produce new and useful effects, then I am warranted to conclude that this patent was, in its original creation, good.… The objection on the Act of Parliament is of the same nature as one of the objections to the specification the specification calls a method of lessening the consumption of steam in fire-engines a principle, which it is not the Act calls it an engine, which perhaps also it is not; but both the specification and statute are referable to the same thing, and, when they are taken with their correlative, are perfectly intelligible. Upon the wider ground, I am therefore of opinion, that the Act has continued this patent. A narrower ground was taken in the argument, which was to expound the word “engine” in the body of this Act, in opposition to the title of it, to mean a method; and I am ready to say, I would resort to that ground, if necessary, in order to support the patent, ut res magis valeat quam pereat. But it is not necessary: for let it be remembered, that though monopolies in the eye of the law are odious, the consideration of the privilege created by this patent is meritorious, because, to use the words of Lord Coke, “the inventor bringeth to, and

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for, the commonwealth, a new manufacture by his invention, costs, and charges.” I conclude, therefore, that the judgment of the Court ought to be for the plaintiff.5

18. Gottschalk v. Benson, 409 U.S. 63 (1972) SUPREME COURT OF THE UNITED STATES Mr. Justice Douglas delivered the opinion of the Court. Respondents filed in the Patent Office an application for an invention that was described as being related “to the processing of data by program and more particularly to the programmed conversion of numerical information” in general-purpose digital computers. They claimed a method for converting binary-coded decimal (BCD) numerals into pure binary numerals. The claims were not limited to any particular art or technology, to any particular apparatus or machinery, or to any particular end use. They purported to cover any use of the claimed method in a general-purpose digital computer of any type.… The question is whether the method described and claimed is a “process” within the meaning of the Patent Act. A digital computer, as distinguished from an analog computer, operates on data expressed in digits, solving a problem by doing arithmetic as a person would do it by head and hand. Some of the digits are stored as components of the computer. Others are introduced into the computer in a form that it is designed to recognize. The computer operates then upon both new and previously stored data. The generalpurpose computer is designed to perform operations under many different programs. The representation of numbers may be in the form of a time series of electrical impulses, magnetized spots on the surface of tapes, drums, or discs, charged spots on

5. The Court was divided, two Judges being for, and two against the validity of the patent. Therefore, no judgment was given. The case was decided one year later, in the Court of Chancery, by Lord Chancellor Loughborough, who declined to revoke the injunction in favor of the patentees. Id., at 155. The Judge acknowledged that the opinions in the Court of Common Pleas on both sides deserved great respect. He added: If nothing can be done upon this, there must be another action. In the meantime, the injunction must be continued. I will not put them to compensation; I will not disturb the possession of their specific right. It is of notoriety, that this fire-engine has been erected in many parts of the country with great advantage.

The issue of the patentability of Watt’s invention was revisited in Hornblower and Maberley v. Boulton and Watt, in error, in the Court of King’s Bench, January 25, 1799. This time the Court unanimously held that Watt’s invention was for a manufacture, hence compliant with the 1624 statute. In Hornblower, Lord Kenyon, Chief Justice, said: I have great respect for the contrary opinions that were given in the Common Pleas, and probably, if I had been called upon on a sudden to determine this case, I should have been at a loss how to decide. But having now heard everything that can be said on the subject, I have no doubt in saying that this is a patent for a manufacture, which I understand to be something made by the hands of man.

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cathode-ray tube screens, the presence or absence of punched holes on paper cards, or other devices. The method or program is a sequence of coded instructions for a digital computer. The patent sought is on a method of programming a general-purpose digital computer to convert signals from binary-coded decimal form into pure binary form. A procedure for solving a given type of mathematical problem is known as an “algorithm.” The procedures set forth in the present claims are of that kind; that is to say, they are a generalized formulation for programs to solve mathematical problems of converting one form of numerical representation to another. From the generic formulation, programs may be developed as specific applications.… The method sought to be patented varies the ordinary arithmetic steps a human would use by changing the order of the steps, changing the symbolism for writing the multiplier used in some steps, and by taking subtotals after each successive operation. The mathematical procedures can be carried out in existing computers long in use, no new machinery being necessary. And, as noted, they can also be performed without a computer.… Here the “process” claim is so abstract and sweeping as to cover both known and unknown uses of the BCD to pure binary conversion. The end use may (1) vary from the operation of a train to verification of drivers’ licenses to researching the law books for precedents and (2) be performed through any existing machinery or future-devised machinery or without any apparatus.… It is argued that a process patent must either be tied to a particular machine or apparatus or must operate to change articles or materials to a “different state or thing.” We do not hold that no process patent could ever qualify if it did not meet the requirements of our prior precedents. It is said that the decision precludes a patent for any program servicing a computer. We do not so hold. It is said that we have before us a program for a digital computer but extend our holding to programs for analog computers. We have, however, made clear from the start that we deal with a program only for digital computers. It is said we freeze process patents to old technologies, leaving no room for the revelations of the new, onrushing technology. Such is not our purpose. What we come down to in a nutshell is the following. It is conceded that one may not patent an idea. But in practical effect that would be the result if the formula for converting BCD numerals to pure binary numerals were patented in this case. The mathematical formula involved here has no substantial practical application except in connection with a digital computer, which means that if the judgment below is affirmed, the patent would wholly pre-empt the mathematical formula and in practical effect would be a patent on the algorithm itself. It may be that the patent laws should be extended to cover these programs, a policy matter to which we are not competent to speak. The President’s Commission on the Patent System rejected the proposal that these programs be patentable: Uncertainty now exists as to whether the statute permits a valid patent to be granted on programs. Direct attempts to patent programs have been rejected on the ground of nonstatutory subject matter. Indirect attempts to obtain patents and avoid the rejection, by drafting claims as a process, or a machine or components

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thereof programmed in a given manner, rather than as a program itself, have confused the issue further and should not be permitted. The Patent Office now cannot examine applications for programs because of a lack of a classification technique and the requisite search files. Even if these were available, reliable searches would not be feasible or economic because of the tremendous volume of prior art being generated. Without this search, the patenting of programs would be tantamount to mere registration and the presumption of validity would be all but nonexistent. It is noted that the creation of programs has undergone substantial and satisfactory growth in the absence of patent protection and that copyright protection for programs is presently available.

If these programs are to be patentable, considerable problems are raised that only committees of Congress can manage, for broad powers of investigation are needed, including hearings that canvass the wide variety of views that those operating in this field entertain. The technological problems tendered in the many briefs before us indicate to us that considered action by the Congress is needed.

19. Bilski v. Kappos, 561 U.S. 593 (2010) SUPREME COURT OF THE UNITED STATES Justice Kennedy delivered part of the opinion of the Court.… The question in this case turns on whether a patent can be issued for a claimed invention designed for the business world. The patent application claims a procedure for instructing buyers and sellers how to protect against the risk of price fluctuations in a discrete section of the economy. Three arguments are advanced for the proposition that the claimed invention is outside the scope of patent law: (1) it is not tied to a machine and does not transform an article; (2) it involves a method of conducting business; and (3) it is merely an abstract idea. The Court of Appeals ruled that the first mentioned of these, the so-called machine-or-transformation test, was the sole test to be used for determining the patentability of a “process” under the Patent Act, 35 U.S.C. § 101. Petitioners’ application seeks patent protection for a claimed invention that explains how buyers and sellers of commodities in the energy market can protect, or hedge, against the risk of price changes. The key claims are claims 1 and 4. Claim 1 describes a series of steps instructing how to hedge risk. Claim 4 puts the concept articulated in claim 1 into a simple mathematical formula.… The patent examiner rejected petitioners’ application, explaining that it “‘is not implemented on a specific apparatus and merely manipulates [an] abstract idea and solves a purely mathematical problem without any limitation to a practical application, therefore, the invention is not directed to the technological arts.’” … The Board of Patent Appeals and Interferences affirmed, concluding that the application involved only mental steps that do not transform physical matter and was directed to an abstract idea.…

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Section 101 thus specifies four independent categories of inventions or discoveries that are eligible for protection: processes, machines, manufactures, and compositions of matter. “In choosing such expansive terms … modified by the comprehensive ‘any,’ Congress plainly contemplated that the patent laws would be given wide scope.” Diamond v. Chakrabarty, 447 U.S. 303, 308 (1980). Congress took this permissive approach to patent eligibility to ensure that “ingenuity should receive a liberal encouragement.” Id. at 308-309 (quoting 5 Writings of Thomas Jefferson 75-76 (H. Washington ed. 1871)).… The present case involves an invention that is claimed to be a “process” under § 101. Section 100(b) defines “process” as: process, art or method, and includes a new use of a known process, machine, manufacture, composition of matter, or material.

The Court first considers two proposed categorical limitations on “process” patents under §101 that would, if adopted, bar petitioners’ application in the present case: the machine-or-transformation test and the categorical exclusion of business method patents.… Under the Court of Appeals’ formulation, an invention is a “process” only if: “(1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing.” … Any suggestion in this Court’s case law that the Patent Act’s terms deviate from their ordinary meaning has only been an explanation for the exceptions for laws of nature, physical phenomena, and abstract ideas. See Parker v. Flook, 437 U.S. 584, 588-589 (1978). This Court has not indicated that the existence of these wellestablished exceptions gives the Judiciary carte blanche to impose other limitations that are inconsistent with the text and the statute’s purpose and design. Concerns about attempts to call any form of human activity a “process” can be met by making sure the claim meets the requirements of §101. Adopting the machine-or-transformation test as the sole test for what constitutes a “process” (as opposed to just an important and useful clue) violates these statutory interpretation principles. Section 100(b) provides that “[t]he term ‘process’ means process, art or method, and includes a new use of a known process, machine, manufacture, composition of matter, or material.” The Court is unaware of any “ordinary, contemporary, common meaning,” Diehr, supra, at 182, of the definitional terms “process, art or method” that would require these terms to be tied to a machine or to transform an article. Respondent urges the Court to look to the other patentable categories in §101—machines, manufactures, and compositions of matter—to confine the meaning of “process” to a machine or transformation, under the doctrine of noscitur a sociis.… This Court’s precedents establish that the machine-or-transformation test is a useful and important clue, an investigative tool, for determining whether some claimed inventions are processes under §101. The machine-or-transformation test is not the sole test for deciding whether an invention is a patent-eligible “process.” It is true that patents for inventions that did not satisfy the machine-ortransformation test were rarely granted in earlier eras, especially in the Industrial Age

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… But times change. Technology and other innovations progress in unexpected ways. For example, it was once forcefully argued that until recent times, “well-established principles of patent law probably would have prevented the issuance of a valid patent on almost any conceivable computer program.” Diehr, 450 U.S. at 195 (Stevens, J., dissenting). But this fact does not mean that unforeseen innovations such as computer programs are always unpatentable. See id. at 192-193 (majority opinion) (holding a procedure for molding rubber that included a computer program is within patentable subject matter). Section 101 is a “dynamic provision designed to encompass new and unforeseen inventions.” J. E. M. Ag Supply, Inc. v. Pioneer Hi-Bred Int’l, Inc., 534 U.S. 124 508 (2001). A categorical rule denying patent protection for “inventions in areas not contemplated by Congress … would frustrate the purposes of the patent law.” Chakrabarty, 447 U.S. at 315. The machine-or-transformation test may well provide a sufficient basis for evaluating processes similar to those in the Industrial Age—for example, inventions grounded in a physical or other tangible form. But there are reasons to doubt whether the test should be the sole criterion for determining the patentability of inventions in the Information Age. As numerous amicus briefs argue, the machine-or-transformation test would create uncertainty as to the patentability of software, advanced diagnostic medicine techniques, and inventions based on linear programming, data compression, and the manipulation of digital signals.… In the course of applying the machine-or-transformation test to emerging technologies, courts may pose questions of such intricacy and refinement that they risk obscuring the larger object of securing patents for valuable inventions without transgressing the public domain. The dissent by Judge Rader refers to some of these difficulties.… As a result, in deciding whether previously unforeseen inventions qualify as patentable “process[es],” it may not make sense to require courts to confine themselves to asking the questions posed by the machine-or-transformation test. Section 101’s terms suggest that new technologies may call for new inquiries. See Benson, supra, at 71, (to “freeze process patents to old technologies, leaving no room for the revelations of the new, onrushing technology[,] … is not our purpose”). It is important to emphasize that the Court today is not commenting on the patentability of any particular invention, let alone holding that any of the abovementioned technologies from the Information Age should or should not receive patent protection. This Age puts the possibility of innovation in the hands of more people and raises new difficulties for the patent law. With ever more people trying to innovate and thus seeking patent protections for their inventions, the patent law faces a great challenge in striking the balance between protecting inventors and not granting monopolies over procedures that others would discover by independent, creative application of general principles. Nothing in this opinion should be read to take a position on where that balance ought to be struck. Section 101 similarly precludes the broad contention that the term “process” categorically excludes business methods. The term “method,” which is within §100(b)’s definition of “process,” at least as a textual matter and before consulting other limitations in the Patent Act and this Court’s precedents, may include at least some methods of doing business. See, e.g., Webster’s New International Dictionary

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1548 (2d ed. 1954) (defining “method” as “[a]n orderly procedure or process … regular way or manner of doing anything; hence, a set form of procedure adopted in investigation or instruction”). The Court is unaware of any argument that the “ordinary, contemporary, common meaning,” Diehr, supra, at 182, of “method” excludes business methods. Nor is it clear how far a prohibition on business method patents would reach, and whether it would exclude technologies for conducting a business more efficiently.… The argument that business methods are categorically outside of §101’s scope is further undermined by the fact that federal law explicitly contemplates the existence of at least some business method patents. Under 35 U.S.C. §273(b)(1), if a patent-holder claims infringement based on “a method in [a] patent,” the alleged infringer can assert a defense of prior use. For purposes of this defense alone, “method” is defined as “a method of doing or conducting business.” §273(a)(3). In other words, by allowing this defense the statute itself acknowledges that there may be business method patents. Section 273’s definition of “method,” to be sure, cannot change the meaning of a prior-enacted statute. But what §273 does is clarify the understanding that a business method is simply one kind of “method” that is, at least in some circumstances, eligible for patenting under §101. A conclusion that business methods are not patentable in any circumstances would render §273 meaningless. This would violate the canon against interpreting any statutory provision in a manner that would render another provision superfluous.… Finally, while § 273 appears to leave open the possibility of some business method patents, it does not suggest broad patentability of such claimed inventions. Interpreting §101 to exclude all business methods simply because business method patents were rarely issued until modern times revives many of the previously discussed difficulties.… At the same time, some business method patents raise special problems in terms of vagueness and suspect validity. See eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 397 (2006) (Kennedy, J., concurring). The Information Age empowers people with new capacities to perform statistical analyses and mathematical calculations with a speed and sophistication that enable the design of protocols for more efficient performance of a vast number of business tasks. If a high enough bar is not set when considering patent applications of this sort, patent examiners and courts could be flooded with claims that would put a chill on creative endeavor and dynamic change. In searching for a limiting principle, this Court’s precedents on the unpatentability of abstract ideas provide useful tools.… Indeed, if the Court of Appeals were to succeed in defining a narrower category or class of patent applications that claim to instruct how business should be conducted, and then rule that the category is unpatentable because, for instance, it represents an attempt to patent abstract ideas, this conclusion might well be in accord with controlling precedent.… But beyond this or some other limitation consistent with the statutory text, the Patent Act leaves open the possibility that there are at least some processes that can be fairly described as business methods that are within patentable subject matter under §101. Finally, even if a particular business method fits into the statutory definition of a “process,” that does not mean that the application claiming that method should be

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granted. In order to receive patent protection, any claimed invention must be novel, §102, nonobvious, §103, and fully and particularly described, §112. These limitations serve a critical role in adjusting the tension, ever present in patent law, between stimulating innovation by protecting inventors and impeding progress by granting patents when not justified by the statutory design. Even though petitioners’ application is not categorically outside of §101 under the two broad and atextual approaches the Court rejects today, that does not mean it is a “process” under §101. Petitioners seek to patent both the concept of hedging risk and the application of that concept to energy markets.… Rather than adopting categorical rules that might have wide-ranging and unforeseen impacts, the Court resolves this case narrowly on the basis of this Court’s decisions in Benson, Flook, and Diehr, which show that petitioners’ claims are not patentable processes because they are attempts to patent abstract ideas. Indeed, all members of the Court agree that the patent application at issue here falls outside of §101 because it claims an abstract idea. In Benson, the Court considered whether a patent application for an algorithm to convert binary-coded decimal numerals into pure binary code was a “process” under §101. 409 U.S. at 64-67. The Court first explained that “[a] principle, in the abstract, is a fundamental truth; an original cause; a motive; these cannot be patented, as no one can claim in either of them an exclusive right.” Id. at 67, 93 (quoting Le Roy, 55 U.S. 156, 175). The Court then held the application at issue was not a “process,” but an unpatentable abstract idea. “It is conceded that one may not patent an idea. But in practical effect that would be the result if the formula for converting … numerals to pure binary numerals were patented in this case.” 409 U.S. at 71. A contrary holding “would wholly preempt the mathematical formula and in practical effect would be a patent on the algorithm itself.” Id. at 72. In Flook, the Court considered the next logical step after Benson. The applicant there attempted to patent a procedure for monitoring the conditions during the catalytic conversion process in the petrochemical and oil-refining industries. The application’s only innovation was reliance on a mathematical algorithm. 437 U.S. at 585-586. Flook held the invention was not a patentable “process.” The Court conceded the invention at issue, unlike the algorithm in Benson, had been limited so that it could still be freely used outside the petrochemical and oil-refining industries. 437 U.S. at 589-590. Nevertheless, Flook rejected “[t]he notion that post-solution activity, no matter how conventional or obvious in itself, can transform an unpatentable principle into a patentable process.” Id. at 590. The Court concluded that the process at issue there was “unpatentable under §101, not because it contain[ed] a mathematical algorithm as one component, but because once that algorithm [wa]s assumed to be within the prior art, the application, considered as a whole, contain[ed] no patentable invention.” Id. at 594. As the Court later explained, Flook stands for the proposition that the prohibition against patenting abstract ideas “cannot be circumvented by attempting to limit the use of the formula to a particular technological environment” or adding “insignificant postsolution activity.” Diehr, 450 U.S. at 191-192. Finally, in Diehr, the Court established a limitation on the principles articulated in Benson and Flook. The application in Diehr claimed a previously unknown method for “molding raw, uncured synthetic rubber into cured precision products,” using a

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mathematical formula to complete some of its several steps by way of a computer. 450 U.S. at 177. Diehr explained that while an abstract idea, law of nature, or mathematical formula could not be patented, “an application of a law of nature or mathematical formula to a known structure or process may well be deserving of patent protection.” Id. at 187. Diehr emphasized the need to consider the invention as a whole, rather than “dissect[ing] the claims into old and new elements and then … ignor[ing] the presence of the old elements in the analysis.” Id. at 188. Finally, the Court concluded that because the claim was not “an attempt to patent a mathematical formula, but rather [was] an industrial process for the molding of rubber products,” it fell within §101s patentable subject matter. Id. at 192-193.” In light of these precedents, it is clear that petitioners’ application is not a patentable “process.” Claims 1 and 4 in petitioners’ application explain the basic concept of hedging, or protecting against risk: “Hedging is a fundamental economic practice long prevalent in our system of commerce and taught in any introductory finance class.” 545 F.3d at 1013 (Rader, J., dissenting); … The concept of hedging, described in claim 1 and reduced to a mathematical formula in claim 4, is an unpatentable abstract idea, just like the algorithms at issue in Benson and Flook. Allowing petitioners to patent risk hedging would preempt use of this approach in all fields, and would effectively grant a monopoly over an abstract idea. Petitioners’ remaining claims are broad examples of how hedging can be used in commodities and energy markets. Flook established that limiting an abstract idea to one field of use or adding token postsolution components did not make the concept patentable. That is exactly what the remaining claims in petitioners’ application do. These claims attempt to patent the use of the abstract idea of hedging risk in the energy market and then instruct the use of well-known random analysis techniques to help establish some of the inputs into the equation. Indeed, these claims add even less to the underlying abstract principle than the invention in Flook did, for the Flook invention was at least directed to the narrower domain of signaling dangers in operating a catalytic converter. Today, the Court once again declines to impose limitations on the Patent Act that are inconsistent with the Act’s text. The patent application here can be rejected under our precedents on the unpatentability of abstract ideas. The Court, therefore, need not define further what constitutes a patentable “process,” beyond pointing to the definition of that term provided in § 100(b) and looking to the guideposts in Benson, Flook, and Diehr. And nothing in today’s opinion should be read as endorsing interpretations of §101 that the Court of Appeals for the Federal Circuit has used in the past. See, e.g., State Street, 149 F.3d at 1373; AT&T Corp., 172 F.3d at 1357. It may be that the Court of Appeals thought it needed to make the machine-or-transformation test exclusive precisely because its case law had not adequately identified less extreme means of restricting business method patents, including (but not limited to) application of our opinions in Benson, Flook, and Diehr. In disapproving an exclusive machine-ortransformation test, we by no means foreclose the Federal Circuit’s development of other limiting criteria that further the purposes of the Patent Act and are not inconsistent with its text.…

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Justice Stevens, with whom Justice Ginsburg, Justice Breyer, and Justice Sotomayor join, concurring in the judgment.… I agree with the Court that, in light of the uncertainty that currently pervades this field, it is prudent to provide further guidance. But I would take a different approach. Rather than making any broad statements about how to define the term “process” in §101 or tinkering with the bounds of the category of unpatentable, abstract ideas, I would restore patent law to its historical and constitutional moorings. For centuries, it was considered well established that a series of steps for conducting business was not, in itself, patentable.… Although the patent application makes clear that the “method can be used for any commodity to manage consumption risk in a fixed bill price product,” … it includes specific applications of the method, particularly in the field of energy, as a means of enabling suppliers and consumers to minimize the risks resulting from fluctuations in demand during specified time periods.… Energy suppliers and consumers may use that method to hedge their risks by agreeing upon a fixed series of payments at regular intervals throughout the year instead of charging or paying prices that fluctuate in response to changing weather conditions. The patent application describes a series of steps, including the evaluation of historical costs and weather variables and the use of economic and statistical formulas, to analyze these data and to estimate the likelihood of certain outcomes.… The text of the Patent Act does not on its face give much guidance about what constitutes a patentable process. The statute defines the term “process” as a “process, art or method [that] includes a new use of a known process, machine, manufacture, composition of matter, or material.” §100(b). But, this definition is not especially helpful, given that it also uses the term “process” and is therefore somewhat circular. As lay speakers use the word “process,” it constitutes any series of steps. But it has always been clear that, as used in §101, the term does not refer to a “‘process’ in the ordinary sense of the word,” Flook, 437 U.S. at 588; see also Corning v. Burden, 56 U.S. 252 (1854) (“[T]he term process is often used in a more vague sense, in which it cannot be the subject of a patent”). Rather … the term “process” (along with the definitions given to that term) has long accumulated a distinctive meaning in patent law. When the term was used in the 1952 Patent Act, it was neither intended nor understood to encompass any series of steps or any way to do any thing. With that understanding in mind, the Government has argued that because “a word” in a statute “is given more precise content by the neighboring words with which it” associates, United States v. Williams, 553 U.S. 285, 294 (2008), we may draw inferences from the fact that “[t]he other three statutory categories of patent-eligible subject matter identified in Section 101—“‘machine, manufacture, or composition of matter’—all ‘are things made by man, and involve technology.’” … Specifically, the Government submits, we may infer “that the term ‘process’ is limited to technological and industrial methods.” … The Court rejects this submission categorically, on the ground that “§100(b) already explicitly defines the term “process.” … But §100(b) defines the term “process” by using the term “process,” as well as several other general terms. This is not a case, then, in which we must either follow a definition … or rely on

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neighboring words to understand the scope of an ambiguous term. The definition itself contains the very ambiguous term that we must define. In my view, the answer lies in between the Government’s and the Court’s positions: The terms adjacent to “process” in §101 provide a clue as to its meaning, although not a very strong clue. Section 101’s list of categories of patentable subject matter is phrased in the disjunctive, suggesting that the term “process” has content distinct from the other items in the list. It would therefore be illogical to “rob” the word “process” of all independent meaning. Reiter v. Sonotone Corp., 442 U.S. 330, 338 (1979). Moreover, to the extent we can draw inferences about what is a “process” from common attributes in §101, it is a dangerous endeavor to do so on the basis of a perceived overarching theme. Given the many moving parts at work in the Patent Act, there is a risk of merely confirming our preconceived notions of what should be patentable or of seeing common attributes that track “the familiar issues of novelty and obviousness” that arise under other sections of the statute but are not relevant to §101, Flook, 437 U.S. at 588. The placement of “process” next to other items thus cannot prove that the term is limited to any particular categories; it does, however, give reason to be skeptical that the scope of a patentable “process” extends to cover any series of steps at all. The Court makes a more serious interpretive error. As briefly discussed in Part II, supra, the Court at points appears to reject the well-settled proposition that the term “process” in §101 is not a “‘process’ in the ordinary sense of the word,” Flook, 437 U.S. at 588. Instead, the Court posits that the word “process” must be understood in light of its “ordinary, contemporary, common meaning,” .… Although this is a fine approach to statutory interpretation in general, it is a deeply flawed approach to a statute that relies on complex terms of art developed against a particular historical background. Indeed, the approach would render §101 almost comical. A process for training a dog, a series of dance steps, a method of shooting a basketball, maybe even words, stories, or songs if framed as the steps of typing letters or uttering sounds—all would be patent-eligible. I am confident that the term “process” in §101 is not nearly so capacious.… Some scholars have remarked, as did Thomas Jefferson, that early patent statutes neither included nor reflected any serious debate about the precise scope of patentable subject matter. See, e.g., Graham, 383 U.S. at 9-10 (discussing Thomas Jefferson’s observations). It has been suggested, however, that “[p]erhaps this was in part a function of an understanding—shared widely among legislators, courts, patent office officials, and inventors—about what patents were meant to protect. Everyone knew that manufactures and machines were at the core of the patent system.” … Thus, although certain processes, such as those related to the technology of the time, might have been considered patentable, it is possible that “[a]gainst this background, it would have been seen as absurd for an entrepreneur to file a patent” on methods of conducting business.… Since at least the days of Assyrian merchants, people have devised better and better ways to conduct business. Yet it appears that neither the Patent Clause, nor early patent law, nor the current §101 contemplated or was publicly understood to mean that such innovations are patentable. Although it may be difficult to define with precision

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what is a patentable “process” under §101, the historical clues converge on one conclusion: A business method is not a “process.” And to the extent that there is ambiguity, we should be mindful of our judicial role. “[W]e must proceed cautiously when we are asked to extend patent rights” into an area that the Patent Act likely was not “enacted to protect,” Flook, 437 U.S. at 596, lest we create a legal regime that Congress never would have endorsed, and that can be repaired only by disturbing settled property rights. In light of its history and purpose, I think it obvious that the 1999 Congress would never have enacted §273 if it had foreseen that this Court would rely on the provision as a basis for concluding that business methods are patentable. Section 273 is a red herring; we should be focusing our attention on §101 itself. The constitutionally mandated purpose and function of the patent laws bolster the conclusion that methods of doing business are not “processes” under §101. The Constitution allows Congress to issue patents “[t]o promote the Progress of … useful Arts,” Article I, §8, cl. 8. This clause “is both a grant of power and a limitation.” Graham, 383 U.S. at 5. It “reflects a balance between the need to encourage innovation and the avoidance of monopolies which stifle competition without any concomitant advance in the ‘Progress of Science and useful Arts.’ Bonito Boats, 489 U.S. at 146. “This is the standard expressed in the Constitution and it may not be ignored. And it is in this light that patent validity ‘requires reference to [the] standard written into the Constitution.’ Graham, 383 U.S. at 6 (quoting Great Atlantic & Pacific Tea Co. v. Supermarket Equipment Corp., 340 U.S. 147, 154 (1950) (Douglas, J., concurring) (emphasis deleted)); see also Grant v. Raymond, 31 U.S. 218 (1832) (explaining that patent “laws which are passed to give effect to this [constitutional] purpose ought, we think, to be construed in the spirit in which they have been made”). Thus, although it is for Congress to “implement the stated purpose of the Framers by selecting the policy that in its judgment best effectuates the constitutional aim,” Graham, 383 U.S. at 6, we interpret ambiguous patent laws as a set of rules that “wee[d] out those inventions which would not be disclosed or devised but for the inducement of a patent,” id. at 11, and that “embod[y]” the “careful balance between the need to promote innovation and the recognition that imitation and refinement through imitation are both necessary to invention itself and the very lifeblood of a competitive economy,” Bonito Boats, 489 U.S. at 146. And absent a discernible signal from Congress, we proceed cautiously when dealing with patents that press on the limits of the “standard written into the constitution,” Graham, 383 U.S. at 6, for at the “fringes of congressional power,” “more is required of legislatures than a vague delegation to be filled in later,” Barenblatt v. United States, 360 U.S. 109, 139-140 (1959) (Black, J., dissenting); see also Greene v. McElroy, 360 U.S. 474, 507 (1959) (“[D]ecisions of great constitutional import and effect” “requir[e] careful and purposeful consideration by those responsible for enacting and implementing our laws”). We should not casually risk exceeding the constitutional limitation on Congress’ behalf.… On one side of the balance is whether a patent monopoly is necessary to “motivate the innovation,” Pfaff v. Wells Electronics, Inc., 525 U.S. 55, 63 (1998). Although there is certainly disagreement about the need for patents, scholars generally agree that when innovation is expensive, risky, and easily copied, inventors are less

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likely to undertake the guaranteed costs of innovation in order to obtain the mere possibility of an invention that others can copy. Both common sense and recent economic scholarship suggest that these dynamics of cost, risk, and reward vary by the type of thing being patented. And the functional case that patents promote progress generally is stronger for subject matter that has “historically been eligible to receive the protection of our patent laws,” Diehr, 450 U.S. at 184, than for methods of doing business. Many have expressed serious doubts about whether patents are necessary to encourage business innovation. Despite the fact that we have long assumed business methods could not be patented, it has been remarked that “the chief business of the American people, is business.” Federal Express developed an overnight delivery service and a variety of specific methods (including shipping through a central hub and online package tracking) without a patent. Although counterfactuals are a dubious form of analysis, I find it hard to believe that many of our entrepreneurs forwent business innovation because they could not claim a patent on their new methods. “[C]ompanies have ample incentives to develop business methods even without patent protection, because the competitive marketplace rewards companies that use more efficient business methods.” … Innovators often capture advantages from new business methods notwithstanding the risk of others copying their innovation. Some business methods occur in secret and therefore can be protected with trade secrecy. And for those methods that occur in public, firms that innovate often capture long-term benefits from doing so, thanks to various first mover advantages, including lockins, branding, and networking effects. Business innovation, moreover, generally does not entail the same kinds of risk as does more traditional, technological innovation. It generally does not require the same “enormous costs in terms of time, research, and development,” Bicron, 416 U.S. at 480, and thus does not require the same kind of “compensation to [innovators] for their labor, toil, and expense,” Seymour v. Osborne, 78 U.S. 516 (1871). Nor, in many cases, would patents on business methods promote progress by encouraging “public disclosure.” Pfaff, 525 U.S. at 63; see also Brenner v. Manson, 383 U.S. 519, 533 (1966) (“[O]ne of the purposes of the patent system is to encourage dissemination of information concerning discoveries and inventions”). Many business methods are practiced in public, and therefore a patent does not necessarily encourage the dissemination of anything not already known. And for the methods practiced in private, the benefits of disclosure may be small: Many such methods are distributive, not productive—that is, they do not generate any efficiency but only provide a means for competitors to one-up each other in a battle for pieces of the pie. And as the Court has explained, “it is hard to see how the public would be benefited by disclosure” of certain business tools, since the nondisclosure of these tools “encourages businesses to initiate new and individualized plans of operation,” which “in turn, leads to a greater variety of business methods.” Bicron, 416 U.S. at 483. In any event, even if patents on business methods were useful for encouraging innovation and disclosure, it would still be questionable whether they would, on balance, facilitate or impede the progress of American business. For even when patents encourage innovation and disclosure, “too much patent protection can impede rather

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than ‘promote the Progress of … useful Arts.’ Laboratory Corp. of America Holdings v. Metabolite Laboratories, Inc., 548 U.S. 124, 126-127 (2006) (Breyer, J., dissenting from dismissal of certiorari). Patents “can discourage research by impeding the free exchange of information,” for example, by forcing people to “avoid the use of potentially patented ideas, by leading them to conduct costly and time-consuming searches of existing or pending patents, by requiring complex licensing arrangements, and by raising the costs of using the patented methods.” Id. at 127. Although “[e]very patent is the grant of a privilege of exacting tolls from the public,” Great Atlantic, 340 U.S. at 154 (Douglas, J., concurring), the tolls of patents on business methods may be especially high. The primary concern is that patents on business methods may prohibit a wide swath of legitimate competition and innovation. As one scholar explains, “it is useful to conceptualize knowledge as a pyramid: the big ideas are on top; specific applications are at the bottom.” … The higher up a patent is on the pyramid, the greater the social cost and the greater the hindrance to further innovation. Thus, this Court stated in Benson that “[p]henomena of nature …, mental processes, and abstract intellectual concepts are not patentable, as they are the basic tools of scientific and technological work,” 409 U.S. at 67; see also Joseph E. Seagram & Sons, Inc., 180 F.2d at 28 (“To give appellant a monopoly, through the issuance of a patent, upon so great an area … would in our view impose without warrant of law a serious restraint upon the advance of science and industry”). Business methods are similarly often closer to “big ideas,” as they are the basic tools of commercial work. They are also, in many cases, the basic tools of further business innovation: Innovation in business methods is often a sequential and complementary process in which imitation may be a “spur to innovation” and patents may “become an impediment.” … “Think how the airline industry might now be structured if the first company to offer frequent flyer miles had enjoyed the sole right to award them.” … “[I]mitation and refinement through imitation are both necessary to invention itself and the very lifeblood of a competitive economy.” Bonito Boats, 489 U.S. at 146. If business methods could be patented, then many business decisions, no matter how small, could be potential patent violations. Businesses would either live in constant fear of litigation or would need to undertake the costs of searching through patents that describe methods of doing business, attempting to decide whether their innovation is one that remains in the public domain.… But as we have long explained, patents should not “embaras[s] the honest pursuit of business with fears and apprehensions of concealed liens and unknown liabilities to lawsuits and vexatious accountings for profits made in good faith.” Atlantic Works v. Brady, 107 U.S. 192, 200 (1883). These effects are magnified by the “potential vagueness” of business method patents, eBay Inc., 547 U.S. at 397 (Kennedy, J., concurring). When it comes to patents, “clarity is essential to promote progress.” Festo Corp., 535 U.S. at 730-731. Yet patents on methods of conducting business generally are composed largely or entirely of intangible steps. Compared to “the kinds of goods … around which patent rules historically developed,” it thus tends to be more costly and time consuming to search through, and to negotiate licenses for, patents on business methods.…

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The breadth of business methods, their omnipresence in our society, and their potential vagueness also invite a particularly pernicious use of patents that we have long criticized. As early as the 19th century, we explained that the patent laws are not intended to “creat[e] a class of speculative schemers who make it their business to watch the advancing wave of improvement, and gather its foam in the form of patented monopolies, which enable them to lay a heavy tax upon the industry of the country, without contributing anything to the real advancement of the arts.” Atlantic Works, 107 U.S. at 200. Yet business method patents may have begun to do exactly that. See eBay Inc., 547 U.S. at 396-397 (opinion of Kennedy, J.). These many costs of business method patents not only may stifle innovation, but they are also likely to “stifle competition,” Bonito Boats, 489 U.S. at 146. Even if a business method patent is ultimately held invalid, patent holders may be able to use it to threaten litigation and to bully competitors, especially those that cannot bear the costs of a drawn out, fact-intensive patent litigation. That can take a particular toll on small and upstart businesses. Of course, patents always serve as a barrier to competition for the type of subject matter that is patented. But patents on business methods are patents on business itself. Therefore, unlike virtually every other category of patents, they are by their very nature likely to depress the dynamism of the marketplace. The Constitution grants to Congress an important power to promote innovation. In its exercise of that power, Congress has established an intricate system of intellectual property. The scope of patentable subject matter under that system is broad. But it is not endless. In the absence of any clear guidance from Congress, we have only limited textual, historical, and functional clues on which to rely. Those clues all point toward the same conclusion: that petitioners’ claim is not a “process” within the meaning of §101 because methods of doing business are not, in themselves, covered by the statute. In my view, acknowledging as much would be a far more sensible and restrained way to resolve this case. Accordingly, while I concur in the judgment, I strongly disagree with the Court’s disposition of this case.…

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REFUSING TO LICENSE INTELLECTUAL PROPERTY

16. Intellectual property owners have the right to say “no”’ to competitors who wish to use the protected intangible assets. Therefore, to say ‘no’ is to use intellectual property. The fundamental query as far as abuses are concerned is the setting of boundaries around that right to say “no.” Behind the boundaries, to say no is using. Beyond them, it is abusing. If follows that understanding how far intellectual property owners can go in refusing to authorize competitors to use their protected assets is fundamentally important to understand the notion of abuses of intellectual property. As said in the Introduction, abuses are the second step in the three-tiered pyramid of the interface intellectual property-competition. 17. The Data General opinion clarifies two important issues associated with the right of intellectual property owners (copyright owners, in the case) of refusing to license competitors. The first issue is related to alternativeness: to say “no” does not impede competitors to enter the market because it is the essence of intellectual property to permit that competitors create their own assets. The second issue concerns the primary objective of intellectual property: to persuade businesses to continue creating and acquiring differentiating assets. If the right to say “no” was denied, there would be no incentive for competitors to develop alternative, competing assets. Consumers would lose because they would have no alternative products and techniques to choose. The DW Integrators case (South Africa) is very similar to Data General, and the Competition Court of South Africa has reached a conclusion that is very similar to that of the District Court of Massachusetts (case no. 20). 18. In this manner refusals to license intellectual property rights are essentially procompetitive. However, they must be grounded on reasonable business justifications. In some cases, as in Data General, simply maintaining exclusivity in the protected asset is a reasonable business justification. But in other cases, courts want to see more. For example, to refuse to license a noncompetitor who is willing to create a new product may not constitute in itself an acceptable justification (see the Magill case, opinion no. 27). In other words, when it comes to assess the procompetitiveness of refusals to license, each case is a case.

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Nuno Pires de Carvalho 20. Data General Corp. v. Grumman Systems Support Corp., 761 F. Supp. 185 (D. Mas. 1991) UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS

Opinion by Walter Jay Skinner, United States District Judge. Data General (DG) sells computer systems and provides services for their maintenance and repair. Grumman Systems Support (Grumman) provides services for the maintenance and repair of numerous computer systems, including those manufactured by DG. Grumman is a Third Party Maintainer (TPM) of equipment manufactured by other firms. DG brought this action for damages and injunctive relief against Grumman’s use of a diagnostic program developed by DG. The program, MV/ADEX, is used both to design DG’s computer systems and to diagnose and repair systems in use. I entered a preliminary injunction against the use of the program by Grumman on December 29, 1988.… Grumman has counterclaimed against DG. Five of the counterclaims—Count V (Monopolization), Count VI (Attempt to Monopolize), Count VII (Conspiracy to Monopolize), Count VII (Unlawful Tie-in) and Count IX (Refusal to Deal)—allege violations of sections 1 and 2 of the Sherman Antitrust Act, 15 U.S.C. §§ 1, 2. DG has moved for summary judgment on these antitrust counterclaims.… The monopolization claims are governed by the standard articulated in United States v. Grinnell Corp., 384 U.S. 563, 570 (1966): “the offense of monopoly under § 2 of the Sherman Act has two elements: (1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.” DG asserts that Grumman has failed to raise a question of material fact as to each of these requirements.… On the question of monopoly power in the relevant market, DG has presented evidence that it sells less than 5% of computer systems and that purchasers of computer systems are price-conscious and conscious of maintenance costs in assessing the long-run price of the system. Consequently, DG concludes that it can not extract monopoly rents in the repair market because purchasers will abandon its product. Grumman asserts to the contrary that the owner of a DG computer system has no alternative but to look to a maintainer of DG computers for repairs. DG controls 90% of the repair services for DG computers. Although questions of what constitutes the relevant market often are discussed in terms of questions of cross-elasticity and market and sub-market, the fundamental inquiry is what market or consumer decision the alleged monopolist must control in order to extract monopoly rents. In this context, the inquiry demands a determination of whether DG must control the sale of computer systems, which it clearly does not, in order to extract monopoly rents. To determine whether its monopoly share of the support services market is sufficient, the trier of fact must measure the ability of

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purchasers to assess the cost of maintenance, their price sensitivity, and their ability to change computer systems if monopoly rents are charged. The evidence introduced by Grumman, including the testimony of its economics expert, creates a material issue of fact as to whether DG is able to exert monopoly power.… The structure and demand in the computer systems and support services markets cannot be determined without weighing the credibility of the evidence.… The second element of the Grinnell test is an exclusionary practice. Although the initial wording of the test refers to the state of mind of the monopolist, Justice Douglas concludes with a conduct-based test: distinguishing the unlawful activity from “growth or development as a consequence of a superior product, business acumen, or historic accident.” … Viewing the evidence in the light most favorable to Grumman, DG had previously promoted the development of TPMs to service its computers. Before 1985, Grumman purchased software diagnostics, schematics, engineering change orders, upgrades and updates, and spare parts from DG. Additionally, Grumman enrolled its field engineers in DG’s training classes and purchased DG’s depot repair services.… All owners of DG computers may purchase training, depot repair services, rev-ups, and spare parts directly from DG, regardless of whether their computers are serviced by DG, TPMs, or themselves. It is unclear whether licensees of MV/ADEX through the CMO program may additionally purchase the services of a TPM and still remain in the program. Consequently, for the purposes of the motion, I will assume that licensees of MV/ADEX through the CMO program may not hire a TPM, but that all owners of DG systems may purchase all available services except MV/ADEX from DG regardless of who maintains their computers. TPMs are excluded from purchasing any of these services except as required to maintain their own DG computers. In addition, Grumman maintains that DG engaged in illegal and unscrupulous acts to “win back” customers. These methods are alleged to include calling TPMs pretending to be customers in order to discover their price lists; making inaccurate promises to customers about DG’s service capabilities; telling customers that TPMs’ service personnel were former employees of DG who were not competent at their jobs; insinuating to customers that TPMs were in financial trouble; and declaring that TPMs could not service the computers because they did not have access to MV/ADEX. While business torts and deception are of concern, their relevance to the exertion of monopoly power is more limited. Whereas derisive comments about competitor employees and financial conditions and “dirty tricks” to gain information from the TPMs make it more difficult to compete against the monopolist, these actions have minimal connection to the monopolist’s exercise of exclusionary powers.… Grumman’s argument that an exclusionary practice exists is based on Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985) and the essential facilities cases such as Otter Tail Power Co. v. United States, 410 U.S. 366 (1973). Aspen was not an essential facilities case, but involved the changed relationship between the two companies controlling the ski areas in the town of Aspen.… Grumman insists that Aspen is analogous to this case. DG had a cooperative policy with TPMs that fostered competition. It then broke off the policy of licensing all diagnostics and selling spare-parts and other support services directly to TPMs. It will

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now sell those products only to owners of DG systems for use on their own systems. In the sense that Aspen addresses the issue of prior promotion of competition in a market that is later halted, this case is analogous. Numerous points, however, differentiate the cases. DG developed the diagnostics, training, and other services to support the owners of DG equipment. It offers all the services, except MV/ADEX, to the owners regardless of whom they use for maintenance. In Aspen, the consumer was denied the use of the fully financed vouchers in the “Adventure Pack” by Skiing Co. merely because the skier would ski Highlands during the vacation. In this case, DG will sell its service products, except the copyrighted diagnostic MV/ADEX, to any ultimate consumer regardless of whether they now or later use a TPM. No “quasi-exclusive dealing” is present. Grumman and other TPMs have the opportunity to develop competing diagnostics and tools for maintenance. Two diagnostics have, in fact, been developed by TPMs. Grumman asserts that these competing diagnostics are not functionally equivalent to MV/ADEX in such capacities as formatting Argus disks. The Navy, in accepting bids for a maintenance contract, rejected Grumman’s bid because of the shortcomings of the competing diagnostics. Naturally, the manufacturer has significant advantages in developing the maintenance services. DG knows the system before it is released to the public and can begin development of a diagnostic earlier; it has immediate contact with the owner, who will need maintenance in the future; and it has name recognition. While these advantages create significant barriers for TPMs, according to Justice Douglas they represent historic accident—the natural benefit of being a manufacturer. See also Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263 (2d Cir. 1979). Grumman protests that it is unable to produce a diagnostic because it cannot get the necessary schematics and DG could easily drive any competing diagnostic into obsolescence by simple modifications in design. In protecting any secret in the design of its computers, DG may normally limit the number of schematics that it sells to the owners of its equipment. The accusation that DG can easily thwart TPMs from developing competing diagnostics is serious. The courts have recognized such behavior of shifting the configuration of hardware to suppress the competition as an exclusionary practice.… Grumman, however, makes no allegations that DG has in fact attempted to subvert competitors’ efforts to develop and implement competing diagnostics. TPMs have demonstrated the ability to develop diagnostics, even if they are not as efficient as MV/ADEX. Consequently, this case differs from Aspen in the following respects: (1) DG will sell its services, except MV/ADEX, to ultimate consumers regardless of who performs their maintenance; (2) TPMs, unlike Highlands, are able to develop service packages that allow competition; and (3) with the exception of its restrictive licensing of MV/ADEX, DG does not engage in any “quasi-exclusive dealing.” … In addition to arguing that Aspen’s proscription against changing a cooperative policy merely to drive the competition out governs this case, Grumman argues that MV/ADEX is an essential facility that DG must share with its competitors. Ordinarily, there is no limitation on a company’s freedom to generate its own intellectual property, but grants of exclusionary power, such as a copyright, are not without limits. See SCM Corp. v. Xerox Corp., 645 F.2d 1195 Cir. 1981). The crux of Grumman’s essential

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facilities argument is that only the manufacturer of computer systems is capable of developing a diagnostic tool that is an essential device in the repair of those computers. The leading essential facilities case in the monopoly area is Otter Tail Power Co. v. United States, 410 U.S. 366 (1973). In that case, the Supreme Court did not create a new test for determining when a monopolist may refuse to sell an essential facility, but continued to apply the general prohibition against unlawfully foreclosing competition.… The doctrine aims to prevent a firm with monopoly power from extending that power “from one stage of production to another, and from one market to another.” MCI Communications Corp. v. American Tel. & Tel. Co., 708 F.2d 1081, 1132 (7th Cir. 1983), cert. denied, 464 U.S. 891 (1983). The court in MCI set out a four-part test for the doctrine: (1) control of the essential facility by a monopolist; (2) a competitor’s inability practically or reasonably to duplicate the essential facility; (3) the denial of the use of the facility to a competitor; and (4) the feasibility of providing the facility. The MCI test obviously cannot be applied blindly to monopolists who hold intellectual property rights. Otherwise, the balance struck in SCM will be upset and every significant patent or copyright will be deemed an essential facility.… Both MCI and Otter Tail involve legally regulated monopolists who refused the plaintiff access to a distribution network. By refusing access to the plaintiff, the defendant attempted to gain monopoly power in second markets, long-distance telephone communications and local electricity distribution, respectively. The theory of these cases and United States v. Terminal Railroad Assoc., 224 U.S. 383 (1912) (a §1 case) has been characterized as a “bottleneck.” See MCI, 708 F.2d at 1132. The bottleneck that DG is alleged to control is the understanding of its own computer systems. Presumably, if TPMs were provided with all the schematic information about the system, they would be able to produce a diagnostic that is as fully capable as MV/ADEX. It is DG’s position as the manufacturer that allegedly gives it the capability to produce the alleged essential facility. The case law has consistently affirmed that a manufacturer is under no obligation to pre-disclose or disclose its knowledge about its products so that competition may arise in the related peripheral hardware, software, and repair services markets. See Berkey Photo v. Eastman Kodak, supra. The underlying thrust of Grumman’s essential facilities claim is that if it cannot force DG to share its knowledge, the essential facilities doctrine requires DG to share the fruits of its knowledge. As the First Circuit stated in a different factual context, “this view of the essential facilities doctrine, however, considerably overstates its scope.” Interface, 816 F.2d at 12. DG does not have monopoly power in the sale of computer systems and thus is not using a bottleneck to create another monopoly. The “bottleneck” of its superior knowledge in the design of DG computers is insufficient to invoke the essential facilities doctrine; a better mousetrap is not necessarily an essential facility. The Sherman Act has not been interpreted to require manufacturers to abandon their advantage in creating accessories to their systems. If manufacturers of complex and innovative systems were required to share with competitors the development of accessories, because they had a possibly absolute advantage through producing the system, the incentives of copyright and patent laws would be severely undermined.

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Not only would the manufacturer, who is in the best position to create these accessories, have less incentive to do so, but also the impetus for competitors to reverse engineer and produce competing solutions would be reduced.…1

21. Microsoft Corp. v. Commission, In Case T-201/04 (2007) EUROPEAN UNION—COURT OF FIRST INSTANCE (GRAND CHAMBER) 1. Microsoft Corp., a company established in Redmond, Washington (United States), designs, develops and markets a wide variety of software products for different kinds of computing devices. Those software products include, in particular, operating systems for client personal computers (“client PCs”), operating systems for work group servers and streaming media players. Microsoft also provides technical assistance for its various products. 2. On September 15, 1998, Mr. Green, a Vice-President of Sun Microsystems, Inc. (“Sun”), a company established in Palo Alto, California (United States) which supplies, in particular, servers and server operating systems, wrote to Mr. Maritz, a VicePresident of Microsoft, as follows: We are writing to you to request that Microsoft provide [Sun] with the complete information required to allow Sun to provide native support for COM objects on Solaris. We also request that Microsoft provide [Sun] with the complete information required to allow [Sun] to provide native support for the complete set of Active Directory technologies on Solaris. We believe it is in the industry’s best interest that applications written to execute on Solaris be able to seamlessly communicate via COM and/or Active Directory with the Windows operating systems and/or with Windows-based software. We believe that Microsoft should include a reference implementation and such other information as is necessary to insure, without reverse engineering, that COM objects and the complete set of Active Directory technologies will run in full compatible fashion on Solaris. We think it necessary that such information be provided for the full range of COM objects as well as for the full set of Active Directory technologies currently on the market. We also think it necessary that such information be provided in a timely manner and on a continuing basis for COM objects and Active Directory technologies that are to be released to the market in the future.…

4. By letter of October 6, 1998, Mr. Maritz replied to the letter of September 15, 1998. In his letter, he said:

1. This opinion was affirmed by the Appellate Court. See Data General Corp. v. Grumman Systems Support Corp., 36 F.3d 1147 (1st Cir. 1994).

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Thank you for your interest in working with Windows. We have some mutual customers using our products, and I think it is great you are interested in opening up your system to interoperate with Windows. Microsoft has always believed in helping software developers, including [its] competitors, build the best possible products and interoperability for [its] platform. You may not realise that the information you requested on how to interoperate with COM and the Active Directory technologies is already published and available to you and every other software developer in the world via the Microsoft Developer Network (MSDN) Universal product. MSDN contains comprehensive information about the services and interfaces of the Windows platform and is a great source of information for developers interested in writing to or interoperating with Windows. In fact, Sun currently has 32 active licenses for the MSDN Universal subscription. Furthermore, as your company has done in the past, I assume you will be sending a significant number of people to attend our Professional Developers Conference in Denver October 11—October 15, 1998. This will be another venue to get the technical information you are seeking in order to work with our systems technologies. Some of the 23 Sun employees that attend[ed] last year[’]s conference should be able to provide you with their comments on the quality and depth of information discussed at these Professional Developers Conferences. You will be pleased to know that there is already a reference implementation of COM on Solaris. This implementation of COM on Solaris is a fully supported binary available from Microsoft. Source code for COM can be licensed from other sources including Software AG.… Regarding the Active Directory, we have no plans to “port” [it] to Solaris. However, to satisfy our mutual customers there are many methods with varying levels of functionality in order to interoperate with the Active Directory. For example, you can use the standard LDAP to access the Windows NT Server Active Directory from Solaris. If after attending [the Professional Developers Conference] and reading through all the public MSDN content you should require some additional support, our Developer Relations Group has account managers who strive to help developers who need additional support for Microsoft’s platforms. I have asked Marshall Goldberg, the Lead Program Manager, to make himself available should you need it.…

6. On 10 December 1998, Sun lodged a complaint with the Commission pursuant to Article 3 of Council Regulation No 17 of 6 February 1962, First Regulation implementing Articles [81 EC] and [82 EC] (OJ, English Special Edition 1959-62, p. 87). 7. Sun’s complaint related to Microsoft’s refusal to give it the information and technology necessary to allow its work group server operating systems to interoperate with the Windows client PC operating system.… 20. On 24 March 2004, the Commission adopted Decision 2007/53/EC relating to a proceeding pursuant to Article 82 [EC] and Article 54 of the EEA Agreement against Microsoft Corp. (Case COMP/C-3.37.792—Microsoft) (OJ 2007 L 32, p. 23; “the contested decision”). 21. In the contested decision, the Commission finds that Microsoft infringed Article 82 EC and Article 54 of the Agreement on the European Economic Area (EEA) by twice abusing a dominant position.…

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101. In this first issue, Microsoft relies on a single plea alleging infringement of Article 82 EC. This plea may be broken down into three parts. In the first part, Microsoft claims that the criteria that permit an undertaking in a dominant position to be compelled to grant a license, as defined by the Community judicature, are not satisfied in this case.… 312. It must be borne in mind that Microsoft’s argument is that its refusal to supply interoperability information cannot constitute an abuse of a dominant position within the meaning of Article 82 EC because, first, the information is protected by intellectual property rights (or constitutes trade secrets) and, second, the criteria established in the case-law that determine when an undertaking in a dominant position can be required to grant a license to a third party are not satisfied in this case. 313. It must also be borne in mind that the Commission contends that there is no need to decide whether Microsoft’s conduct constitutes a refusal to license intellectual property rights to a third party, or whether trade secrets merit the same degree of protection as intellectual property rights, since the strict criteria against which such a refusal may be found to constitute an abuse of a dominant position within the meaning of Article 82 EC are in any event satisfied in the present case … 314. While Microsoft and the Commission are thus agreed that the refusal at issue may be assessed under Article 82 EC on the assumption that it constitutes a refusal to license intellectual property rights, they disagree as to the criteria established in the case-law that are applicable in such a situation. 315. Thus, Microsoft relies, primarily, on the criteria laid down in Magill and IMS Health, … and, in the alternative, on those laid down in Bronner, … 316. The Commission, on the other hand, contends that an “automatic” application of the criteria laid down in IMS Health, … would be “problematic” in this case. It maintains that, in order to determine whether such a refusal is abusive, it must take into consideration all the particular circumstances surrounding that refusal, which need not necessarily be the same as those identified in Magill and IMS Health, paragraph 107 above. Thus it explains at recital 558 to the contested decision, that “[t]he case-law of the European Courts … suggests that the Commission must analyse the entirety of the circumstances surrounding a specific instance of a refusal to supply and must take its decision [on the basis of] the results of such a comprehensive examination.” 317. At the hearing, the Commission, questioned on this issue by the Court, confirmed that it had considered in the contested decision that Microsoft’s conduct presented three characteristics that allowed it to be characterized as abusive. The first consists in the fact that the information that Microsoft refuses to disclose to its competitors relates to interoperability in the software industry, a matter to which the Community legislature attaches particular importance. The second characteristic lies in the fact that Microsoft uses its extraordinary power on the client PC operating systems market to eliminate competition on the adjacent work group server operating systems market. The third characteristic is that the conduct in question involves disruption of previous levels of supply.…

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331. It follows from the case-law cited above that the refusal by an undertaking holding a dominant position to license a third party to use a product covered by an intellectual property right cannot in itself constitute an abuse of a dominant position within the meaning of Article 82 EC. It is only in exceptional circumstances that the exercise of the exclusive right by the owner of the intellectual property right may give rise to such an abuse. 332. It also follows from that case-law that the following circumstances, in particular, must be considered to be exceptional: – in the first place, the refusal relates to a product or service indispensable to the exercise of a particular activity on a neighboring market; – in the second place, the refusal is of such a kind as to exclude any effective competition on that neighboring market; – in the third place, the refusal prevents the appearance of a new product for which there is potential consumer demand. 333. Once it is established that such circumstances are present, the refusal by the holder of a dominant position to grant a license may infringe Article 82 EC unless the refusal is objectively justified. 334. The Court notes that the circumstance that the refusal prevents the appearance of a new product for which there is potential consumer demand is found only in the case-law on the exercise of an intellectual property right. 335. Finally, it is appropriate to add that, in order that a refusal to give access to a product or service indispensable to the exercise of a particular activity may be considered abusive, it is necessary to distinguish two markets, namely, a market constituted by that product or service and on which the undertaking refusing to supply holds a dominant position and a neighboring market on which the product or service is used in the manufacture of another product or for the supply of another service. The fact that the indispensable product or service is not marketed separately does not exclude from the outset the possibility of identifying a separate market (see, to that effect, IMS Health, … ). Thus, the Court of Justice held, at paragraph 44 of IMS Health, … that it was sufficient that a potential market or even a hypothetical market could be identified and that such was the case where the products or services were indispensable to the conduct of a particular business activity and where there was an actual demand for them on the part of undertakings that sought to carry on that business. The Court of Justice concluded at the following paragraph of the judgment that it was decisive that two different stages of production were identified and that they were interconnected in that the upstream product was indispensable for supply of the downstream product.… 560. In the contested decision, the Commission considered whether the refusal at issue gave rise to a “risk” of the elimination of competition on the work group server operating systems market … Microsoft contends that that criterion is not sufficiently strict, since according to the case-law on the exercise of an intellectual property right

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the Commission must demonstrate that the refusal to license an intellectual property right to a third party is “likely to eliminate all competition,” or, in other words, that there is a “high probability” that the conduct in question will have such a result. 561. The Court finds that Microsoft’s complaint is purely one of terminology and is wholly irrelevant. The expressions “risk of elimination of competition” and “likely to eliminate competition” are used without distinction by the Community judicature to reflect the same idea, namely that Article 82 EC does not apply only from the time when there is no more, or practically no more, competition on the market. If the Commission were required to wait until competitors were eliminated from the market, or until their elimination was sufficiently imminent, before being able to take action under Article 82 EC, that would clearly run counter to the objective of that provision, which is to maintain undistorted competition in the common market and, in particular, to safeguard the competition that still exists on the relevant market. 562. In this case, the Commission had all the more reason to apply Article 82 EC before the elimination of competition on the work group server operating systems market had become a reality because that market is characterized by significant network effects and because the elimination of competition would therefore be difficult to reverse (see recitals 515 to 522 and 533 to the contested decision). 563. Nor is it necessary to demonstrate that all competition on the market would be eliminated. What matters, for the purpose of establishing an infringement of Article 82 EC, is that the refusal at issue is liable to, or is likely to, eliminate all effective competition on the market. It must be made clear that the fact that the competitors of the dominant undertaking retain a marginal presence in certain niches on the market cannot suffice to substantiate the existence of such competition.… 619. The Commission had even more reason to conclude that there was a risk that competition would be eliminated on that market because the market has certain features that are likely to discourage organizations that have already taken up Windows for their work group servers from migrating to competing operating systems in the future. Thus, as the Commission correctly states …, it follows from certain results of the third Mercer survey that the fact of having an “established record as proven technology” is seen as a significant factor by the large majority of IT executives questioned. At the time of the adoption of the contested decision, Microsoft, at a conservative estimate, held a market share of at least 60% on the work group server operating systems market … Likewise, certain results of that survey also establish that the factor “available skill-sets and cost/availability of support (in-house or external)” is important for the majority of the IT executives questioned. As the Commission quite correctly states … “[that] means that the easier it is to find technicians skilled in using a given work group server operating system, the more customers are inclined to purchase that work group server operating system” and, “[i]n turn, however, the more popular a work group server operating system is among customers, the easier it is for technicians (and the more willing are technicians) to acquire skills related to that product.” Microsoft’s very high market share on the work group server operating

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system market has the consequence that a very large number of technicians possess skills that are specific to Windows operating systems. 620. The Court therefore concludes that the circumstance that the refusal at issue entailed the risk of elimination of competition is present in this case. 650. … [I]n the first place, the Commission was correct to observe … that “[owing] to the lack of interoperability that competing work group server operating system products can achieve with the Windows domain architecture, an increasing number of consumers are locked into a homogeneous Windows solution at the level of work group server operating systems.” 651. It must be borne in mind that … Microsoft’s refusal prevented its competitors from developing work group server operating systems capable of attaining a sufficient degree of interoperability with the Windows domain architecture, with the consequence that consumers’ purchasing decisions in respect of work group server operating systems were channeled towards Microsoft’s products. The Court has also already observed … that it was apparent from a number of documents in the file that the technologies of the Windows 2000 range, in particular Active Directory, were increasingly being taken up by organizations. As interoperability problems arise more acutely with work group server operating systems in that range of products than with those of the preceding generation …, the increasing uptake of those systems merely reinforces the “lock-in” effect referred to in the preceding paragraph. 652. The limitation thus placed on consumer choice is all the more damaging to consumers because … they consider that non-Microsoft work group server operating systems are better than Windows work group server operating systems with respect to a series of features to which they attach great importance, such as “reliability/availability of the … system” and “security included with the server operating system.” 653. In the second place, the Commission was correct to consider that the artificial advantage in terms of interoperability that Microsoft retained by its refusal discouraged its competitors from developing and marketing work group server operating systems with innovative features, to the prejudice, notably, of consumers … That refusal has the consequence that those competitors are placed at a disadvantage by comparison with Microsoft so far as the merits of their products are concerned, particularly with regard to parameters such as security, reliability, ease of use or operating performance speed … 654. The Commission’s finding that “[i]f Microsoft’s competitors had access to the interoperability information that Microsoft refuses to supply, they could use the disclosures to make the advanced features of their own products available in the framework of the web of interoperability relationships that underpin the Windows domain architecture” … is corroborated by the conduct that those competitors had adopted in the past, when they had access to certain information concerning Microsoft’s products. The two examples that the Commission gives …, “PC NetLink” and “NDS for NT,” speak volumes in that regard. PC NetLink is software developed by Sun

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on the basis of AS/U, which had been developed by AT&T using source code that Microsoft had licensed to it in the 1990s (recitals 211 to 213 to the contested decision). A document submitted by Microsoft during the administrative procedure shows that the innovative features and added value that PC NetLink brought to Windows work group networks was used as a selling point for that product … Likewise, in its marketing material, Novell highlighted the new features that NDS for NT—software that it had developed using reverse engineering—brought to the Windows domain architecture (in this instance Windows NT) … 655. The Commission was careful to emphasize, in that context, that there was “ample scope for differentiation and innovation beyond the design of interface specifications” … In other words, the same specification can be implemented in numerous different and innovative ways by software designers. 656. Thus, the contested decision rests on the concept that, once the obstacle represented for Microsoft’s competitors by the insufficient degree of interoperability with the Windows domain architecture has been removed, those competitors will be able to offer work group server operating systems that, far from merely reproducing the Windows systems already on the market, will be distinguished from those systems with respect to parameters that consumers consider important … 657. It must be borne in mind, in that regard, that Microsoft’s competitors would not be able to clone or reproduce its products solely by having access to the interoperability information covered by the contested decision. Apart from the fact that Microsoft itself acknowledges in its pleadings that the remedy prescribed by Article 5 of the contested decision would not allow such a result to be achieved … it is appropriate to repeat that the information at issue does not extend to implementation details or to other features of Microsoft’s source code … The Court also notes that the protocols whose specifications Microsoft is required to disclose in application of the contested decision represent only a minimum part of the entire set of protocols implemented in Windows work group server operating systems. 658. Nor would Microsoft’s competitors have any interest in merely reproducing Windows work group server operating systems. Once they are able to use the information communicated to them to develop systems that are sufficiently interoperable with the Windows domain architecture, they will have no other choice, if they wish to take advantage of a competitive advantage over Microsoft and maintain a profitable presence on the market, than to differentiate their products from Microsoft’s products with respect to certain parameters and certain features. It must be borne in mind that … the implementation of specifications is a difficult task that requires significant investment in money and time. 659. Last, Microsoft’s argument that it will have less incentive to develop a given technology if it is required to make that technology available to its competitors … is of no relevance to the examination of the circumstance relating to the new product, where the issue to be decided is the impact of the refusal to supply on the incentive for Microsoft’s competitors to innovate and not on Microsoft’s incentives to innovate. That

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is an issue that will be decided when the Court examines the circumstance relating to the absence of objective justification.… 660. In the third place, the Commission is also correct to reject as unfounded Microsoft’s assertion during the administrative procedure that it was not demonstrated that its refusal caused prejudice to consumers … 661. First of all, … the results of the third Mercer survey show that, contrary to Microsoft’s contention, consumers consider non-Microsoft work group server operating systems to be better than Windows work group server operating systems on a number of features to which they attach great importance. 662. Next, Microsoft cannot rely on the fact that consumers never claimed at any time during the administrative procedure that they had been forced to adopt a Windows work group server operating system as a consequence of its refusal to disclose interoperability information to its competitors. In that connection, it is sufficient to point out that Microsoft does not dispute the Commission’s findings … Thus, … the Commission observes that it is developers of complementary software required to interoperate with Microsoft’s systems who “depend on the interface information” and that “[c]ustomers will not always exactly know what is disclosed by Microsoft to other work group operating system vendors and what is not.” … [T]he Commission states “[w]hen confronted with a ‘choice’ between putting up with interoperability problems that render their business processes cumbersome, inefficient and costly, and embracing a homogeneous Windows solution for their work group network, customers will tend to opt for the latter proposition” and that “[o]nce they have standardised on Windows, they are unlikely to report interoperability problems between their client PCs and the work group servers.” 663. Furthermore, Microsoft’s own statements concerning the disclosures made under the United States settlement show that those disclosures had the consequence of offering greater choice to consumers … 664. Last, it must be borne in mind that it is settled case-law that Article 82 EC covers not only practices that may prejudice consumers directly but also those that indirectly prejudice them by impairing an effective competitive structure (Case 85/76 Hoffmann–La Roche v. Commission [1979] ECR 461, paragraph 125, and Irish Sugar v. Commission, paragraph 229 above, paragraph 232). In this case, Microsoft impaired the effective competitive structure on the work group server operating systems market by acquiring a significant market share on that market. 665. The Court concludes from all of the foregoing considerations that the Commission’s finding to the effect that Microsoft’s refusal limits technical development to the prejudice of consumers within the meaning of Article 82(b) EC is not manifestly incorrect. The Court therefore finds that the circumstance relating to the appearance of a new product is present in this case.… 689. In the present case, as the Commission found at recital 709 to the contested decision and as Microsoft expressly confirmed in the application, Microsoft relied as

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justification for its conduct solely on the fact that the technology concerned was covered by intellectual property rights. It made clear that if it were required to grant third parties access to that technology, that “would … eliminate future incentives to invest in the creation of more intellectual property” … In the reply, the applicant also relied on that fact that the technology was secret and valuable and that it contained important innovations. 690. The Court considers that, even on the assumption that it is correct, the fact that the communication protocols covered by the contested decision, or the specifications for those protocols, are covered by intellectual property rights cannot constitute objective justification within the meaning of Magill and IMS Health, … Microsoft’s argument is inconsistent with the raison d’être of the exception that that case-law thus recognizes in favor of free competition, since if the mere fact of holding intellectual property rights could in itself constitute objective justification for the refusal to grant a license, the exception established by the case-law could never apply. In other words, a refusal to license an intellectual property right could never be considered to constitute an infringement of Article 82 EC even though in Magill and IMS Health, … the Court of Justice specifically stated the contrary. 691. It must be borne in mind that … the Community judicature considers that the fact that the holder of an intellectual property right can exploit that right solely for his own benefit constitutes the very substance of his exclusive right. Accordingly, a simple refusal, even on the part of an undertaking in a dominant position, to grant a license to a third party cannot in itself constitute an abuse of a dominant position within the meaning of Article 82 EC. It is only when it is accompanied by exceptional circumstances such as those hitherto envisaged in the case-law that such a refusal can be characterized as abusive and that, accordingly, it is permissible, in the public interest in maintaining effective competition on the market, to encroach upon the exclusive right of the holder of the intellectual property right by requiring him to grant licenses to third parties seeking to enter or remain on that market. It must be borne in mind that it has been established above that such exceptional circumstances were present in this case. 692. The argument that Microsoft puts forward in the reply, namely that the technology concerned is secret and of great value to the licensees and contains important innovations, cannot succeed either. 693. First, the fact that the technology concerned is secret is the consequence of a unilateral business decision on Microsoft’s part. Furthermore, Microsoft cannot rely on the argument that the interoperability information is secret as a ground for not being required to disclose it unless the exceptional circumstances identified by the Court of Justice in Magill and IMS Health, … are present, and at the same time justify its refusal by what it alleges to be the secret nature of the information. Last, there is no reason why secret technology should enjoy a higher level of protection than, for example, technology that has necessarily been disclosed to the public by its inventor in a patent-application procedure.

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694. Second, from the moment at which it is established that—as in this case—the interoperability information is indispensable, that information is necessarily of great value to the competitors who wish to have access to it. 695. Third, it is inherent in the fact that the undertaking concerned holds an intellectual property right that the subject-matter of that right is innovative or original. There can be no patent without an invention and no copyright without an original work. 696. The Court further observes that in the contested decision the Commission did not simply reject Microsoft’s assertion that the fact that the technology concerned was covered by intellectual property rights justified its refusal to disclose the relevant information. The Commission also examined the applicant’s argument that if it were required to give third parties access to that technology there would be a negative impact on its incentives to innovate … 697. The Court finds that, as the Commission correctly submits, Microsoft, which bore the initial burden of proof …, did not sufficiently establish that if it were required to disclose the interoperability information that would have a significant negative impact on its incentives to innovate. 698. Microsoft merely put forward vague, general and theoretical arguments on that point. Thus, as the Commission observes at recital 709 to the contested decision, in its response of 17 October 2003 to the third statement of objections Microsoft merely stated that “[d]isclosure would … eliminate future incentives to invest in the creation of more intellectual property,” without specifying the technologies or products to which it thus referred. 699. In certain passages in the response referred to in the preceding paragraph, Microsoft envisages a negative impact on its incentives to innovate by reference to its operating systems in general, namely both those for client PCs and those for servers. 700. In that regard, it is sufficient to note that … the Commission quite correctly refuted Microsoft’s arguments relating to the fear that its products would be cloned. It must be borne in mind, in particular, that the remedy prescribed in Article 5 of the contested decision does not, and is not designed to, allows Microsoft’s competitors to copy its products … 701. It follows that it has not been demonstrated that the disclosure of the information to which that remedy relates will significantly reduce—still less eliminate—Microsoft’s incentives to innovate. 702. In that context, the Court observes that … it is normal practice for operators in the industry to disclose to third parties the information that will facilitate interoperability with their products and Microsoft itself had followed that practice until it was sufficiently established on the work group server operating systems market. Such disclosure allows the operators concerned to make their own products more attractive and therefore more valuable. In fact, none of the parties has claimed in the present case that such disclosure had had any negative impact on those operators’ incentives to innovate.

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703. The Court further considers that if the disclosures made under the United States settlement and the MCPP as regards server-to-client protocols had no negative impact on Microsoft’s incentives to innovate … , there is no obvious reason to believe that the consequences should be any different in the case of disclosure relating to server/server protocols.… 709. In other words, in accordance with the principles laid down in the case-law …, the Commission, after establishing that the exceptional circumstances identified by the Court of Justice in Magill and IMS Health, … were present in this case, then proceeded to consider whether the justification put forward by Microsoft, on the basis of the alleged impact on its incentives to innovate, might prevail over those exceptional circumstances, including the circumstance that the refusal at issue limited technical development to the prejudice of consumers within the meaning of Article 82(b) EC. 710. The Commission came to a negative conclusion but not by balancing the negative impact that the imposition of a requirement to supply the information at issue might have on Microsoft’s incentives to innovate against the positive impact of that obligation on innovation in the industry as a whole, but after refuting Microsoft’s arguments relating to the fear that its products might be cloned …, establishing that the disclosure of interoperability was widespread in the industry concerned … and showing that IBM’s commitment to the Commission in 1984 was not substantially different from what Microsoft was ordered to do in the contested decision … and that its approach was consistent with Directive 91/250 … 711. It follows from all of the foregoing considerations that Microsoft has not demonstrated the existence of any objective justification for its refusal to disclose the interoperability at issue.2

22. Intergraph Corp. v. Intel Corp., 195 F.3d 1346 (Fed. Cir. 1999) UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT Opinion by Newman, Circuit Judge. Intel is a manufacturer of high performance computer microprocessors. The microprocessors are sold to producers of various computer-based devices, who adapt and integrate the microprocessors into products that are designed and sold for particular uses. These producers are called original equipment manufacturers, or OEMs. Intergraph Corporation is an OEM, and develops, makes, and sells computer workstations that are used in producing computer-aided graphics. From 1987 to 1993 Intergraph’s workstations were based on a high performance microprocessor developed by the Fairchild division of National Semiconductor, embodying what is called

2. After this long discussion on abusive refusal to deal, the court embarked on a likewise lengthy analysis of Microsoft’ practice of bundling the Windows operating system with Windows Media Player.

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the “Clipper” technology. Intergraph owns the Clipper technology and patents thereon. In 1993 Intergraph discontinued use of Clipper microprocessors in its workstations and switched to Intel microprocessors. In 1994 Intel designated Intergraph a “strategic customer” and provided Intergraph with various special benefits, including proprietary information and products, under nondisclosure agreements. Starting in late 1996 Intergraph charged several Intel OEM customers with infringement of the Clipper patents based on their use of Intel microprocessors. The accused companies sought defense and indemnification from Intel. Negotiations ensued between Intel and Intergraph. Intel inquired about a license to the Clipper patents, but the proposed terms were rejected by Intergraph as inadequate. Intel then proposed certain patent cross-licenses, also rejected by Intergraph. Intel also proposed that the nondisclosure agreement relating to a new joint development project include a license to the Clipper patents; this too was rejected by Intergraph. As negotiations failed and threats continued the relationship deteriorated, and so did the technical assistance and other special benefits that Intel had been providing to Intergraph. In November 1997 Intergraph sued Intel for infringement of the Clipper patents. Intergraph also charged Intel with other violations of law, including fraud, misappropriation of trade secrets, negligence, wantonness and willfulness, breach of contract, intentional interference with business relations, breach of express and implied warranties, and violation of the Alabama Trade Secrets Act. Intergraph demanded that Intel be enjoined from infringement of the Clipper patents, and the award of compensatory and punitive damages and trebled damages. Intergraph moved to enjoin Intel pendente lite from cutting off or delaying provision of the special benefits that Intel had previously provided to Intergraph. Following Intel’s opposition to this motion Intergraph amended its complaint to charge Intel with violation of the antitrust laws.… The district court ruled that Intergraph is likely to succeed in showing that Intel is a “monopolist,” whereby Intel’s withdrawal of the benefits it had previously accorded to Intergraph and other actions were deemed to violate sections 1 and 2 of the Sherman Act. 15 U.S.C. The court relied on several legal theories, viz.: (1) the essential facility theory and the corollary theory of refusal to deal, (2) leveraging and tying, (3) coercive reciprocity, (4) conspiracy and other acts in restraint of trade, (5) improper use of intellectual property, and (6) retaliatory enforcement of the nondisclosure agreements. The court alternatively ruled that Intergraph is likely to succeed on its contract claims, including the claim that the mutual at-will termination provision of the nondisclosure agreements is unconscionable. While the parties dispute some of the factual determinations of the district court, the court’s dispositive rulings were made as a matter of law, and are subject to plenary review. Intel states that unlawful monopolization was not shown, as a matter of law, because Intergraph and Intel are not competitors. Unlawful monopolization requires both the existence of monopoly power and anticompetitive conduct.… Monopoly power is generally defined as the power to control prices or exclude competition in a relevant market; anticompetitive conduct is generally defined as conduct whose

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purpose is to acquire or preserve the power to control prices or exclude competition.… The prohibited conduct must be directed toward competitors and must be intended to injure competition. See Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 458 (1993) (“The law directs itself not against conduct which is competitive, even severely so, but against conduct which unfairly tends to destroy competition itself.”) Such conduct must affect the relevant product market, that is, the “area of effective competition” between the defendant and plaintiff. See American Key Corp. v. Cole Nat’l Corp., 762 F.2d 1569, 1581 (11th Cir. 1985) (“The relevant market is the ‘area of effective competition’ in which competitors generally are willing to compete for the consumer potential.”) (quoting Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320, 327-29 (1961)); see also, e.g., AD/SAT, Div. of Skylight, Inc. v. Associated Press, 181 F.3d 216, 227 (2d Cir. 1999) (“The relevant market for purposes of antitrust litigation is the ‘area of effective competition’ within which the defendant operates.”) In Brown Shoe Co. v. United States, 370 U.S. 294, 324 (1962) the Court summarized that the relevant market has two dimensions: first, the relevant product market, which identifies the products or services that compete with each other; and second, the geographic market, which may be relevant when the competition is geographically confined. Thus “the ‘market’ which one must study to determine when a producer has monopoly power will vary with the part of commerce under consideration.” United States v. E. I. du Pont de Nemours & Co., 351 U.S. 377, 404 (1956). The antitrust law has consistently recognized that a producer’s advantageous or dominant market position based on superiority of a commercial product and ensuing market demand is not the illegal use of monopoly power prohibited by the Sherman Act. In Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 596 n. 19 (1985) the Court explained that “the offense of monopoly under ‘2 of the Sherman Act has two elements: (1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident,” quoting United States v. Grinnell Corp., 384 U.S. 563, 570-571 (1966). Product superiority and the ensuing market position, flowing from a company’s research, talents, commercial efforts, and financial commitments, do not convert the successful enterprise into an illegal monopolist under the Sherman Act. Intel does not dispute the high market share achieved by its high performance microprocessors. However, that is not a violation of law. Intel stresses that it is not in competition with Intergraph in any relevant market; that its relationship with Intergraph is that of supplier and customer, not competitor. Although the district court found that Intel and Intergraph compete or will compete in the future in the “graphics subsystems” market, as we discuss post, Intel points out, and Intergraph does not dispute, that neither firm possesses monopoly power in this market. Intel stresses that violation of the Sherman Act requires the use of monopoly power to exclude competition or maintain prices, … none of which is here alleged. Although the district court recognized that Intel’s market power derives from the technological superiority of its products, the court found a prima facie case of market

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power based on Intel’s market share of high performance microprocessors, and concluded that Intel had willfully acquired and maintained monopoly power in the high-end microprocessor market, although the record did not show an effect on competition in any market in which Intergraph competes with Intel.… Intel’s market power in the microprocessor market is irrelevant to the issues of this case, all of which relate to the effect of Intel’s actions on Intergraph’s position in its own markets. There is substantial precedent discussing Sherman Act constraints with respect to a single firm’s conduct toward another firm when there is no effect or threat of monopolization flowing from that conduct.… The conduct complained of is Intel’s withdrawal or reduction of technical assistance and special benefits, particularly pre-release access to Intel’s new products, in reaction to Intergraph’s suit for patent infringement. However, the Sherman Act does not convert all harsh commercial actions into antitrust violations. Unilateral conduct that may adversely affect another’s business situation, but is not intended to monopolize that business, does not violate the Sherman Act.… Although Intergraph stresses the adverse effect on its business of Intel’s proposed withdrawal of these special benefits, the record contains no analysis of the effect of such action on competition among manufacturers of graphics subsystems or high-end workstations. “The antitrust laws were enacted for the protection of competition, not competitors,” Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 488 (1977) (quoting Brown Shoe, 370 U.S. at 320). See, e.g., Levine, 72 F.3d at 1551 (“the antitrust laws are intended to protect competition, not competitors”).… Intel’s conduct with respect to Intergraph does not constitute the offense of monopolization or the threat thereof in any market relevant to competition with Intergraph. The Sherman Act is a law in the public, not private, interest. And even if the district court’s view of Intel as a monopolist were accepted, as stated in Mr. Furniture Warehouse, Inc. v. Barclays American/Commercial Inc., 919 F.2d 1517, 1522 (11th Cir. 1990), “to constitute a violation the monopolist’s activities must tend to cause harm to competition; unrelated harm to an individual competitor or consumer is not sufficient.” … … Intergraph argues that the essential facility theory provides it with the entitlement, in view of its dependence on Intel microprocessors, to Intel’s technical assistance and other special customer benefits, because Intergraph needs those benefits in order to compete in its workstation market. However, precedent is quite clear that the essential facility theory does not depart from the need for a competitive relationship in order to incur Sherman Act liability and remedy. See, e.g., Caribbean Broadcasting Sys., Ltd. v. Cable & Wireless PLC, 331 U.S. App. D.C. 226, 148 F.3d 1080, 1088 (D.C. Cir. 1998) (an antitrust claim on the essential facility theory requires that a monopolist who competes with the plaintiff in the monopolized market controls an essential facility, and refuses the plaintiff’s request for access to the facility); Alaska Airlines, Inc. v. United Airlines, Inc., 948 F.2d 536, 542 (9th Cir. 1991) (“Stated most generally, the essential facilities doctrine imposes liability when one firm, which controls an essential facility, denies a second firm reasonable access to a product or service that the second firm must obtain in order to compete with the first.”). In Otter

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Tail Power, Aspen Skiing, and MCI Communications the “essential facilities” denied to the plaintiffs were all controlled by competitors.… Although the viability and scope of the essential facility theory has occasioned much scholarly commentary, no court has taken it beyond the situation of competition with the controller of the facility, whether the competition is in the field of the facility itself or in a vertically related market that is controlled by the facility. That is, there must be a market in which plaintiff and defendant compete, such that a monopolist extends its monopoly to the downstream market by refusing access to the facility it controls.… Absent such a relevant market and competitive relationship, the essential facility theory does not support a Sherman Act violation. Ignoring this weight of jurisprudence, Intergraph argues that violation of the Sherman Act under the essential facility theory does not depend on whether Intel and Intergraph are competitors in any market. That is incorrect. As we have discussed, the presence of a competitive relationship is fundamental to invoking the Sherman Act to force access to the property of another. See Northern Pacific Ry. Co. v. United States, 356 U.S. 1, 4 (1958) (“the policy unequivocally laid down by the Act is competition”). Other than as a remedy for illegal acts, the antitrust laws do not compel a company to do business with anyone customer, supplier, or competitor. See American Key Corp., 762 F.2d at 1578 (the “antitrust laws do not compel a company to do business with anyone”). The notion that withholding of technical information and samples of pre-release chips violates the Sherman Act, based on essential facility jurisprudence, is an unwarranted extension of precedent and cannot be supported on the premises presented. The district court erred in holding that Intel’s superior microprocessor product and Intergraph’s dependency thereon converted Intel’s special customer benefits into an “essential facility” under the Sherman Act. The court’s ruling of antitrust violation cannot be sustained on this ground. Intergraph also phrases Intel’s action in withholding access to its proprietary information, pre-release chip samples, and technical services as a “refusal to deal,” and thus illegal whether or not the criteria are met of an “essential facility.” However, it is well established that “in the absence of any purpose to create or maintain a monopoly, the [Sherman] act does not restrict the long recognized right of a trader or manufacturer engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom he will deal.” United States v. Colgate & Co., 250 U.S. 300, 307 465 (1919).… Courts have recognized that “the relationship between a manufacturer and its customer should be reasonably harmonious; and the bringing of a lawsuit by the customer may provide a sound business reason for the manufacturer to terminate their relations.” House of Materials, Inc. v. Simplicity Pattern Co., 298 F.2d 867, 871 (2d Cir. 1962); see also Zoslaw v. MCA Distrib. Corp., 693 F.2d 870, 889-90 (9th Cir. 1982) (noting absence of any case where refusal to deal in response to a customer’s suit against a manufacturer has been deemed an unreasonable restraint of trade); Corenswet, Inc. v. Amana Refrigeration, Inc., 594 F.2d 129, 134 n. 3 (5th Cir. 1979) (court should not “be called upon to weld together two business entities which have shown a propensity for disagreement, friction, and even adverse litigation”). Although we have observed a few rulings wherein a court has, for example, barred the termination

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of a distributor during litigation, no case has held that the divulgation of proprietary information and the provision of special or privileged treatment to a legal adversary can be compelled on a “refusal to deal” antitrust premise. A “refusal to deal” may raise antitrust concerns when the refusal is directed against competition and the purpose is to create, maintain, or enlarge a monopoly. For example, in Lorain Journal Co. v. United States, 342 U.S. 143 (1951) the only newspaper in town refused to sell newspaper advertising to persons who also advertised on a competing radio station; this was held to be an attempt to monopolize the mass dissemination of all news and advertising, and to violate the Sherman Act. See also, e.g., Data General Corp. v. Grumman Sys. Support Corp., 36 F.3d 1147, 1183-84 (1st Cir. 1994) (“[A] monopolist’s unilateral refusal to deal with its competitors (as long as the refusal harms the competitive process) may constitute prima facie evidence of exclusionary conduct in the context of a section 2 claim. A monopolist may nevertheless rebut such evidence by establishing a valid business justification for its conduct.”) (citing Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 483 n. 32 (1992)). Intergraph provided no support for its charge that Intel’s action in withholding “strategic customer” benefits from Intergraph was for the purpose of enhancing Intel’s competitive position. Although the district court found that there was a lack of business justification for Intel’s actions, there was no showing of harm to competition with Intel; thus the need did not arise to establish the defense of business justification. As stated in California Computer Products, Inc. v. International Bus. Mach. Corp., 613 F.2d 727, 744 (9th Cir. 1979), a manufacturer is “under no duty to help [plaintiff] or other peripheral equipment manufacturers survive or expand.” Absent a duty, justification is unnecessary. To the extent that Intergraph has presented on this appeal, or the district court relied on, a theory of refusal to deal based on Intel’s withdrawal of the special customer benefits (Intel continued to sell to Intergraph as a regular customer), a basis for violation of the antitrust laws has not been established. The district court held that Intel “has attempted to leverage its monopoly power in the ‘X86’ CPU market to prevent Intergraph from competing in the graphics subsystem and workstation markets and to control and dominate competition in these markets through discriminatory and favored agreements and understandings with some of Intergraph’s competitors.” The district court found that Intel was itself in the graphics subsystems market, for Intel “signed an agreement to purchase Chips & Technology Company, an experienced and successful producer of graphics chips and chip sets” and was in the process of developing a graphics chipset. The court held that these actions were an illegal leveraging of monopoly power in violation of the Sherman Act, and that this warranted the remedy imposed in the preliminary injunction. Antitrust liability based on leveraging of monopoly power is a concept of imprecise definition for the courts have varied in their requirements of the nature of the advantage obtained in the assertedly leveraged market. The district court relied on Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263, 275 (2d Cir. 1979) for the

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position that the Sherman Act is violated if monopoly power in one market provides a “competitive advantage” in another market, whether or not there is an intent to create a monopoly in the second market. However, the district court appeared to view Intel’s participation in, and planned entry into, the graphics workstation market as a per se Sherman Act violation, for there was no economic evidence or proffer concerning Intel’s participation in the downstream market.… Absent an adverse effect in the second market, the Sherman Act would serve to restrain competition rather than promote it. The concept of illegal leveraging arose in United States v. Griffith, 334 U.S. 100, 107-08 (1948), wherein the Court explained that monopoly power cannot be used “to beget monopoly” and “to gain a competitive advantage.” The Second Circuit has rejected a broad reading of Berkey Photo, describing the statement quoted supra as “dictum” and holding in Twin Laboratories, Inc. v. Weider Health & Fitness, 900 F.2d 566 (2d Cir. 1990) that Sherman Act violation based on leveraging requires a showing of “tangible harm to competition” in the second market. See also AD/SAT, 181 F.3d at 230 (“Although a plaintiff alleging monopoly leveraging is not required to demonstrate a substantial market share by the defendant, application of the doctrine is limited to those circumstances where the challenged conduct actually injures competition, not just competitors, in the second, non-monopolized market.”) Some circuits have explicitly rejected the standard stated in Berkey Photo. In Fineman v. Armstrong World Industries, Inc., 980 F.2d 171 (3d Cir. 1992) the court held that a section 2 leverage claim requires the use of monopoly power in the second market, and that a mere attempt to gain a competitive advantage is insufficient as a matter of law. In Alaska Airlines, 948 F.2d at 548-49, the Ninth Circuit stated that “the elements of the established actions for ‘monopolization’ and ‘attempted monopolization’ are vital to differentiate between efficient and natural monopolies on the one hand, and unlawful monopolies on the other. Berkey Photo’s monopoly leveraging doctrine fails to differentiate properly among monopolies.” The Eleventh Circuit approached the issue in Aquatherm Indus., Inc, v. Florida Power & Light Co., 145 F.3d 1258, 1262 (11th Cir. 1998), declining to “extend Berkey Photo to a situation in which a monopolist projects its power into a market it not only does not seek to monopolize, but in which it does not even seek to compete.” In Amey, Inc. v. Gulf Abstract & Title, Inc., 758 F.2d 1486, 1503-04 (11th Cir. 1985) the court, citing Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 45 (1984), stated that the use of a position in one market to gain an advantage in another market is not an illegal market restraint unless “a significant fraction or buyers or sellers are frozen out of a market.” The district court’s ruling herein is not in accord with Eleventh Circuit precedent, for Intel’s action affected only Intergraph, in a heavily populated competitive market.… The district court’s ruling that Intel’s expansion into the computer workstation and graphics subsystems markets constitutes illegal leveraging appears to be based on a per se theory of future Sherman Act violation. It is an enlargement of antitrust theory and policy to prohibit downstream integration by a “monopolist” into new markets. The specter of Intel’s resources and talent is not evidence of future Sherman Act

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violation. As we have discussed, the purpose of the antitrust laws is to foster competition in the public interest, not to protect others from competition, in their private interest. Intergraph cites section 16 of the Clayton Act, 15 U.S.C. ‘26, as authority for the district court’s ruling. Section 16 authorizes action “against threatened loss or damage by a violation of the antitrust laws.” The salutary purpose is to prevent antitrust injury before it happens. However, the conduct to be prevented must be such that if it occurred would violate the antitrust laws. Section 16 authorizes prevention of the consequences of antitrust violation; it does not create the violation. The injunction cannot be supported on a theory of illegal leveraging.… In response to Intel’s argument that its proprietary information and pre-release products are subject to copyright and patents, the district court observed that Intel’s intellectual property “does not confer upon it a privilege or immunity to violate the antitrust laws.” That is of course correct. But it is also correct that the antitrust laws do not negate the patentee’s right to exclude others from patent property. See Cygnus Therapeutic Sys. v. ALZA Corp., 92 F.3d 1153, 1160 (Fed. Cir. 1996) (“The patent statute grants a patentee the right to exclude others from making, using, or selling the patented invention.”) The patent and antitrust laws are complementary, the patent system serving to encourage invention and the bringing of new products to market by adjusting investment-based risk, and the antitrust laws serving to foster industrial competition. See Loctite Corp. v. Ultraseal Ltd., 781 F.2d 861, 876-77 (Fed. Cir. 1985) (the purpose of the patent system is to “encourage innovation and its fruits”; the purpose of the antitrust laws is “to promote competition”). The patent and antitrust laws serve the public in different ways, both of importance to the nation. The district court stated that “unlawful ‘exclusionary conduct can include a monopolist’s unilateral refusal to license a [patent or] copyright or to sell a patented or copyrighted work,’” quoting from Image Technical Services.…This quotation, however, is part of a longer passage that imparts a quite different meaning: Under the fact-based approaches of Aspen Skiing and Kodak, some measure must guarantee that the jury account for the procompetitive effects and statutory rights extended by the intellectual property laws. To assure such consideration, we adopt a modified version of the rebuttable presumption created by the First Circuit in Data General, and hold that “while exclusionary conduct can include a monopolist’s unilateral refusal to license a [patent or] copyright,” or to sell its patented or copyrighted work, a monopolist’s “desire to exclude others from its [protected] work is a presumptively valid business justification for any immediate harm to consumers.

Image Technical Servs., 125 F.3d at 1218 (alterations in original). In Image Technical Services the Ninth Circuit reported that it had found “no reported case in which a court had imposed antitrust liability for a unilateral refusal to sell or license a patent or copyright.” 125 F.3d at 1216. Nor have we. In accord is the joint statement of the United States Department of Justice and Federal Trade Comm’n, Antitrust Guidelines for the Licensing of Intellectual Property 4 (1995) that market power does not “impose on the intellectual property owner an obligation to license the use of that property to others.” Id. at 4. See 35 U.S.C. ‘271(d)(4) (“No patent owner otherwise entitled to relief for

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infringement or contributory infringement of a patent shall be denied relief or deemed guilty of misuse or illegal extension of the patent right by reason of his having done one or more of the following: … (4) refused to license or use any rights to the patent”). See also, e.g., Miller Insituform, Inc. v. Insituform of North Am., Inc., 830 F.2d 606, 609 (6th Cir. 1987) (“A patent holder who lawfully acquires a patent cannot be held liable under section 2 of the Sherman Act for maintaining the [market] power he lawfully acquired by refusing to license the patent to others.”); United States v. Westinghouse Electric Corp., 648 F.2d 642, 647-48 (9th Cir. 1981) (patent holder has the “untrammeled” right to license or not, exclusively or otherwise); SCM Corp. v. Xerox Corp., 645 F.2d 1195, 1206-07 (2d Cir. 1981). Further, Intergraph is not seeking a license under Intel’s patents and copyrights, but a preferred position as to the products that embody this intellectual property before they are commercially available, as well as access to trade secrets. In Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 161 (1989) the Court recognized that trade secrets are of value only before the products embodying them are commercially available. Intergraph seeks technical information that is not generally known, samples of new products before they are available to the public, and individualized technical assistance. However, as we have stated, the owner of proprietary information has no obligation to provide it, whether to a competitor, customer, or supplier. Precedent makes clear that a customer who is dependent on a manufacturer’s supply of a component cannot on that ground force the producer to provide it; there must also be an anticompetitive aspect invoking the Sherman Act. In Eastman Kodak, for example, Kodak and the independent service organizations were in direct competition in the market for servicing Kodak’s photocopiers and micrographic equipment; the Court assumed, for the purpose of reviewing a grant of summary judgment, that Kodak had the intent to limit competition in the service market and that it succeeded in doing so. 504 U.S. at 455, 458. The district court herein recognized that there must be an anticompetitive intent, but ignored the absence of competition between Intel and Intergraph. The district court’s conclusory statement that Intel was using its intellectual property to restrain trade was devoid of evidence or elaboration or authority. A Sherman Act violation cannot be so imprecisely invoked.… Despite the district court’s sensitive concern for Intergraph’s well-being while it conducts its patent suit against Intel, there must be an adverse effect on competition in order to bring an antitrust remedy to bear. The remedy of compulsory disclosure of proprietary information and provision of pre-production chips and other commercial and intellectual property is a dramatic remedy for antitrust illegality, and requires violation of antitrust law or the likelihood that such violation would be established. In the proceedings whose record is before us, Intergraph has not shown a substantial likelihood of success in establishing that Intel violated the antitrust laws in its actions with respect to Intergraph, or that Intel agreed by contract to provide the benefits contained in the injunction. The preliminary injunction is vacated.…

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23. Image Technical Services, Inc. v. Eastman Kodak Co., 125 F.3d 1195 (1997) UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT Opinion by Beezer, Circuit Judge Plaintiffs-Appellees Image Technical Services, and ten other independent service organizations (“ISOs”) that service Kodak photocopiers and micrographic equipment sued the Eastman Kodak Co. (“Kodak”) for violations of the Sherman Act. The ISOs alleged that Kodak used its monopoly in the market for Kodak photocopier and micrographic parts to create a second monopoly in the equipment service markets. A jury verdict awarded treble damages totaling $ 71.8 million. The district court denied Kodak’s post trial motions and entered a ten year permanent injunction requiring Kodak to sell “all parts” to ISOs. Kodak filed a timely appeal, challenging the jury’s verdict, the ISOs’ evidence, the jury instructions, the damage awards and the permanent injunction. Kodak also seeks reversal on the basis of an alleged biased juror. This appeal raises questions relating to the application of antitrust principles upon a finding that a monopolist unilaterally refused to deal with competitors. We also address overlapping patent and copyright issues and their significance in the antitrust context.… Kodak manufactures, sells and services high volume photocopiers and micrographic (or microfilm) equipment. Competition in these markets is strong. In the photocopier market Kodak’s competitors include Xerox, IBM and Canon. Kodak’s competitors in the micrographics market include Minolta, Bell & Howell and 3M. Despite comparable products in these markets, Kodak’s equipment is distinctive. Although Kodak equipment may perform similar functions to that of its competitors, Kodak’s parts are not interchangeable with parts used in other manufacturers’ equipment. Kodak sells and installs replacement parts for its equipment. Kodak competes with ISOs in these markets. Kodak has ready access to all parts necessary for repair services because it manufactures many of the parts used in its equipment and purchases the remaining necessary parts from independent original-equipment manufacturers. In the service market, Kodak repairs at least 80% of the machines it manufactures. ISOs began servicing Kodak equipment in the early 1980’s, and have provided cheaper and better service at times, according to some customers. ISOs obtain parts for repair service from a variety of sources, including, at one time, Kodak. As ISOs grew more competitive, Kodak began restricting access to its photocopier and micrographic parts. In 1985, Kodak stopped selling copier parts to ISOs, and in 1986, Kodak halted sales of micrographic parts to ISOs. Additionally, Kodak secured agreements from their contracted original-equipment manufacturers not to sell parts to ISOs. These parts restrictions limited the ISOs ability to compete in the service market for Kodak machines. Competition in the service market requires that service providers have ready access to all parts. Kodak offers annual or multi-year service contracts to its customers. Service providers generally contract with equipment owners through multi-year service

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contracts. ISOs claim that they were unable to provide similar contracts because they lack a reliable supply of parts. Some ISOs contend that the parts shortage forced them out of business. In 1987, the ISOs filed this action against Kodak, seeking damages and injunctive relief for violations of the Sherman Act. The ISOs claimed that Kodak both: (1) unlawfully tied the sale of service for Kodak machines with the sale of parts in violation of §1 of the Sherman Act, and (2) monopolized or attempted to monopolize the sale of service for Kodak machines in violation of § 2 of the Sherman Act.… After remand, the case proceeded to trial in the district court. Before closing arguments, the ISOs withdrew their §1 tying and conspiracy claims. The remaining §2 attempted monopolization and monopolization claims were submitted to the jury. A unanimous verdict awarded damages to the ISO’s totaling $ 71.8 million after trebling. Ten ISOs were awarded damages covering lost service profits in the amount of $12,172,900 (before trebling) and six ISOs were awarded damages covering lost profits for used equipment sales totaling $11,775,400 (before trebling). After accepting the verdict, the district court crafted a ten year injunction requiring Kodak to sell all parts to ISOs on “reasonable and nondiscriminatory terms and prices.” The injunction required Kodak to sell: (1) all parts for Kodak equipment; (2) all parts described in Kodak’s Parts Lists; (3) all parts of supply items that are field replaceable by Kodak technicians; (4) all service manuals and price lists; and (5) all tools or devices “essential to servicing Kodak equipment.” … The second element of a §2 monopoly claim, the “conduct” element, is the use of monopoly power “to foreclose competition, to gain a competitive advantage, or to destroy a competitor.” Kodak, 504 U.S. at 482-83 (quoting United States v. Griffith, 334 U.S. 100, 107 (1948)). The ISOs proceeded under a “monopoly leveraging” theory, alleging that Kodak used its monopoly over Kodak parts to gain or attempt to gain a monopoly over the service of Kodak equipment. The Supreme Court endorsed this theory in Kodak noting: “If Kodak adopted its parts and service policies as part of a scheme of willful acquisition or maintenance of monopoly power, it will have violated §2.” Id. (citations omitted). “Willful acquisition” or “maintenance of monopoly power” involves “exclusionary conduct,” not power gained “from growth or development as a consequence of a superior product, business acumen, or historic accident.” Grinnell, 384 U.S. at 570-71. Kodak attacks the district court’s monopoly conduct jury instructions as well as the ISOs’ evidence establishing Kodak’s exclusionary conduct.… Kodak’s chief complaint with the monopoly power jury instructions lies with Jury Instruction No. 29. That Instruction, entitled “Monopolization—Monopoly Conduct,” states in relevant part: [a] company with monopoly power in a relevant market has no general duty to cooperate with its business rivals and may refuse to deal with them or with their customers if valid business reasons exist for such refusal. It is unlawful, however, for a monopolist to engage in conduct, including refusals to deal, that unnecessarily excludes or handicaps competitors in order to maintain a monopoly. (emphasis added).

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Kodak argues that this instruction lacks objective standards and improperly includes within the prohibited activities a lawful monopolist’s “aggressive” competition. Specifically, Kodak challenges Instruction No. 29’s “unnecessarily excludes or handicaps competitors” language. Kodak says that this language is based on a form of “monopoly leveraging” that we previously rejected in Alaska Airlines, Inc. v. United Airlines, Inc., 948 F.2d 536, 543 (9th Cir. 1991). In Alaska Airlines we did reject the Second Circuit’s holding in Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263 (2d Cir. 1979). Berkey Photo recognized liability under §2 of the Sherman Act on a theory of monopoly leveraging involving a firm that used “its monopoly power in one market to gain a competitive advantage in another, albeit without an attempt to monopolize the second market.” 603 F.2d at 275. In Alaska Airlines, we held that “monopoly leveraging” could not exist as a basis for §2 liability in the absence of the defendant using its monopoly in one market to monopolize or attempt to monopolize the downstream market. 948 F.2d at 547. We characterized Berkey Photo’s downstream monopoly requirement—“to gain a competitive advantage”—as too “loose.” Alaska Airlines, 948 F.2d at 546. Kodak accuses the district court of incorporating Berkey Photo’s repudiated language into the court’s instructions. We disagree. Instruction No. 29 required the jury to find that Kodak’s monopoly conduct be undertaken “in order to maintain a monopoly” in the downstream market. Berkey Photo’s watered-down standard does not go this far. Instruction No. 29 makes clear that the monopolies at issue are Kodak’s alleged service monopolies and the Instruction required the jury to find that Kodak acted in furtherance of maintaining its service monopolies. Instruction No. 29’s “unnecessarily excludes or handicaps competitors” language does not come from Berkey Photo, but from the jury instruction endorsed by the Supreme Court in Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 597 (1985). Kodak also objects to the attempted monopolization and monopolization jury instructions on the grounds that they fail to describe adequately the “essential facilities” doctrine, which Kodak contends is the controlling law in unilateral refusal to deal cases. Kodak asserts that this doctrine is the sole legal theory that could require Kodak to sell “all parts.” Kodak argues that the essential facilities doctrine required the jury to find that Kodak’s parts monopoly carries “the power to eliminate competition.” Kodak’s challenge raises a novel issue: whether a monopolist is liable under §2 of the Sherman Act for an anticompetitive refusal to deal only under an “essential facilities” theory, that is, only when the refusal involves something “essential” to the survival of competitors. As noted, Kodak would answer affirmatively; we reject this theory. Instead, relying on Kodak and Aspen Skiing, we endorse the ISOs’ theory that §2 of the Sherman Act prohibits a monopolist from refusing to deal in order to create or maintain a monopoly absent a legitimate business justification. We need not apply the essential facilities doctrine. Section 2 of the Sherman Act prohibits a monopolist’s unilateral action, like Kodak’s refusal to deal, if that conduct harms the competitive process in the absence of a legitimate business justification. See Kodak, 504 U.S. at 483 n. 32 (citing Aspen Skiing, 472 U.S. at 602). Unilateral refusals to deal often concern an “essential” facility. See Otter Tail Power Co. v. United States, 410 U.S. 366 (1973). In Alaska Airlines, we

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defined the essential facilities doctrine, generally, as: imposing “liability when one firm, which controls an essential facility, denies a second firm reasonable access to a product or service that the second firm must obtain to compete with the first.” 948 F.2d 536, 542. A facility is “essential” if it is otherwise unavailable and cannot be “reasonably or practically duplicated.” Anaheim v. Southern California Edison Co., 955 F.2d 1373, 1380 (9th Cir. 1992). In Otter Trail Power Co. v. United States, the Supreme Court held that the defendant, Otter Trail Power, used its electrical utility equipment, an “essential facility,” to gain monopoly power over all commercial electrical services. 410 U.S. at 377-79. Otter Trail Power generally sold both wholesale and retail electrical services. Later it refused to provide only wholesale electrical services to several municipalities that intended to supply retail electrical services to the ultimate customers. The Court held that Otter Trail Power’s refusal to supply “only wholesale” services eliminated competition in the downstream market for retail services as Otter Trail Power owned the only “facility” capable of supplying these services. The Court held that such “exclusionary” conduct violated §2 of the Sherman Act. Id. In Alaska Airlines, we interpreted Otter Trail as requiring plaintiffs proceeding under the “essential facilities” doctrine to establish that the controlled facility “carries with it the power to eliminate competition in the downstream market.” 948 F.2d at 544; see, e.g., Twin Laboratories, Inv. v. Weider Health & Fitness, 900 F.2d 566, 569 (2d Cir. 1990) (“A successful ‘essential facilities’ plaintiff must prove that denial of access has caused it ‘severe handicap [in the market].”). Kodak faults the district court for failing to instruct the jury that to be liable under §2, Kodak’s exclusionary conduct must have “eliminated competition” in the downstream service market. The Supreme Court has never explicitly held that a §2 refusal to deal claim can only be established under the “essential facilities” rubric. In Kodak the Supreme Court never discussed the essential facilities doctrine; nor do any of the cases cited by the Court employ the essential facilities analysis. See 504 U.S. at 483 (citing Grinnell Corp., 384 U.S. at 570-71; United States v. Aluminum Co. of America, 148 F.2d 416, 432 (2d Cir. 1945), and Aspen Skiing, 472 U.S. at 600-605). Rather in discussing a firm’s right to “refuse to deal with its competitors,” the Supreme Court noted, citing Aspen Skiing, that this right “exists only if there are legitimate competitive reasons for the refusal.” Kodak, 504 U.S. at 483 n. 32. The Supreme Court considered a refusal to deal claim in Aspen Skiing without referencing the essential facilities doctrine.… Aspen Skiing, 472 U.S. at 611 n. 44 (“Given our conclusion that the evidence amply supports the verdict under the instructions as given by the trial court, we find it unnecessary to consider the possible relevance of the ‘essential facilities’ doctrine ….”). The Supreme Court began its analysis in Aspen Skiing with a discussion of the “right to refuse to deal,” a right the Court characterized as highly valued but not “unqualified.” Id. at 601. The Court, quoting extensively from Lorain Journal Co. v. United States, 342 U.S. 143, 155 (1951), held that the right to refuse to deal was “neither absolute nor exempt from regulation” and when used “as a purposeful means of monopolizing interstate commerce” the exercise of that right violates the Sherman Act. Aspen Skiing, 472 U.S. at 602. Thus “the long recognized right … [to] freely … exercise

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[one’s] own independent discretion as to parties with whom he will deal” does not violate the Sherman Act “in the absence of any purpose to create or maintain a monopoly.” Id. (quoting Lorain Journal, 342 U.S. at 155) (emphasis in the original) (citations omitted).… Next, the Court reasoned that a monopolist’s refusal to deal was not limited to the specific facts of Lorain Journal, but also covered the Aspen Skiing defendantmonopolist’s election “to make an important change in a pattern of distribution that had originated in a competitive market and had persisted for several years.” 472 U.S. at 603. The Court noted that competitors in other markets continued to use interchangeable lift tickets and thus inferred that “such tickets satisfy consumer demand in free competitive markets.” Id. The Court concluded that although such conduct was not “necessarily anticompetitive,” the posture of the case and the strength of the evidence presented compelled the Court to uphold the jury’s finding of liability. The Court noted that the challenged instructions correctly required the jury to distinguish “between practices which tend to exclude or restrict competition on the one hand, and the success of a business which reflects only a superior product, a well-run business, or luck, on the other.” Id. Other instructions properly informed the jury that the defendant’s refusal to deal “does not violate Section 2 if valid business reasons exist for that refusal.” Id. at 605. By ignoring the essential facilities doctrine in Aspen Skiing, the Supreme Court endorsed the application of traditional § 2 principles to unilateral refusal to deal cases. Jury Instructions Nos. 28 and 29 here covered the requirements set forth in Aspen Skiing. Like the Supreme Court in Aspen Skiing, we are faced with a situation in which a monopolist made a conscious choice to change an established pattern of distribution to the detriment of competitors. Id. at 603. Although the service market prior to Kodak’s parts policy had not “originated in a competitive market and persisted for several years,” id., the ISO service market had existed for three years and was growing rapidly before Kodak implemented its parts policy.… The district court’s Jury Instruction No. 29 was proper.… Our conclusion that the ISOs have shown that Kodak has both attained monopoly power and exercised exclusionary conduct does not end our inquiry. Kodak’s conduct may not be actionable if supported by a legitimate business justification. When a legitimate business justification supports a monopolist’s exclusionary conduct, that conduct does not violate §2 of the Sherman Act. See Kodak, 504 U.S. at 483; Oahu Gas, 838 F.2d at 368. A plaintiff may rebut an asserted business justification by demonstrating either that the justification does not legitimately promote competition or that the justification is pretextual. See Kodak, 504 U.S. at 483-84 (citing Kodak, 903 F.2d at 618). Kodak asserts that the protection of its patented and copyrighted parts is a valid business justification for its anticompetitive conduct and argues that the district court’s erroneous jury instructions made it impossible for the jury to properly consider this justification. Kodak attacks the district court’s failure both to provide a “less restrictive alternatives” instruction, and to instruct as to Kodak’s intellectual property rights.… Kodak also attacks the district court’s business justifications instructions for their failure to properly detail Kodak’s intellectual property rights. Kodak argues that the court failed to instruct the jury that Kodak’s numerous patents and copyrights provide

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a legitimate business justification for Kodak’s alleged exclusionary conduct. Kodak holds 220 valid United States patents covering 65 parts for its high volume photocopiers and micrographics equipment, and all Kodak diagnostic software and service software are copyrighted. The jury instructions do not afford Kodak any “rights” or “privileges” based on its patents and copyrights: all parts are treated the same. In Jury Instruction No. 37, the court told the jury: if you find that Kodak engaged in monopolization or attempted monopolization by misuse of its alleged parts monopoly … then the fact that some of the replacement parts are patented or copyrighted does not provide Kodak with a defense against any of those antitrust claims.

In Jury Instruction No. 28, the court stated, over Kodak’s objection, that: such [exclusionary] conduct does not refer to ordinary means of competition, like offering better products or services, exercising superior skill or business judgment, utilizing more efficient technology, or exercising natural competitive advantages.

Kodak proposed to include “exercising lawful patents and copyrights” amongst the list of non-exclusionary conduct in Instruction No. 28, but the district court rejected that language. Kodak’s challenge raises unresolved questions concerning the relationship between federal antitrust, copyright and patent laws. In particular we must determine the significance of a monopolist’s unilateral refusal to sell or license a patented or copyrighted product in the context of a §2 monopolization claim based upon monopoly leveraging. This is a question of first impression. We first identify the general principles of antitrust, copyright and patent law as we must ultimately harmonize these statutory schemes in responding to Kodak’s challenge. Antitrust law seeks to promote and protect a competitive marketplace for the benefit of the public.… The Sherman Act, the relevant antitrust law here, prohibits efforts both to restrain trade by combination or conspiracy and the acquisition or maintenance of a monopoly by exclusionary conduct. 15 U.S.C. §§1, 2. Patent law seeks to protect inventions, while inducing their introduction into the market for public benefit. SCM Corp., 645 F.2d at 1203. Patent laws “reward the inventor with the power to exclude others from making, using or selling [a patented] invention throughout the United States.” Id. Meanwhile, the public benefits both from the faster introduction of inventions, and the resulting increase in market competition. Legally, a patent amounts to a permissible monopoly over the protected work. See Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 135 (1969). Patent laws “are in pari materia with the antitrust laws and modify them pro tanto (as far as the patent laws go).” Simpson v. Union Oil Co., 377 U.S. 13, 24 (1964). Federal copyright law “secures a fair return for an author’s creative labor” in the short run, while ultimately seeking “to stimulate artistic creativity for the general public good.” Twentieth Century Music Corp. v. Aiken, 422 U.S. 151, 156 (1975) (internal quotations omitted). The Copyright Act grants to the copyright owner the exclusive right to distribute the protected work. 17 U.S.C. §106. This right encompasses

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the right to “refrain from vending or licensing,” as the owner may “content [itself] with simply exercising the right to exclude others from using [its] property.” Data General, 36 F.3d at 1186 (quoting Fox Film Corp. v. Doyal, 286 U.S. 123, 127 (1932)); see Stewart v. Abend, 495 U.S. 207, 228-29 (1990) (“nothing in the copyright statutes would prevent an author from hoarding all of his works during the term of the copyright.”). Clearly the antitrust, copyright and patent laws both overlap and, in certain situations, seem to conflict. This is not a new revelation. We have previously noted the “obvious tension” between the patent and antitrust laws: “one body of law creates and protects monopoly power while the other seeks to proscribe it.” United States v. Westinghouse Electric Corp., 648 F.2d 642, 646 (9th Cir. 1981) (citations omitted). Similarly, tension exists between the antitrust and copyright laws. See Data General, 36 F.3d at 1187. Two principles have emerged regarding the interplay between these laws: (1) neither patent nor copyright holders are immune from antitrust liability, and (2) patent and copyright holders may refuse to sell or license protected work. First, as to antitrust liability, case law supports the proposition that a holder of a patent or copyright violates the antitrust laws by “concerted and contractual behavior that threatens competition.” Id. at 1185 n. 63 (citation omitted). In Kodak, the Supreme Court noted: [we have] held many times that power gained through some natural advantage such as a patent, copyright, or business acumen can give rise to liability if “a seller exploits his dominant position in one market to expand his empire into the next.”

504 U.S. at 480 n. 29 (quoting Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 611 (1953) and citing Northern Pacific R. Co. v. United States, 356 U.S. 1 (1958); United States v. Paramount Pictures, Inc., 334 U.S. 131 (1948); Leitch Mfg. Co. v. Barber Co., 302 U.S. 458, 463 (1938)). Case law also supports the right of a patent or copyright holder to refuse to sell or license protected work. See Westinghouse, 648 F.2d at 647. In United States v. Westinghouse Electric Corp., we held that “the right to license [a] patent, exclusively or otherwise, or to refuse to license at all, is the ‘untrammeled right’ of the patentee.” Id. (quoting Cataphote Corporation v. DeSoto Chemical Coatings, Inc., 450 F.2d 769, 774 (9th Cir. 1971)); see Zenith Radio Corp., 395 U.S. at 135 (the patent holder has the “right to invoke the State’s power to prevent others from utilizing [the] discovery without [the patent holder’s] consent”) (citations omitted); Tricom Inc. v. Electronic Data Systems Corp., 902 F. Supp. 741, 743 (E.D. Mich. 1995) (“Under patent and copyright law, [the owner] may not be compelled to license … to anyone.”) (citations omitted). Next we lay out the problem presented here. The Supreme Court touched on this question in Kodak, i.e., the effect to be given a monopolist’s unilateral refusal to sell or license a patented or copyrighted product in the context of a §2 monopoly leveraging claim. In footnote 29, previously discussed, the Supreme Court in Kodak refutes the argument that the possession by a manufacturer of “inherent power” in the market for its parts “should immunize [that manufacturer] from the antitrust laws in another

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market.” 504 U.S. at 480 n. 29. The Court stated that a monopolist who acquires a dominant position in one market through patents and copyrights may violate §2 if the monopolist exploits that dominant position to enhance a monopoly in another market. Although footnote 29 appears in the Court’s discussion of the §1 tying claim, the §2 discussion frequently refers back to the §1 discussion, and the Court’s statement that “exploiting [a] dominant position in one market to expand [the] empire into the next” is broad enough to cover monopoly leveraging under §2. Id. By responding in this fashion, the Court in Kodak supposed that intellectual property rights do not confer an absolute immunity from antitrust claims. Also relevant to the relationship between §1 and §2, the Court in Leitch Manufacturing held that it made no difference that the defendant had not expanded its monopoly “by contract.” 302 U.S. at 463. The Court held: The owner of the patent monopoly, ignoring the limitation “inherent in the patent grant,” sought by its method of doing business to extend the monopoly to unpatented material.… [This is unlawful] whatever the nature of the device by which the owner of the patent seeks to effect such unauthorized extension of the monopoly.

Id. (citation omitted); see also Mercoid Corp. v. Mid-Continent Investment Co., 320 U.S. 661, 665 (1943) (“The method by which the monopoly is sought to be extended is immaterial.”) The particular patent misuse issues addressed in Leitch and Mercoid are now controlled by 35 U.S.C. §271, Dawson Chem. Co. v. Rohm & Haas, 448 U.S. 176 (1980), but this does not alter the application of their reasoning here. The Kodak Court, however, did not specifically address the question of antitrust liability based upon a unilateral refusal to deal in a patented or copyrighted product. Kodak and its amicus correctly indicate that the right of exclusive dealing is reserved from antitrust liability. We find no reported case in which a court has imposed antitrust liability for a unilateral refusal to sell or license a patent or copyright. Courts do not generally view a monopolist’s unilateral refusal to license a patent as “exclusionary conduct.” See Data General, 36 F.3d at 1186 (citing Miller Insituform, Inc. v. Insituform of North America, 830 F.2d 606, 609 (6th Cir. 1987) (“A patent holder who lawfully acquires a patent cannot be held liable under Section 2 of the Sherman Act for maintaining the monopoly power he lawfully acquired by refusing to license the patent to others.”); Westinghouse, 648 F.2d at 647 (finding no antitrust violation because “Westinghouse has done no more than to license some of its patents and refuse to license others.”); SCM Corp., 645 F.2d at 1206 (“where a patent has been lawfully acquired, subsequent conduct permissible under the patent laws cannot trigger any liability under the antitrust laws.”). This basic right of exclusion does have limits. For example, a patent offers no protection if it was unlawfully acquired. Data General, 36 F.3d at 1186 (citing SCM Corp., 645 F.2d at 1208-09). Nor does the right of exclusion protect an attempt to extend a lawful monopoly beyond the grant of a patent. See Mercoid, 320 U.S. at 665. Section 2 of the Sherman Act condemns exclusionary conduct that extends natural monopolies

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into separate markets. Much depends, therefore, on the definition of the patent grant and the relevant market. The relevant market for determining the patent or copyright grant is determined under patent or copyright law. See, e.g., id. at 666 (the patent’s grant “is limited to the invention which it defines.”). The relevant markets for antitrust purposes are determined by examining economic conditions. See Kodak, 504 U.S. at 462 (citing Jefferson Parish Hospital Dist. No. 2. v. Hyde, 466 U.S. 2, 21-22 (1984)). We recently noted the distinction between copyright market definition and antitrust market definition in Triad Systems Corp. v. Southeastern Express Co., 64 F.3d 1330 (9th Cir. 1995). There, the plaintiff, Southeastern, argued that the copyright of the defendant, Triad, did not “extend to the service market” for Triad computers. We disagreed stating: Triad invented, developed, and marketed its software to enable its customers and its own technicians to service Triad computers. Southeastern is getting a free ride when it uses that software to perform precisely the same service. Triad is entitled to licensing fees from Southeastern and other ISOs .…

Id. at 1337. Rather than merely requiring Southeastern to pay for future use, the district court enjoined Southeastern from servicing the computers that had licensed software. See id. at 1334. We never reached Southeastern’s antitrust counterclaims, as they had not yet been tried. Id. at 1338 (district court properly bifurcated the copyright and antitrust claims). Neither did we refer to antitrust principles in defining the reach of Triad’s copyright. Parts and service here have been proven separate markets in the antitrust context, but this does not resolve the question whether the service market falls “reasonably within the patent [or copyright] grant” for the purpose of determining the extent of the exclusive rights conveyed. Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 708-09 (Fed. Cir. 1992). These are separate questions, which may result in contrary answers. At the border of intellectual property monopolies and antitrust markets lies a field of dissonance yet to be harmonized by statute or the Supreme Court. When an owner of intellectual property takes concerted action in violation of §1, this dissonance does not threaten his core right of exclusion. See Brownell v. Ketcham Wire & Manufacturing Co., 211 F.2d 121, 129 (9th Cir. 1954) (listing acts giving rise to antitrust liability). Contrary to the ISOs’ arguments, there is an important difference between §1tying and §2 monopoly leveraging: the limiting principles of §1 restrain those claims from making the impact on intellectual property rights threatened by §2 monopoly leveraging claims. Where, as here, the claim involves a failure to act that is at the heart of the property right, liability depends largely on market definition and lacks the limiting principles of §1. Under §2, “behavior that might otherwise not be of concern to the antitrust laws—or that might even be viewed as procompetitive—can take on exclusionary connotations when practiced by a monopolist.” Kodak, 504 U.S. at 488 (Scalia, J. dissenting) (…); see also Greyhound Computer v. International Business Machines, 559 F.2d 488, 498 (9th Cir. 1977) (otherwise lawful conduct may be exclusionary when practiced by a monopolist). Harmonizing antitrust monopoly

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theory with the monopolies granted by intellectual property law requires that some weight be given to the intellectual property rights of the monopolist. The effect of claims based upon unilateral conduct on the value of intellectual property rights is a cause for serious concern. Unilateral conduct is the most common conduct in the economy. After Kodak, unilateral conduct by a manufacturer in its own aftermarkets may give rise to liability and, in one-brand markets, monopoly power created by patents and copyrights will frequently be found. Under current law the defense of monopolization claims will rest largely on the legitimacy of the asserted business justifications, as evidenced by the jury instructions approved in Aspen Skiing. Without bounds, claims based on unilateral conduct will proliferate. The history of this case demonstrates that such claims rest on highly disputed factual questions regarding market definition. Particularly where treble damages are possible, such claims will detract from the advantages lawfully granted to the holders of patents or copyrights by subjecting them to the cost and risk of lawsuits based upon the effect, on an arguably separate market, of their refusal to sell or license. The cost of such suits will reduce a patent holder’s “incentive … to risk the often enormous costs in terms of time, research, and development.” Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 480 (1974). Such an effect on patent and copyright holders is contrary to the fundamental and complementary purposes of both the intellectual property and antitrust laws, which aim to “encourage innovation, industry and competition.” Atari Games Corp. v. Nintendo of America, Inc., 897 F.2d 1572, 1576 (Fed. Cir. 1990) (citing Loctite Corp. v. Ultraseal Ltd., 781 F.2d 861, 876-77 (Fed. Cir. 1985)). We now resolve the question detailed above. Under the fact-based approaches of Aspen Skiing and Kodak, some measure must guarantee that the jury account for the procompetitive effects and statutory rights extended by the intellectual property laws. To assure such consideration, we adopt a modified version of the rebuttable presumption created by the First Circuit in Data General, and hold that “while exclusionary conduct can include a monopolist’s unilateral refusal to license a [patent or] copyright,” or to sell its patented or copyrighted work, a monopolist’s “desire to exclude others from its [protected] work is a presumptively valid business justification for any immediate harm to consumers.” Data General, 36 F.3d at 1187. This presumption does not “rest on formalistic distinctions” that “are generally disfavored in antitrust laws;” rather it is based on “actual market realities.” Kodak, 504 U.S. at 466-67. This presumption harmonizes the goals of the relevant statutes and takes into account the long term effects of regulation on these purposes. The presumption should act to focus the factfinder on the primary interest of both intellectual property and antitrust laws: public interest. Mercoid, 320 U.S. at 665 (citation omitted) (“It is the public interest which is dominant in the patent system.”); Standard Oil, 221 U.S. at 58 (antitrust laws serve the public interest by encouraging effective competition).…

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24. DW Integrators CC Claimant v. SAS Institute (Pty) Ltd., Case Number: 14/IR/NOV99 (1999) SOUTH AFRICA—COMPETITION TRIBUNAL 1. This case is concerned with the complex interface between anti-trust and intellectual property—we are being asked, in the name of anti-trust, to oblige the respondent, SAS Institute (SAS), a large software firm and an uncontested owner of valuable intellectual property, to issue a license in its intellectual property to the claimant, DW Integrators (DWI), a firm that provides consulting services to the licensees of SAS software programs. The services provided by DWI and other service providers essentially enable SAS’s clients to adapt the SAS software to their specific needs. The claimant avers that it cannot provide its services effectively without itself possessing a license in SAS software and that SAS, by refusing to issue a license to DWI, is preventing the latter from participating in the market. 2. In other words, the claimant avers that it is being excluded from the market by acts perpetrated by a dominant firm and, accordingly, that the respondent is in violation of section 8(c) of the Competition Act that provides that it is an offence for a dominant firm to engage in an exclusionary act if the anticompetitive effects of that act outweigh any associated efficiency gains. Moreover, the claimant alleges that the respondent’s software to which, it claims, it is denied access, is an essential facility insofar as it is, in the words of the Act, “an infrastructure or resource that cannot reasonably be duplicated, and without access to which competitors cannot reasonably provide goods or services to their customers.” Accordingly, the claimant alleges that the respondent has thereby placed itself in violation of section 8(b) of the Act, which prohibits a dominant firm from denying a competitor access to an essential facility. A violation of section 8(b) cannot be countervailed by efficiency gains—it is, in other words, per se illegal. 3. The claimant has submitted a complaint along these lines to the Competition Commission. In addition, the claimant has asked the Tribunal to make an order in terms of section 59 that will, in the interim, provide relief from the transgressions allegedly perpetrated by the respondent. This is the matter with which the Tribunal is presently seized. In order to grant interim relief the Tribunal must be satisfied that a restrictive practice exists; that, in the absence of an order, the claimant will incur irreparable harm or that the purposes of the Act will be frustrated; and that the balance of convenience favors the granting of an order. The Tribunal must be satisfied on all three counts failing which it is not entitled to make an order in terms of section 59.… 12. A few months later, SAS cancelled its software license agreement with DWI after DWI had failed to pay its license fees despite several reminders. The parties are at odds as to whether SAS’s cancellation complied with the terms of the license agreement. At any rate, DWI tried to convince SAS to change its mind and tendered payment of the license fee. SAS, however, rejected DWI’s late payment stating that it would not accept

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payment “prior to being convinced that DWI’s business supported the best interests of SAS Institute.” DWI interpreted this statement to support its contention that SAS was denying DWI a license in order to exclude it from the market unless it agreed to go along with the allegedly anticompetitive terms of SAS’s new draft Quality Partner Agreement. 13. DWI maintains that without a SAS software license it is unable to provide adequate consulting services to its clients. It alleges that access to its clients’ software is scant consolation, since its clients do not always have spare computers available for DWI consultants to work on. Furthermore, it says that without its own license it is unable to run training courses for its consultants, which impairs its ability to keep its consultants properly trained. As a result, it runs the risk of losing some of its clients.… 18. Caution is particularly well-advised when dealing with the interface between anti-trust and intellectual property. We concur with the much-cited decision in Atari Games Corporation v. Nintendo of America Inc (897 F.2d 1572 (Fed. Cir. 1990)), which warns that “the danger of disturbing the complementary balance struck by Congress is great when a court is asked to preliminarily enjoin conduct affecting patent and antitrust rights. A preliminary injunction entered into without a sufficient factual basis and findings, though intended to maintain the status quo, can offend the public policies embodied in both the patent and anti-trust laws.” (at 1577).… 21. The principal relief that the claimant seeks from the Tribunal is a declaration that the license agreement that the respondent refused to renew remains in full force and effect and is binding upon the claimant and respondent, provided the claimant pays the relevant license fee. To grant an order in these terms, the Tribunal would have to find that the respondent’s refusal to renew the license constituted a breach of contract. An enquiry into whether the respondent breached the contract is not a competition law enquiry. The competition law issue here is rather whether the respondent’s refusal to grant the license, whether by way of renewal of the existing license or the issuing of a new one, is an abuse of dominance in terms of the relevant provisions of section 8 of the Act. If we find that section 8 has been transgressed, we could order that the respondent be granted a license, but we could not declare that this should be by way of renewal of the existing license agreement rather than under a new license agreement. 22. We are then left with the allegation that the respondent, by refusing to enter into a new license agreement, is abusing a dominant position and this in two ways: firstly, by perpetrating an exclusionary act in violation of 8(c); secondly, by denying the claimant access to an essential facility in violation of 8(b). 23. A necessary preliminary in establishing abuse of dominance, is establishing dominance and, in order to do this, the relevant market has to be identified. The evidence and arguments of the parties is not helpful in identifying the relevant market with the requisite degree of confidence. In interim relief proceedings where, without the benefit of the Commission’s investigation, the views of the parties are all that the

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Tribunal has to rely upon, the effect of the inability of the parties to establish the relevant market is particularly debilitating. 24. The claimant holds that the relevant market is the market for information delivery software and, conceivably, because of the allegedly unique qualities of the respondents product, the market for SAS information delivery software. The claimant claims that the respondent is dominant in the former market—the market for information delivery software—both internationally and domestically; and obviously that it is a monopolist in the latter market, the market for SAS information delivery software. It then identifies a “sub-market”—the market for servicing SAS information delivery software—arguing that SAS is leveraging its monopoly, or, alternatively, its dominant position in the primary market in order to limit competition in the “sub-market.” 25. Little concrete evidence is presented in support of these various claims. We reject the contention that SAS is a monopolist.… 30. There is one remaining issue relevant to the question of establishing dominance and that concerns the claimant’s argument that, because it has established itself as a specialist service provider for SAS software, the respondent effectively enjoys the power of a monopolist in relation to the claimant, regardless of whether SAS is actually in a monopoly position in relation to the market for information delivery software (it clearly is not) or, indeed, whether it is dominant in the market for information delivery software (which we conclude has not been conclusively established). We have to tread carefully here. Were this argument to be accepted too easily it would in effect mean that any distributor or supplier or service provider that attached itself to a particular brand would be absolved of the necessity to establish dominance, but would simply have to establish that an abuse took place. A similar argument is raised in the case of franchising where the cost to the franchisee of switching from an established franchise into a new franchise relationship is prohibitive, thus according the existing franchisor effective dominance, despite the putative existence of alternative franchising opportunities. This is referred to as “relational dominance.” It is a controversial concept.… Although the concept of “relational dominance” might possibly be applicable in this case, we have not been provided with either a sufficient factual or conceptual basis to identify dominance purely on the basis of the relationship between the parties. 31. Our conclusion then is that dominance has not been established in the market for information delivery software, and nor has dominance been established in the relationship between the parties. There is accordingly no further basis for examining the alleged restrictive practice because it is framed as an abuse of a dominant position. Accordingly, the application for interim relief is dismissed because it has failed to establish the existence of a restrictive practice.… 19. Magill is a much cited opinion that sets limits to the right of copyright owners to refuse to license. It denies that right when infringers need to use the intellectual property asset for creating a product that does not compete with the copyright owner’s product and for which there is a potential consumer’s demand. The Court of Justice of the European Union (formerly, the European Court of Justice) held that the copyright owners were in a position of dominance and their refusal was an

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abuse of that position. Consequently, the Court authorized the use of copyrighted program listings by TV guide publishers. There is, however, something very troublesome in these findings. The first aspect that calls the attention is that the Court authorized the use of copyrighted work by others without any remuneration. This is confiscation, which runs against the very fundamentals of free market economies, where the compulsory use of private property must give rise to fair compensation. But the second aspect is that the discussion in Magill evolved around the refusal to license copyrighted TV program listings, which, under the Feist approach (see case no. 6), is not copyrightable. Magill, therefore, may be seen under a “too much” intellectual property approach—and this would justify the order of a compulsory license without remuneration. Even if the Court could not deny copyright protection (in the European Union, copyright is a national matter), at least it could deny its enforceability.

25. Radio Telefis Eireann (RTE) and Independent Television Publications Ltd. (ITP) v. Commission (Magill case), Joined Cases C-241/91 P and C-242/91 P (1995) COURT OF JUSTICE OF THE EUROPEAN UNION … 6. According to the judgments of the Court of First Instance, most households in Ireland and 30% to 40% of households in Northern Ireland can receive television programs broadcast by RTE, ITV and BBC. 7. At the material time, no comprehensive weekly television guide was available on the market in Ireland or in Northern Ireland. Each television station published a television guide covering exclusively its own programs and claimed, under Irish and United Kingdom legislation, copyright protection for its own weekly program listings in order to prevent their reproduction by third parties. 8. RTE itself published its own weekly television guide, while ITV did so through ITP, a company established for that purpose. 9. ITP, RTE and BBC practiced the following policy with regard to the dissemination of program listings. They provided their program schedules free of charge, on request, to daily and periodical newspapers, accompanied by a license for which no charge was made, setting out the conditions under which that information could be reproduced. Daily listings and, if the following day was a public holiday, the listings for two days, could thus be published in the press, subject to certain conditions relating to the format of publication. Publication of “highlights” of the week was also authorized. ITP, RTE and the BBC ensured strict compliance with the license conditions by instituting legal proceedings, where necessary, against publications that failed to comply with them. 10. Magill TV Guide Ltd. (“Magill”) attempted to publish a comprehensive weekly television guide but was prevented from doing so by the appellants and the BBC, which obtained injunctions prohibiting publication of weekly television listings.

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11. Magill lodged a complaint with the Commission … seeking a declaration that the appellants and the BBC were abusing their dominant position by refusing to grant licenses for the publication of their respective weekly listings.… 46. So far as dominant position is concerned, it is to be remembered at the outset that mere ownership of an intellectual property right cannot confer such a position. 47. However , the basic information as to the channel, day, time and title of programs is the necessary result of programming by television stations, which are thus the only source of such information for an undertaking, like Magill, which wishes to publish it together with commentaries or pictures. By force of circumstance, RTE and ITP, as the agent of ITV, enjoy, along with the BBC, a de facto monopoly over the information used to compile listings for the television programs received in most households in Ireland and 30% to 40% of households in Northern Ireland. The appellants are thus in a position to prevent effective competition on the market in weekly television magazines. The Court of First Instance was therefore right in confirming the Commission’s assessment that the appellants occupied a dominant position … 48. With regard to the issue of abuse, the arguments of the appellants and IPO wrongly presuppose that where the conduct of an undertaking in a dominant position consists of the exercise of a right classified by national law as “copyright,” such conduct can never be reviewed in relation to Article 86 of the Treaty. 49. Admittedly, in the absence of Community standardization or harmonization of laws, determination of the conditions and procedures for granting protection of an intellectual property right is a matter for national rules. Further, the exclusive right of reproduction forms part of the author’s rights, so that refusal to grant a license, even if it is the act of an undertaking holding a dominant position, cannot in itself constitute abuse of a dominant position (judgment in Case 238/87 Volvo, cited above, paragraphs 7 and 8). 50. However, it is also clear from that judgment (paragraph 9) that the exercise of an exclusive right by the proprietor may, in exceptional circumstances, involve abusive conduct. 51. In the present case, the conduct objected to is the appellants’ reliance on copyright conferred by national legislation so as to prevent Magill—or any other undertaking having the same intention—from publishing on a weekly basis information (channel, day, time and title of programs) together with commentaries and pictures obtained independently of the appellants. 52. Among the circumstances taken into account by the Court of First Instance in concluding that such conduct was abusive was, first, the fact that there was, according to the findings of the Court of First Instance, no actual or potential substitute for a weekly television guide offering information on the programs for the week ahead. On this point, the Court of First Instance confirmed the Commission’s finding that the complete lists of programs for a 24-hour period—and for a 48-hour period at weekends and before public holidays—published in certain daily and Sunday newspapers, and

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the television sections of certain magazines covering, in addition, “highlights” of the week’s programs, were only to a limited extent substitutable for advance information to viewers on all the week’s programs. Only weekly television guides containing comprehensive listings for the week ahead would enable users to decide in advance that programs they wished to follow and arrange their leisure activities for the week accordingly. The Court of First Instance also established that there was a specific, constant and regular potential demand on the part of consumers.… 53. Thus the appellants—who were, by force of circumstance, the only sources of the basic information on program scheduling that is the indispensable raw material for compiling a weekly television guide—gave viewers wishing to obtain information on the choice of programs for the week ahead no choice but to buy the weekly guides for each station and draw from each of them the information they needed to make comparisons. 54. The appellants’ refusal to provide basic information by relying on national copyright provisions thus prevented the appearance of a new product, a comprehensive weekly guide to television programs, which the appellants did not offer and for which there was a potential consumer demand. Such refusal constitutes an abuse under heading (b) of the second paragraph of Article 86 of the Treaty. 55. Second, there was no justification for such refusal either in the activity of television broadcasting or in that of publishing television magazines .… 56. Third, and finally, as the Court of First Instance also held, the appellants, by their conduct, reserved to themselves the secondary market of weekly television guides by excluding all competition on that market (see the judgment in Joined Cases 6/73 and 7/73 Commercial Solvents v. Commission [1974] ECR 223, paragraph 25) since they denied access to the basic information that is the raw material indispensable for the compilation of such a guide. 67. In the light of all those circumstances, the Court of First Instance did not err in law in holding that the appellants’ conduct was an abuse of a dominant position within the meaning of Article 86 of the Treaty. 68. It follows that the plea in law alleging misapplication by the Court of First Instance of the concept of abuse of a dominant position must be dismissed as unfounded. It is therefore unnecessary to examine the reasoning of the contested judgments in so far as it is based on Article 36 of the Treaty.… 72. So far as the Berne Convention (“the Convention”) is concerned, RTE had submitted before the Court of First Instance that Article 9(1) thereof conferred an exclusive right of reproduction and that Article 9(2) allowed a signatory State to permit reproduction only in certain special cases, provided that such reproduction did not conflict with normal exploitation of the work and did not unreasonably prejudice the legitimate interests of the author. From this RTE deduced that Article 2 of the contested decision was incompatible with the Convention inasmuch as it conflicted with the

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normal exploitation of RTE’s copyright in the program listings and seriously prejudiced its legitimate interests (RTE judgment, paragraph 100). 73. In response to those arguments, the Court of First Instance considered whether the Convention was applicable. Its first finding was that the Community was not a party to it.… 74. The Court of First Instance accordingly dismissed as unfounded the plea alleging infringement of the Convention (RTE judgment, paragraph 104). 75. RTE claims that Article 9(2) of the Berne Convention, as revised in Paris in 1971, only allows for exceptions from authors’ exclusive rights of reproduction to be made by legislation, in special cases, and provided that such reproduction does not prejudice the normal exploitation of the work or cause unreasonable prejudice to the legitimate interests of the author. 76. According to RTE, the Convention does not contain a definition of what comes under its protection but excludes only “miscellaneous news facts having the character of mere facts of press information” (Article 2(8)), an exception that must be interpreted restrictively. It is thus for the national legislature and courts to determine the scope of the Convention at national level. 77. RTE submits that the obligation imposed by the Commission’s decision has not been provided for by legislation that is sufficiently clear in its terms to define the circumstances in which, and the conditions on which, reproduction is to be permitted. The decision itself cannot be regarded as “legislation.” Application of competition law does not fulfill the conditions of Article 9(2). A copyright holder must be able to know on the basis of explicit legislation whether or not he may be subject to an obligation of compulsory licensing. A provision such as Article 86 of the Treaty, which merely sets out a general obligation and must be made precise and adapted from case to case, does not fulfill the conditions laid down by Article 9(2) of the Convention. Community legislation alone is capable of providing a proper legislative basis.… 88. The first limb of ITP’s second plea is that the Court of First Instance misconstrued Article 3 of Regulation No 17 in holding that that provision enabled the Commission to impose compulsory licensing, on conditions approved by it, relating to intellectual property rights conferred by the laws of the Member States. Relying on the judgment in Case 144/81 Keurkoop v. Nancy Kean Gifts [1982] ECR2853, ITP submits that only the Parliaments of Ireland and the United Kingdom may take away or replace the copyrights that they have conferred. 89. The second limb alleges infringement of the principle of proportionality in so far as the Court of First Instance held that the Commission’s decision was not contrary to that principle (ITP judgment, paragraphs 78 to 81). ITP contends that the Court of First Instance should have taken account of a number of considerations: the decision removed not only ITP’s exclusive right of reproduction, but also its right of first marketing, particularly important where, as in this case, the product has a useful life of 10 days; there is no reciprocity between ITP and the competitors (other than the BBC

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and RTE) to whom it is required to grant licenses; many of those competitors, particularly the national newspapers, have turnovers and profits greatly in excess of those of ITP and they also possess valuable copyrights that they protect from reproduction. 90. It is appropriate to observe that Article 3 of Regulation No 17 is to be applied according to the nature of the infringement found and may include an order to do certain acts or things which, unlawfully, have not been done as well as an order to bring an end to certain acts, practices or situations that are contrary to the Treaty (judgment in Joined Cases 6/73 and 7/73 Commercial Solvents, cited above, paragraph 45). 91. In the present case, after finding that the refusal to provide undertakings such as Magill with the basic information contained in television program listings was an abuse of a dominant position, the Commission was entitled under Article 3, in order to ensure that its decision was effective, to require the appellants to provide that information. As the Court of First Instance rightly found, the imposition of that obligation—with the possibility of making authorization of publication dependent on certain conditions, including payment of royalties—was the only way of bringing the infringement to an end. 92. The Court of First Instance was also entitled to dismiss, on the basis of the same findings of fact, the allegation that the principle of proportionality had been infringed. 93. As the Court of First Instance correctly pointed out, in the context of the application of Article 3 of Regulation No 17, the principle of proportionality means that the burdens imposed on undertakings in order to bring an infringement of competition law to an end must not exceed what is appropriate and necessary to attain the objective sought, namely reestablishment of compliance with the rules infringed (ITP judgment, paragraph 80). 94. In holding, at paragraph 81 of the ITP judgment, that, in the light of the above findings, the order addressed to the applicant was an appropriate and necessary measure to bring the infringement to an end, the Court of First Instance did not commit an error of law. 95. In its third plea ITP claims that the Court of First Instance failed to comply with Article 190 of the EEC Treaty in finding that the decision was adequately reasoned (ITP judgment, paragraphs 64 and 65) when the Commission did no more than state that the exercise of copyright was outside the scope of the specific subject matter of this right and went on to conclude that an exercise of copyright consisting simply in refusing to grant a reproduction license was an abuse of a dominant position.… 20. There are two major differences between the facts in Magill (case no. 25) and in Sega (case no. 27). In Magill the complainant needed to use the copyrighted work in its entirety in order to produce the TV guide, whereas in Sega the defendant only needed to use a small portion. Second, Magill wanted to generate a product that the copyright owner did not make and for which there as consumer potential demand. But Accolade wanted to create products that competed with Sega’s.

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21. Importantly, the Sega court noted and criticized the use of Sega’s trademark as a tool to prevent competitors’ use of its software. The same frivolous use of a trademark (a trademark had been registered with the only purpose of preventing parallel imports, by reinforcing a contractual clause that prohibited exports) was noted (and likewise disregarded) by the Consten court (case no. 28).

26. IMS Health GmbH & Co., Case C-418/01 (2004)3 COURT OF JUSTICE OF THE EUROPEAN UNION (FIFTH CHAMBER) 1. By order of 12 July 2001, received at the Court on 22 October 2001, the Landgericht Frankfurt am Main referred for a preliminary ruling under Article 234 EC three questions on the interpretation of Article 82 EC. 2. Those questions arose in proceedings between IMS Health GmbH & Co. OHG (“IMS”) and NDC Health GmbH & Co. KG (“NDC”) concerning the use by the latter of a brick structure developed by IMS for the provision of German regional sales data on pharmaceutical products. 3. IMS and NDC are engaged in tracking sales of pharmaceutical and healthcare products. 4. IMS provides data on regional sales of pharmaceutical products in Germany to pharmaceutical laboratories formatted according to the brick structure. Since January 2000, it has provided studies based on a brick structure consisting of 1 860 bricks, or a derived structure consisting of 2 847 bricks, each corresponding to a designated geographic area. According to the order for reference, those bricks were created by taking account of various criteria, such as the boundaries of municipalities, postcodes, population density, transport connections and the geographical distribution of pharmacies and doctors’ surgeries.… 6. The national court found that IMS not only marketed its brick structures, but also distributed them free of charge to pharmacies and doctors’ surgeries. According to the national court, that practice helped those structures to become the normal industry standard to which its clients adapted their information and distribution systems. 7. After leaving his post in 1998, a former manager of IMS created Pharma Intranet Information AG (“PII”), whose activity also consisted in marketing regional data on pharmaceutical products in Germany formatted on the basis of brick structures. At 3. In IMS Health the Court of Justice of the European Union confirmed law that it set in the Volvo (AB Volvo v. Erik Veng, Case 238/87 (1988)) and CICRA (CICRA v. Renault, Case 53/87 (1988) cases, both affirming that the exercise of the exclusive right in registered industrial designs could not be deemed in itself an abuse of a dominant position. Because Volvo and CICRA were superseded—especially in the context of the protection of industrial designs covering components of complex products for repairing purposes—by subsequent European legislation, they were not selected for appearing in this compilation.

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first, PII tried to market structures consisting of 2 201 bricks. On account of reticence manifested by potential clients, who were accustomed to structures consisting of 1 860 or 2 847 bricks, it decided to use structures of 1 860 or 3 000 bricks, very similar to those used by IMS. 8. PII was acquired by NDC.… 9. On application by IMS the Landgericht Frankfurt am Main granted an interlocutory order, of 27 October 2000, prohibiting PII from using the 3 000 brick structure or any other brick structure derived from the IMS 1 860 brick structure (hereinafter generically referred to as “the 1 860 brick structure”). After PII’s acquisition by NDC, the same prohibition was issued in respect of NDC by interlocutory order of 28 December 2000. 10. Those orders were both confirmed by a judgment of the Landgericht Frankfurt am Main of 16 November 2000 and then by judgment of the Oberlandesgericht Frankfurt am Main (Germany) of 12 July 2001. The latter based its decision on the finding that the brick structure used by IMS is a database within the meaning of Article 4 of the Urheberrechtsgesetz (copyright law), which may be protected by copyright. 11. On 19 December 2000, NDC made a complaint to the Commission of the European Communities, claiming that IMS’s refusal to grant it a license to use the 1 860 brick structure constituted an infringement of Article 82 EC.… 21. By its first question, the national court asks, essentially, whether the refusal to grant a license to use a brick structure for the presentation of regional sales data by an undertaking in a dominant position that has an intellectual property right therein to another undertaking that also wishes to provide such data in the same Member State, but which, because potential users are unfavorable to it, cannot develop an alternative brick structure for the presentation of the data that it proposes to offer, constitutes an abuse of a dominant position within the meaning of Article 82 EC. 22. As the Advocate General stated in point 29 of his Opinion, that question is based on the premises, whose validity it is for the national court to ascertain, that the use of the 1, 860 brick structure protected by an intellectual property right is indispensable in order to allow a potential competitor to have access to the market in which the undertaking that owns the right occupies a dominant position. 23. By its second question, the national court questions the effect that the degree of participation by users may have on the development of a brick structure, protected by an intellectual property right owned by a dominant undertaking, on the determination of whether the refusal by that undertaking to grant a license to use that structure is abusive. By its third question, the national court is uncertain, in the same context and for the purposes of the same assessment, as to the effect of the outlay, particularly in terms of cost, that potential users have to provide in order to be able to purchase market studies presented on the basis of a structure other than that protected by the intellectual property right. 24. As the Advocate General noted in point 32 of his Opinion, those two questions, read in the light of the order for reference, concern the matters underlying the first

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question, because they seek essentially to clarify the relevant criteria for the determination of whether use of the 1 860 brick structure protected by the intellectual property right is indispensable for enabling a potential competitor to gain access to the market in which the undertaking owning the right occupies a dominant position. 25. Accordingly, it is appropriate to answer the second and third questions first.… 28. It is clear from paragraphs 43 and 44 of Bronner that, in order to determine whether a product or service is indispensable for enabling an undertaking to carry on business in a particular market, it must be determined whether there are products or services that constitute alternative solutions, even if they are less advantageous, and whether there are technical, legal or economic obstacles capable of making it impossible or at least unreasonably difficult for any undertaking seeking to operate in the market to create, possibly in cooperation with other operators, the alternative products or services. According to paragraph 46 of Bronner, in order to accept the existence of economic obstacles, it must be established, at the very least, that the creation of those products or services is not economically viable for production on a scale comparable to that of the undertaking that controls the existing product or service. 29. It is for the national court to determine, in the light of the evidence submitted to it, whether such is the case in the dispute in the main proceedings. In that regard, as the Advocate General stated in points 83 and 84 of his Opinion, account must be taken of the fact that a high level of participation by the pharmaceutical laboratories in the improvement of the 1 860 brick structure protected by copyright, on the supposition that it is proven, has created a dependency by users in regard to that structure, particularly at a technical level. In such circumstances, it is likely that those laboratories would have to make exceptional organizational and financial efforts in order to acquire the studies on regional sales of pharmaceutical products presented on the basis of a structure other than that protected by the intellectual property right. The supplier of that alternative structure might therefore be obliged to offer terms that are such as to rule out any economic viability of business on a scale comparable to that of the undertaking that controls the protected structure. 30. The answer to the second and third questions must, therefore, be that, for the purposes of examining whether the refusal by an undertaking in a dominant position to grant a license for a brick structure protected by an intellectual property right that it owns is abusive, the degree of participation by users in the development of that structure and the outlay, particularly in terms of cost, on the part of potential users in order to purchase studies on regional sales of pharmaceutical products presented on the basis of an alternative structure are factors that must be taken into consideration in order to determine whether the protected structure is indispensable to the marketing of studies of that kind.… 34. According to settled case-law, the exclusive right of reproduction forms part of the rights of the owner of an intellectual property right, so that refusal to grant a license, even if it is the act of an undertaking holding a dominant position, cannot in itself

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constitute abuse of a dominant position (judgment in Case 238/87 Volvo [1988] ECR 6211, paragraph 8, and Magill, paragraph 49). 35. Nevertheless, as is clear from that case-law, exercise of an exclusive right by the owner may, in exceptional circumstances, involve abusive conduct (Volvo, paragraph 9, and Magill, paragraph 50). 36. The Court held that such exceptional circumstances were present in the case giving rise to the judgment in Magill, in which the conduct of the television channels in a dominant position that gave rise to the complaint consisted in their relying on the copyright conferred by national legislation on the weekly listings of their programs in order to prevent another undertaking from publishing information on those programs together with commentaries, on a weekly basis. 37. According to the summary of the Magill judgment made by the Court at paragraph 40 of the judgment in Bronner, the exceptional circumstances were constituted by the fact that the refusal in question concerned a product (information on the weekly schedules of certain television channels), the supply of which was indispensable for carrying on the business in question (the publishing of a general television guide), in that, without that information, the person wishing to produce such a guide would find it impossible to publish it and offer it for sale (Magill, paragraph 53), the fact that such refusal prevented the emergence of a new product for which there was a potential consumer demand (paragraph 54), the fact that it was not justified by objective considerations (paragraph 55), and was likely to exclude all competition in the secondary market (paragraph 56). 38. It is clear from that case-law that, in order for the refusal by an undertaking that owns a copyright to give access to a product or service indispensable for carrying on a particular business to be treated as abusive, it is sufficient that three cumulative conditions be satisfied, namely, that that refusal is preventing the emergence of a new product for which there is a potential consumer demand, that it is unjustified and such as to exclude any competition on a secondary market. 39. In light of the order for reference and the observations submitted to the Court, which reveal a major dispute as regards the interpretation of the third condition, it is appropriate to consider that question first. 40. In that regard, it is appropriate to recall the approach followed by the Court in the Bronner judgment, in which it was asked whether the fact that a press undertaking with a very large share of the daily newspaper market in a Member State that operates the only nationwide newspaper home-delivery scheme in that Member State refuses paid access to that scheme by the publisher of a rival newspaper, which by reason of its small circulation is unable either alone or in cooperation with other publishers to set up and operate its own home-delivery scheme under economically reasonable conditions, constitutes abuse of a dominant position. 41. The Court, first of all, invited the national court to determine whether the home–delivery schemes constituted a separate market (Bronner, paragraph 34), on

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which, in light of the circumstances of the case, the press undertaking held a de facto monopoly position and, thus, a dominant position (paragraph 35). It then invited the national court to determine whether the refusal by the owner of the only nationwide home-delivery scheme in a Member State, which used that scheme to distribute its own daily newspapers, to allow the publisher of a rival daily newspaper access to it deprived that competitor of a means of distribution judged essential for the sale of its newspaper (paragraph 37). 42. Therefore, the Court held that it was relevant, in order to assess whether the refusal to grant access to a product or a service indispensable for carrying on a particular business activity was an abuse, to distinguish an upstream market, constituted by the product or service, in that case the market for home delivery of daily newspapers, and a (secondary) downstream market, on which the product or service in question is used for the production of another product or the supply of another service, in that case the market for daily newspapers themselves. 43. The fact that the home-delivery service was not marketed separately was not regarded as precluding, from the outset, the possibility of identifying a separate market. 44. It appears, therefore, as the Advocate General set out in points 56 to 59 of his Opinion, that, for the purposes of the application of the earlier case-law, it is sufficient that a potential market or even hypothetical market can be identified. Such is the case where the products or services are indispensable in order to carry on a particular business and where there is an actual demand for them on the part of undertakings that seek to carry on the business for which they are indispensable. 45. Accordingly, it is determinative that two different stages of production may be identified and that they are interconnected, inasmuch as the upstream product is indispensable for the supply of the downstream product. 46. Transposed to the facts of the case in the main proceedings, that approach prompts consideration as to whether the 1 860 brick structure constitutes, upstream, an indispensable factor in the downstream supply of German regional sales data for pharmaceutical products. 47. It is for the national court to establish whether that is in fact the position, and, if so be the case, to examine whether the refusal by IMS to grant a license to use the structure at issue is capable of excluding all competition on the market for the supply of German regional sales data on pharmaceutical products. 48. As the Advocate General stated in point 62 of his Opinion, that condition relates to the consideration that, in the balancing of the interest in protection of the intellectual property right and the economic freedom of its owner against the interest in protection of free competition, the latter can prevail only where refusal to grant a license prevents the development of the secondary market to the detriment of consumers. 49. Therefore, the refusal by an undertaking in a dominant position to allow access to a product protected by an intellectual property right, where that product is indispensable for operating on a secondary market, may be regarded as abusive only where the

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undertaking that requested the license does not intend to limit itself essentially to duplicating the goods or services already offered on the secondary market by the owner of the intellectual property right, but intends to produce new goods or services not offered by the owner of the right and for which there is a potential consumer demand. 50. It is for the national court to determine whether such is the case in the dispute in the main proceedings. The second condition, relating to whether the refusal was unjustified. 51. As to that condition, on whose interpretation no specific observations have been made, it is for the national court to examine, if appropriate, in light of the facts before it, whether the refusal of the request for a license is justified by objective considerations. 52. Accordingly, the answer to the first question must be that the refusal by an undertaking that holds a dominant position and owns an intellectual property right in a brick structure indispensable to the presentation of regional sales data on pharmaceutical products in a Member State to grant a license to use that structure to another undertaking that also wishes to provide such data in the same Member State, constitutes an abuse of a dominant position within the meaning of Article 82 EC where the following conditions are fulfilled: – the undertaking that requested the license intends to offer, on the market for the supply of the data in question, new products or services not offered by the owner of the intellectual property right and for which there is a potential consumer demand; – the refusal is not justified by objective considerations; – the refusal is such as to reserve to the owner of the intellectual property right the market for the supply of data on sales of pharmaceutical products in the Member State concerned by eliminating all competition on that market.…

27. Sega Enterprises Ltd. v. Accolade, Inc., 977 F.2d 1510 (9th Cir. 1992) UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT Opinion by Circuit Judge Reinhardt. This case presents several difficult questions of first impression involving our copyright and trademark laws. We are asked to determine, first, whether the Copyright Act permits persons who are neither copyright holders nor licensees to disassemble a copyrighted computer program in order to gain an understanding of the unprotected functional elements of the program. In light of the public policies underlying the Act, we conclude that, when the person seeking the understanding has a legitimate reason for doing so and when no other means of access to the unprotected elements exists, such disassembly is as a matter of law a fair use of the copyrighted work. Second, we

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must decide the legal consequences under the Lanham Trademark Act of a computer manufacturer’s use of a security system that affords access to its computers to software cartridges that include an initialization code that triggers a screen display of the computer manufacturer’s trademark. The computer manufacturer also manufactures software cartridges; those cartridges all contain the initialization code. The question is whether the computer manufacturer may enjoin competing cartridge manufacturers from gaining access to its computers through the use of the code on the ground that such use will result in the display of a “false” trademark. Again, our holding is based on the public policies underlying the statute. We hold that when there is no other method of access to the computer that is known or readily available to rival cartridge manufacturers, the use of the initialization code by a rival does not violate the Act even though that use triggers a misleading trademark display. Accordingly, we reverse the district court’s grant of a preliminary injunction in favor of plaintiff-appellee Sega Enterprises, Ltd. on its claims of copyright and trademark infringement. We decline, however, to order that an injunction pendente lite issue precluding Sega from continuing to use its security system, even though such use may result in a certain amount of false labeling. We prefer to leave the decision on that question to the district court initially. Plaintiff-appellee Sega Enterprises, Ltd. (“Sega”), a Japanese corporation, and its subsidiary, Sega of America, develop and market video entertainment systems, including the “Genesis” console (distributed in Asia under the name “Mega-Drive”) and video game cartridges. Defendant-appellant Accolade, Inc., is an independent developer, manufacturer, and marketer of computer entertainment software, including game cartridges that are compatible with the Genesis console, as well as game cartridges that are compatible with other computer systems. Sega licenses its copyrighted computer code and its “SEGA” trademark to a number of independent developers of computer game software. Those licensees develop and sell Genesis-compatible video games in competition with Sega. Accolade is not and never has been a licensee of Sega. Prior to rendering its own games compatible with the Genesis console, Accolade explored the possibility of entering into a licensing agreement with Sega, but abandoned the effort because the agreement would have required that Sega be the exclusive manufacturer of all games produced by Accolade. Accolade used a two-step process to render its video games compatible with the Genesis console. First, it “reverse engineered” Sega’s video game programs in order to discover the requirements for compatibility with the Genesis console. As part of the reverse engineering process, Accolade transformed the machine-readable object code contained in commercially available copies of Sega’s game cartridges into humanreadable source code using a process called “disassembly” or “decompilation.”4 4. Footnote 2 of the opinion reads: Computer programs are written in specialized alphanumeric languages, or “source code.” In order to operate a computer, source code must be translated into computer readable form, or “object code.” Object code uses only two symbols, 0 and 1, in combinations which represent the alphanumeric characters of the source code. A

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Accolade purchased a Genesis console and three Sega game cartridges, wired a decompiler into the console circuitry, and generated printouts of the resulting source code. Accolade engineers studied and annotated the printouts in order to identify areas of commonality among the three game programs. They then loaded the disassembled code back into a computer, and experimented to discover the interface specifications for the Genesis console by modifying the programs and studying the results. At the end of the reverse engineering process, Accolade created a development manual that incorporated the information it had discovered about the requirements for a Genesiscompatible game. According to the Accolade employees who created the manual, the manual contained only functional descriptions of the interface requirements and did not include any of Sega’s code. In the second stage, Accolade created its own games for the Genesis. According to Accolade, at this stage it did not copy Sega’s programs, but relied only on the information concerning interface specifications for the Genesis that was contained in its development manual. Accolade maintains that with the exception of the interface specifications, none of the code in its own games is derived in any way from its examination of Sega’s code. In 1990, Accolade released “Ishido,” a game that it had originally developed and released for use with the Macintosh and IBM personal computer systems, for use with the Genesis console. Even before Accolade began to reverse engineer Sega’s games, Sega had grown concerned about the rise of software and hardware piracy in Taiwan and other Southeast Asian countries to which it exported its products. Taiwan is not a signatory to the Berne Convention and does not recognize foreign copyrights. Taiwan does allow prosecution of trademark counterfeiters. However, the counterfeiters had discovered how to modify Sega’s game programs to blank out the screen display of Sega’s trademark before repackaging and reselling the games as their own. Accordingly, Sega began to explore methods of protecting its trademark rights in the Genesis and Genesis-compatible games. While the development of its own trademark security system (TMSS) was pending, Sega licensed a patented TMSS for use with the Genesis home entertainment system. The most recent version of the Genesis console, the “Genesis III,” incorporates the licensed TMSS. When a game cartridge is inserted, the microprocessor contained in the Genesis III searches the game program for four bytes of data consisting of the letters “S-E-G-A” (the “TMSS initialization code”). If the Genesis III finds the TMSS initialization code in the right location, the game is rendered compatible and will operate on the console. In such case, the TMSS initialization code then prompts a visual display for approximately three seconds that reads “PRODUCED BY OR UNDER LICENSE FROM

program written in source code is translated into object code using a computer program called an “assembler” or “compiler,” and then imprinted onto a silicon chip for commercial distribution. Devices called “disassemblers” or “decompilers” can reverse this process by “reading” the electronic signals for “0” and “1” that are produced while the program is being run, storing the resulting object code in computer memory, and translating the object code into source code. Both assembly and disassembly devices are commercially available, and both types of devices are widely used within the software industry.

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SEGA ENTERPRISES LTD” (the “Sega Message”). All of Sega’s game cartridges, including those disassembled by Accolade, contain the TMSS initialization code. Accolade learned of the impending release of the Genesis III in the United States in January, 1991, when the Genesis III was displayed at a consumer electronics show. When a demonstration at the consumer electronics show revealed that Accolade’s “Ishido” game cartridges would not operate on the Genesis III, Accolade returned to the drawing board. During the reverse engineering process, Accolade engineers had discovered a small segment of code—the TMSS initialization code—that was included in the “power-up” sequence of every Sega game, but that had no identifiable function. The games would operate on the original Genesis console even if the code segment was removed. Mike Lorenzen, the Accolade engineer with primary responsibility for reverse engineering the interface procedures for the Genesis console, sent a memo regarding the code segment to Alan Miller, his supervisor and the current president of Accolade, in which he noted that “it is possible that some future Sega peripheral device might require it for proper initialization.” In the second round of reverse engineering, Accolade engineers focused on the code segment identified by Lorenzen. After further study, Accolade added the code to its development manual in the form of a standard header file to be used in all games. The file contains approximately twenty to twenty-five bytes of data. Each of Accolade’s games contains a total of 500,000 to 1,500,000 bytes. According to Accolade employees, the header file is the only portion of Sega’s code that Accolade copied into its own game programs. In this appeal, Sega does not raise a separate claim of copyright infringement with respect to the header file. In 1991, Accolade released five more games for use with the Genesis III, “Star Control,” “Hardball!,” “Onslaught,” “Turrican,” and “Mike Ditka Power Football.” With the exception of “Mike Ditka Power Football,” all of those games, like “Ishido,” had originally been developed and marketed for use with other hardware systems. All contained the standard header file that included the TMSS initialization code. According to Accolade, it did not learn until after the Genesis III was released on the market in September, 1991, that in addition to enabling its software to operate on the Genesis III, the header file caused the display of the Sega Message. All of the games except “Onslaught” operate on the Genesis III console; apparently, the programmer who translated “Onslaught” for use with the Genesis system did not place the TMSS initialization code at the correct location in the program. All of Accolade’s Genesis-compatible games are packaged in a similar fashion. The front of the box displays Accolade’s “Ballistic” trademark and states “for use with Sega Genesis and Mega Drive Systems.” The back of the box contains the following statement: “Sega and Genesis are registered trademarks of Sega Enterprises, Ltd. Game 1991 Accolade, Inc. All rights reserved. Ballistic is a trademark of Accolade, Inc. Accolade, Inc. is not associated with Sega Enterprises, Ltd. All product and corporate names are trademarks and registered trademarks of their respective owners.” Sega filed suit against Accolade on October 31, 1991, alleging trademark infringement and false designation of origin in violation of sections 32(1) and 43(a) of the Lanham Act, 15 U.S.C. §§1114(a)(1), 1125(a). On November 29, 1991, Sega amended

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its complaint to include a claim for copyright infringement. Accolade filed a counterclaim against Sega for false designation of origin under section 43(a) of the Lanham Act, 15 U.S.C. §1125(a).… Accolade raises four arguments in support of its position that disassembly of the object code in a copyrighted computer program does not constitute copyright infringement. First, it maintains that intermediate copying does not infringe the exclusive rights granted to copyright owners in section 106 of the Copyright Act unless the end product of the copying is substantially similar to the copyrighted work. Second, it argues that disassembly of object code in order to gain an understanding of the ideas and functional concepts embodied in the code is lawful under section 102(b) of the Act, which exempts ideas and functional concepts from copyright protection. Third, it suggests that disassembly is authorized by section 117 of the Act, which entitles the lawful owner of a copy of a computer program to load the program into a computer. Finally, Accolade contends that disassembly of object code in order to gain an understanding of the ideas and functional concepts embodied in the code is a fair use that is privileged by section 107 of the Act. Neither the language of the Act nor the law of this circuit supports Accolade’s first three arguments. Accolade’s fourth argument, however, has merit. Although the question is fairly debatable, we conclude based on the policies underlying the Copyright Act that disassembly of copyrighted object code is, as a matter of law, a fair use of the copyrighted work if such disassembly provides the only means of access to those elements of the code that are not protected by copyright and the copier has a legitimate reason for seeking such access. Accordingly, we hold that Sega has failed to demonstrate a likelihood of success on the merits of its copyright claim. Because on the record before us the hardships do not tip sharply (or at all) in Sega’s favor, the preliminary injunction issued in its favor must be dissolved, at least with respect to that claim.… Accolade contends, finally, that its disassembly of copyrighted object code as a necessary step in its examination of the unprotected ideas and functional concepts embodied in the code is a fair use that is privileged by section 107 of the Act. Because, in the case before us, disassembly is the only means of gaining access to those unprotected aspects of the program, and because Accolade has a legitimate interest in gaining such access (in order to determine how to make its cartridges compatible with the Genesis console), we agree with Accolade. Where there is good reason for studying or examining the unprotected aspects of a copyrighted computer program, disassembly for purposes of such study or examination constitutes a fair use.… Section 107 lists the factors to be considered in determining whether a particular use is a fair one. Those factors include: (1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes; (2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and

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(4) the effect of the use upon the potential market for or value of the copyrighted work. 17 U.S.C. §107. The statutory factors are not exclusive. Rather, the doctrine of fair use is in essence “an equitable rule of reason.” … In determining that Accolade’s disassembly of Sega’s object code did not constitute a fair use, the district court treated the first and fourth statutory factors as dispositive, and ignored the second factor entirely. Given the nature and characteristics of Accolade’s direct use of the copied works, the ultimate use to which Accolade put the functional information it obtained, and the nature of the market for home video entertainment systems, we conclude that neither the first nor the fourth factor weighs in Sega’s favor. In fact, we conclude that both factors support Accolade’s fair use defense, as does the second factor, a factor that is important to the resolution of cases such as the one before us. With respect to the first statutory factor, we observe initially that the fact that copying is for a commercial purpose weighs against a finding of fair use.… However, the presumption of unfairness that arises in such cases can be rebutted by the characteristics of a particular commercial use.… Further “the commercial nature of a use is a matter of degree, not an absolute.…” … Sega argues that because Accolade copied its object code in order to produce a competing product, the Harper & Row presumption applies and precludes a finding of fair use. That analysis is far too simple and ignores a number of important considerations. We must consider other aspects of “the purpose and character of the use” as well. As we have noted, the use at issue was an intermediate one only and thus any commercial “exploitation” was indirect or derivative. The declarations of Accolade’s employees indicate, and the district court found, that Accolade copied Sega’s software solely in order to discover the functional requirements for compatibility with the Genesis console—aspects of Sega’s programs that are not protected by copyright. 17 U.S.C. §102(b). With respect to the video game programs contained in Accolade’s game cartridges, there is no evidence in the record that Accolade sought to avoid performing its own creative work. Indeed, most of the games that Accolade released for use with the Genesis console were originally developed for other hardware systems. Moreover, with respect to the interface procedures for the Genesis console, Accolade did not seek to avoid paying a customarily charged fee for use of those procedures, nor did it simply copy Sega’s code; rather, it wrote its own procedures based on what it had learned through disassembly. Taken together, these facts indicate that although Accolade’s ultimate purpose was the release of Genesis-compatible games for sale, its direct purpose in copying Sega’s code, and thus its direct use of the copyrighted material, was simply to study the functional requirements for Genesis compatibility so that it could modify existing games and make them usable with the Genesis console. Moreover, as we discuss below, no other method of studying those requirements was available to Accolade. On these facts, we conclude that Accolade copied Sega’s code for a legitimate, essentially nonexploitative purpose, and that the commercial aspect of its use can best be described as of minimal significance.

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We further note that we are free to consider the public benefit resulting from a particular use notwithstanding the fact that the alleged infringer may gain commercially. See Hustler, 796 F.2d at 1153 (quoting MCA, Inc. v. Wilson, 677 F.2d 180, 182 (2d Cir. 1981)). Public benefit need not be direct or tangible, but may arise because the challenged use serves a public interest. Id. In the case before us, Accolade’s identification of the functional requirements for Genesis compatibility has led to an increase in the number of independently designed video game programs offered for use with the Genesis console. It is precisely this growth in creative expression, based on the dissemination of other creative works and the unprotected ideas contained in those works, that the Copyright Act was intended to promote.… The fact that Genesiscompatible video games are not scholarly works, but works offered for sale on the market, does not alter our judgment in this regard. We conclude that given the purpose and character of Accolade’s use of Sega’s video game programs, the presumption of unfairness has been overcome and the first statutory factor weighs in favor of Accolade. As applied, the fourth statutory factor, effect on the potential market for the copyrighted work, bears a close relationship to the “purpose and character” inquiry in that it, too, accommodates the distinction between the copying of works in order to make independent creative expression possible and the simple exploitation of another’s creative efforts. We must, of course, inquire whether, “if [the challenged use] should become widespread, it would adversely affect the potential market for the copyrighted work,” Sony Corp. v. Universal City Studios, 464 U.S. 417, 451 (1984), by diminishing potential sales, interfering with marketability, or usurping the market, Hustler, 796 F.2d at 1155-56. If the copying resulted in the latter effect, all other considerations might be irrelevant. The Harper & Row Court found a use that effectively usurped the market for the copyrighted work by supplanting that work to be dispositive. 471 U.S. at 567-69. However, the same consequences do not and could not attach to a use that simply enables the copier to enter the market for works of the same type as the copied work. Unlike the defendant in Harper & Row, which printed excerpts from President Ford’s memoirs verbatim with the stated purpose of “scooping” a Time magazine review of the book, 471 U.S. at 562, Accolade did not attempt to “scoop” Sega’s release of any particular game or games, but sought only to become a legitimate competitor in the field of Genesis-compatible video games. Within that market, it is the characteristics of the game program as experienced by the user that determine the program’s commercial success. As we have noted, there is nothing in the record that suggests that Accolade copied any of those elements. By facilitating the entry of a new competitor, the first lawful one that is not a Sega licensee, Accolade’s disassembly of Sega’s software undoubtedly “affected” the market for Genesis-compatible games in an indirect fashion. We note, however, that while no consumer except the most avid devotee of President Ford’s regime might be expected to buy more than one version of the President’s memoirs, video game users typically purchase more than one game. There is no basis for assuming that Accolade’s “Ishido” has significantly affected the market for Sega’s “Altered Beast,” since a consumer might easily purchase both; nor does it seem unlikely that a consumer particularly

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interested in sports might purchase both Accolade’s “Mike Ditka Power Football” and Sega’s “Joe Montana Football,” particularly if the games are, as Accolade contends, not substantially similar. In any event, an attempt to monopolize the market by making it impossible for others to compete runs counter to the statutory purpose of promoting creative expression and cannot constitute a strong equitable basis for resisting the invocation of the fair use doctrine. Thus, we conclude that the fourth statutory factor weighs in Accolade’s, not Sega’s, favor, notwithstanding the minor economic loss Sega may suffer. The second statutory factor, the nature of the copyrighted work, reflects the fact that not all copyrighted works are entitled to the same level of protection. The protection established by the Copyright Act for original works of authorship does not extend to the ideas underlying a work or to the functional or factual aspects of the work. 17 U.S.C. §102(b). To the extent that a work is functional or factual, it may be copied, Baker v. Selden, 101 U.S. 99, 102-04 (1879), as may those expressive elements of the work that “must necessarily be used as incident to” expression of the underlying ideas, functional concepts, or facts, id. at 104. Works of fiction receive greater protection than works that have strong factual elements, such as historical or biographical works … or works that have strong functional elements, such as accounting textbooks, … Works that are merely compilations of fact are copyrightable, but the copyright in such a work is “thin.” … Computer programs pose unique problems for the application of the “idea/expression distinction” that determines the extent of copyright protection. To the extent that there are many possible ways of accomplishing a given task or fulfilling a particular market demand, the programmer’s choice of program structure and design may be highly creative and idiosyncratic. However, computer programs are, in essence, utilitarian articles—articles that accomplish tasks. As such, they contain many logical, structural, and visual display elements that are dictated by the function to be performed, by considerations of efficiency, or by external factors such as compatibility requirements and industry demands.… In some circumstances, even the exact set of commands used by the programmer is deemed functional rather than creative for purposes of copyright. “When specific instructions, even though previously copyrighted, are the only and essential means of accomplishing a given task, their later use by another will not amount to infringement.” … Because of the hybrid nature of computer programs, there is no settled standard for identifying what is protected expression and what is unprotected idea in a case involving the alleged infringement of a copyright in computer software. We are in wholehearted agreement with the Second Circuit’s recent observation that “thus far, many of the decisions in this area reflect the courts’ attempt to fit the proverbial square peg in a round hole.” CAI, 23 U.S.P.Q. 2d at 1257.… Under a test that breaks down a computer program into its component subroutines and sub-subroutines and then identifies the idea or core functional element of each, such as the test recently adopted by the Second Circuit in CAI, 23 U.S.P.Q.2D (BNA) at 1252-53, many aspects of the program are not protected by copyright. In our view, in light of the essentially utilitarian nature of computer programs, the Second Circuit’s approach is an appropriate one.

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Sega argues that even if many elements of its video game programs are properly characterized as functional and therefore not protected by copyright, Accolade copied protected expression. Sega is correct. The record makes clear that disassembly is wholesale copying. Because computer programs are also unique among copyrighted works in the form in which they are distributed for public use, however, Sega’s observation does not bring us much closer to a resolution of the dispute. The unprotected aspects of most functional works are readily accessible to the human eye. The systems described in accounting textbooks or the basic structural concepts embodied in architectural plans, to give two examples, can be easily copied without also copying any of the protected, expressive aspects of the original works. Computer programs, however, are typically distributed for public use in object code form, embedded in a silicon chip or on a floppy disk. For that reason, humans often cannot gain access to the unprotected ideas and functional concepts contained in object code without disassembling that code—i.e., making copies. Atari Games Corp. v. Nintendo of America, 975 F.2d 832 (Fed. Cir. 1992). Sega argues that the record does not establish that disassembly of its object code is the only available method for gaining access to the interface specifications for the Genesis console, and the district court agreed. An independent examination of the record reveals that Sega misstates its contents, and demonstrates that the district court committed clear error in this respect. First, the record clearly establishes that humans cannot read object code. Sega makes much of Mike Lorenzen’s statement that a reverse engineer can work directly from the zeros and ones of object code but “it’s not as fun.” In full, Lorenzen’s statements establish only that the use of an electronic decompiler is not absolutely necessary. Trained programmers can disassemble object code by hand. Because even a trained programmer cannot possibly remember the millions of zeros and ones that make up a program, however, he must make a written or computerized copy of the disassembled code in order to keep track of his work.… The relevant fact for purposes of Sega’s copyright infringement claim and Accolade’s fair use defense is that translation of a program from object code into source code cannot be accomplished without making copies of the code. Second, the record provides no support for a conclusion that a viable alternative to disassembly exists. The district court found that Accolade could have avoided a copyright infringement claim by “peeling” the chips contained in Sega’s games or in the Genesis console, as authorized by section 906 of the SCPA, 17 U.S.C. §906. Even Sega’s amici agree that this finding was clear error. The declaration of Dr. Harry Tredennick, an expert witness for Accolade, establishes that chip peeling yields only a physical diagram of the object code embedded in a ROM chip. It does not obviate the need to translate object code into source code. Atari Games Corp., slip op. at 22. The district court also suggested that Accolade could have avoided a copyright infringement suit by programming in a “clean room.” That finding too is clearly erroneous. A “clean room” is a procedure used in the computer industry in order to prevent direct copying of a competitor’s code during the development of a competing product. Programmers in clean rooms are provided only with the functional specifications for the desired program. As Dr. Tredennick explained, the use of a clean room

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would not have avoided the need for disassembly because disassembly was necessary in order to discover the functional specifications for a Genesis-compatible game. In summary, the record clearly establishes that disassembly of the object code in Sega’s video game cartridges was necessary in order to understand the functional requirements for Genesis compatibility. The interface procedures for the Genesis console are distributed for public use only in object code form, and are not visible to the user during operation of the video game program. Because object code cannot be read by humans, it must be disassembled, either by hand or by machine. Disassembly of object code necessarily entails copying. Those facts dictate our analysis of the second statutory fair use factor. If disassembly of copyrighted object code is per se an unfair use, the owner of the copyright gains a de facto monopoly over the functional aspects of his work—aspects that were expressly denied copyright protection by Congress. 17 U.S.C. §102(b). In order to enjoy a lawful monopoly over the idea or functional principle underlying a work, the creator of the work must satisfy the more stringent standards imposed by the patent laws. Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 159-64 (1989). Sega does not hold a patent on the Genesis console. Because Sega’s video game programs contain unprotected aspects that cannot be examined without copying, we afford them a lower degree of protection than more traditional literary works. See CAI, 23 U.S.P.Q. 2d at 1257. In light of all the considerations discussed above, we conclude that the second statutory factor also weighs in favor of Accolade. As to the third statutory factor, Accolade disassembled entire programs written by Sega. Accordingly, the third factor weighs against Accolade. The fact that an entire work was copied does not, however, preclude a finding a fair use.… In fact, where the ultimate (as opposed to direct) use is as limited as it was here, the factor is of very little weight. Compare Wright v. Warner Books, Inc., 953 F.2d 731, 738 (2d Cir. 1991). In summary, careful analysis of the purpose and characteristics of Accolade’s use of Sega’s video game programs, the nature of the computer programs involved, and the nature of the market for video game cartridges yields the conclusion that the first, second, and fourth statutory fair use factors weigh in favor of Accolade, while only the third weighs in favor of Sega, and even then only slightly. Accordingly, Accolade clearly has by far the better case on the fair use issue. We are not unaware of the fact that to those used to considering copyright issues in more traditional contexts, our result may seem incongruous at first blush. To oversimplify, the record establishes that Accolade, a commercial competitor of Sega, engaged in wholesale copying of Sega’s copyrighted code as a preliminary step in the development of a competing product. However, the key to this case is that we are dealing with computer software, a relatively unexplored area in the world of copyright law. We must avoid the temptation of trying to force “the proverbial square peg into a round hole.” CAI, 23 U.S.P.Q. 2d at 1257. In determining whether a challenged use of copyrighted material is fair, a court must keep in mind the public policy underlying the Copyright Act. “The immediate effect of our copyright law is to secure a fair return for an ‘author’s’ creative labor. But the ultimate aim is, by this incentive, to stimulate artistic creativity for the general public good.” Sony Corp., 464 U.S. at 432 (quoting Twentieth Century Music Corp. v.

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Aiken, 422 U.S. 151, 156 (1975)). When technological change has rendered an aspect or application of the Copyright Act ambiguous, “the Copyright Act must be construed in light of this basic purpose.” Id. As discussed above, the fact that computer programs are distributed for public use in object code form often precludes public access to the ideas and functional concepts contained in those programs, and thus confers on the copyright owner a de facto monopoly over those ideas and functional concepts. That result defeats the fundamental purpose of the Copyright Act—to encourage the production of original works by protecting the expressive elements of those works while leaving the ideas, facts, and functional concepts in the public domain for others to build on. Feist Publications, 111 S. Ct. at 1290; see also Atari Games Corp., slip op. at 18-20. Sega argues that the considerable time, effort, and money that went into development of the Genesis and Genesis-compatible video games militate against a finding of fair use. Borrowing from antitrust principles, Sega attempts to label Accolade a “free rider” on its product development efforts. In Feist Publications, however, the Court unequivocally rejected the “sweat of the brow” rationale for copyright protection.… Under the Copyright Act, if a work is largely functional, it receives only weak protection. “This result is neither unfair nor unfortunate. It is the means by which copyright advances the progress of science and art.” … (“In truth, ‘it is just such wasted effort that the proscription against the copyright of ideas and facts … [is] designed to prevent.”) (quoting Rosemont Enterprises, Inc. v. Random House, Inc., 366 F.2d 303, 310 (2d Cir. 1966), cert. denied, 385 U.S. 1009 (1967)); CAI, 23 U.S.P.Q. 2d at 1257. Here, while the work may not be largely functional, it incorporates functional elements that do not merit protection. The equitable considerations involved weigh on the side of public access. Accordingly, we reject Sega’s argument. We conclude that where disassembly is the only way to gain access to the ideas and functional elements embodied in a copyrighted computer program and where there is a legitimate reason for seeking such access, disassembly is a fair use of the copyrighted work, as a matter of law. Our conclusion does not, of course, insulate Accolade from a claim of copyright infringement with respect to its finished products. Sega has reserved the right to raise such a claim, and it may do so on remand. Ordinarily in a trademark case, a trademark holder contends that another party is misusing the holder’s mark or is attempting to pass off goods or services as those of the trademark holder. The other party usually protests that the mark is not being misused, that there is no actual confusion, or that for some other reason no violation has occurred. This case is different. Here, both parties agree that there is a misuse of a trademark, both agree that there is unlawful mislabeling, and both agree that confusion may result. The issue, here, is—which party is primarily responsible? Which is the wrongdoer—the violator? Is it Sega, which has adopted a security system governing access to its Genesis III console that displays its trademark and message whenever the initialization code for the security system is utilized, even when the video game program was manufactured by a Sega competitor? Or is it Accolade, which, having discovered how to gain access to the Genesis III through the initialization code, uses that code even though doing so triggers the display of Sega’s trademark and message in a manner that leads observers to believe that Sega manufactured the Accolade game

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cartridge? In other words, is Sega the injured party because its mark is wrongfully attached to an Accolade video game by Accolade? Or is Accolade wronged because its game is mislabeled as a Sega product by Sega? The facts are relatively straightforward and we have little difficulty answering the question. Sega’s trademark security system (TMSS) initialization code not only enables video game programs to operate on the Genesis III console, but also prompts a screen display of the SEGA trademark and message. As a result, Accolade’s inclusion of the TMSS initialization code in its video game programs has an effect ultimately beneficial neither to Sega nor to Accolade. A Genesis III owner who purchases a video game made by Accolade sees Sega’s trademark associated with Accolade’s product each time he inserts the game cartridge into the console. Sega claims that Accolade’s inclusion of the TMSS initialization code in its games constitutes trademark infringement and false designation of origin in violation of sections 32(1)(a) and 43(a) of the Lanham Trademark Act, 15 U.S.C. §§1114(1)(a), 1125(a), respectively. Accolade counterclaims that Sega’s use of the TMSS to prompt a screen display of its trademark constitutes false designation of origin under Lanham Act section 43(a), 15 U.S.C. §1125(a). Because the TMSS has the effect of regulating access to the Genesis III console, and because there is no indication in the record of any public or industry awareness of any feasible alternate method of gaining access to the Genesis III, we hold that Sega is primarily responsible for any resultant confusion. Thus, it has not demonstrated a likelihood of success on the merits of its Lanham Act claims. Accordingly, the preliminary injunction it obtained must be dissolved with respect to the trademark claim also. However, we decline to instruct the district court to grant Accolade’s request for preliminary injunctive relief at this time. The decision whether to grant such relief requires the making of factual and equitable determinations in light of the legal conclusions we express here. Such determinations are best left in the first instance to the district court. Section 32(1)(a) of the Lanham Act creates a cause of action for trademark infringement against any person who, without the consent of the trademark owner, “uses in commerce any reproduction … of a registered mark in connection with the sale, offering for sale, distribution, or advertising of any goods or services on or in connection with which such use is likely to cause confusion, or to cause mistake, or to deceive.…” 15 U.S.C. §1114(1)(a). Section 43(a) proscribes the use in commerce of a false designation of origin in connection with goods or services where such use is “likely to cause confusion, or … mistake.” Id. §1125(a). Both Sega and Accolade agree that the screen display of the Sega trademark and message creates a likelihood of consumer confusion regarding the origin of Accolade’s games. The question is: which party is legally responsible for that confusion? We disagree with the answer given by the district court. The district court found that Accolade bore primary responsibility for any consumer confusion that resulted from the display of the false Sega Message. However, Accolade had no desire to cause the Sega Message to appear or otherwise to create any appearance of association between itself and Sega; in fact, it had precisely the opposite

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wish. It used the TMSS initialization code only because it wanted to gain access for its products to the Genesis III, and was aware of no other method for doing so. On the other hand, while it may not have been Sega’s ultimate goal to mislabel Accolade’s products, the record is clear that the false labeling was the result of a deliberate decision on the part of Sega to include in the Genesis III a device that would both limit general access and cause false labeling. The decision to use the SEGA trademark as an essential element of a functional device that regulates access and to cause the SEGA trademark and message to be displayed whenever that functional device was triggered compels us to place primary responsibility for consumer confusion squarely on Sega. With respect to Accolade, we emphasize that the record clearly establishes that it had only one objective in this matter: to make its video game programs compatible with the Genesis III console. That objective was a legitimate and a lawful one. There is no evidence whatsoever that Accolade wished Sega’s trademark to be displayed when Accolade’s games were played on Sega’s consoles. To the contrary, Accolade included disclaimers on its packaging materials that stated that “Accolade, Inc. is not associated with Sega Enterprises, Ltd.” … In contrast, Sega officials testified that Sega incorporated the TMSS into the Genesis console, known in Asia as the Mega-Drive, in order to lay the groundwork for the trademark prosecution of software pirates who sell counterfeit cartridges in Taiwan and South Korea, as well as in the United States. Sega then marketed the redesigned console worldwide. Sega intended that when Sega game programs manufactured by a counterfeiter were played on its consoles, the Sega Message would be displayed, thereby establishing the legal basis for a claim of trademark infringement. However, as Sega certainly knew, the TMSS also had the potential to affect legitimate competitors adversely. First, Sega should have foreseen that a competitor might discover how to utilize the TMSS, and that when it did and included the initialization code in its cartridges, its video game programs would also end up being falsely labeled. Sega should also have known that the TMSS might discourage some competitors from manufacturing independently developed games for use with the Genesis III console, because they would not want to become the victims of such a labeling practice. Thus, in addition to laying the groundwork for lawsuits against pirates, Sega knowingly risked two significant consequences: the false labeling of some competitors’ products and the discouraging of other competitors from manufacturing Genesis-compatible games. Under the Lanham Act, the former conduct, at least, is clearly unlawful. “Trademark policies are designed ‘(1) to protect consumers from being misled … (2) to prevent an impairment of the value of the enterprise that owns the trademark; and (3) to achieve these ends in a manner consistent with the objectives of free competition.” Anti-Monopoly, Inc. v. General Mills Fun Group, 611 F.2d 296, 300-01 (9th Cir. 1979) (quoting HMH Publishing Co. v. Brincat, 504 F.2d 713, 716 (9th Cir. 1974)). Sega violated the first and the third of these principles. “The trademark is misused if it serves to limit competition in the manufacture and sales of a product. That is the special province of the limited monopolies provided pursuant to the patent laws.” Id. at 301 (citation omitted).

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Sega makes much of the fact that it did not adopt the TMSS in order to wage war on Accolade in particular, but rather as a defensive measure against software counterfeiters. It is regrettable that Sega is troubled by software pirates who manufacture counterfeit products in other areas of the world where adequate copyright remedies are not available. However, under the Lanham Act, which governs the use of trademarks and other designations of origin in this country, it is the effect of the message display that matters. Whatever Sega’s intent with respect to the TMSS, the device serves to limit competition in the market for Genesis-compatible games and to mislabel the products of competitors. Moreover, by seeking injunctive relief based on the mislabeling it has itself induced, Sega seeks once again to take advantage of its trademark to exclude its competitors from the market. The use of a mark for such purpose is inconsistent with the Lanham Act. Sega argues that even if the legal analysis we have enunciated is correct, the facts do not support its application to this case. Specifically, Sega contends that the TMSS does not prevent legitimate unlicensed competitors from developing and marketing Genesis III-compatible cartridges that do not trigger a display of the Sega trademark and message. In other words, Sega claims that Accolade could have “engineered around” the TMSS. Accolade strongly disagrees with Sega’s factual assertions. It contends that the TMSS initialization sequence is a functional feature that must be included in a video game program by a manufacturer in order for the game to operate on the Genesis III. Sega’s factual argument stands or falls on the Nagashima declaration and the accompanying modified game cartridges that Sega introduced at the hearing. Having carefully reviewed the declaration, we conclude that Sega has not met its burden of establishing nonfunctionality.… Viewed in the correct light, the record before us supports only one conclusion: The TMSS initialization code is a functional feature of a Genesis-compatible game and Accolade may not be barred from using it. “Functional features of a product are features ‘which constitute the actual benefit that the consumer wishes to purchase, as distinguished from an assurance that a particular entity made, sponsored, or endorsed a product.’” Vuitton et Fils S.A. v. J. Young Enterprises, Inc., 644 F.2d 769, 774 (9th Cir. 1981) (quoting International Order of Job’s Daughters v. Lindeburg & Co., 633 F.2d 912, 917 (9th Cir. 1980), cert. denied, 452 U.S. 941 (1981)). A product feature thus is functional “if it is essential to the use or purpose of the article or if it affects the cost or quality of the article.” Inwood Laboratories, 456 U.S. at 850 n. 10. The Lanham Act does not protect essentially functional or utilitarian product features because such protection would constitute a grant of a perpetual monopoly over features that could not be patented. Keene Corp. v. Paraflex Industries, Inc., 653 F.2d 822, 824 (3d Cir. 1981). Even when the allegedly functional product feature is a trademark, the trademark owner may not enjoy a monopoly over the functional use of the mark. Job’s Daughters, 633 F.2d at 918-19. In determining whether a product feature is functional, a court may consider a number of factors, including—but not limited to—“the availability of alternative designs; and whether a particular design results from a comparatively simple or cheap

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method of manufacture.” Clamp Mfg. Co. v. Enco Mfg. Co., Inc., 870 F.2d 512, 516 (9th Cir.), cert. denied, 493 U.S. 872 (1989). The availability of alternative methods of manufacture must be more than merely theoretical or speculative, however. The court must find “that commercially feasible alternative configurations exist.” Id. (emphasis added). Moreover, some cases have even suggested that in order to establish nonfunctionality the party with the burden must demonstrate that the product feature “‘serves no purpose other than identification.’” Keene Corp., 653 F.2d at 826 (quoting SK&F Co. v. Premo Pharmaceutical Laboratories, Inc., 625 F.2d 1055, 1063 (3d Cir. 1980)). With these principles in mind, we turn to the question whether the TMSS initialization code is a functional feature of a Genesis-compatible game.… Because the TMSS serves the function of regulating access to the Genesis III, and because a means of access to the Genesis III console without using the TMSS initialization code is not known to manufacturers of competing video game cartridges, there is an insufficient basis for a finding of nonfunctionality. Moreover, we note that the only evidence in the record (other than the Nagashima declaration) relating to Accolade’s ability to gain access to the Genesis III through the use of any process other than the TMSS is the affidavit of Alan Miller. Miller stated that Accolade’s software engineers—who, absent any evidence to the contrary, we presume to be reasonably competent representatives of their profession—have not been able to discover such a method. This evidence supports our conclusion that Sega has not met its burden of establishing nonfunctionality.… In summary, because Sega did not produce sufficient evidence regarding the existence of a feasible alternative to the use of the TMSS initialization code, it did not carry its burden and its claim of nonfunctionality fails. Possibly, Sega will be able to meet its burden of proof at trial. We cannot say. However, we conclude that in light of the record before the district court, Sega was not entitled to preliminary injunctive relief under the Lanham Act.…

§2.02

LICENSING (AND ASSIGNING) INTELLECTUAL PROPERTY

22. The competition policies in regard of intellectual property licensing support and facilitate intellectual property owners’ private deals. There is a general idea that, intellectual property being about exclusivity, anything that goes in the direction of eliminating exclusivity is procompetitive. However, in many jurisdictions licensing is seen with suspicion, because of the fear that intellectual property owners may use their potential bargaining power in order to reach anticompetitive arrangements. In many cases, such bargaining power is imposed on the licensee. In other cases, licensor and licensee may collude, under the licensing pretext, thereby harming competition in general. In any event, intellectual property holders should not be allowed to expand their rights by private engagements. Speaking about patents, the Mercoid opinion strongly criticized abuses in licenses (see case no. 40). If allowed, “Private business would function as its own patent office and impose its own law upon its licensees. It would obtain by contract what letters patent alone may grant.”

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Territorial Restrictions 28. Etablissements Consten SARL and Grundig-Verkaufs-GMBH, Joined Cases 56/64 and 58/64 (1976) COURT OF JUSTICE OF THE EUROPEAN UNION

… The applicants submit that the prohibition in Article 85(1) applies only to so-called horizontal agreements.… Furthermore, the possible application of Article 85 to a sole distributorship contract cannot be excluded merely because the grantor and the concessionaire are not competitors inter se and not on a footing of equality. Competition may be distorted within the meaning of Article 85(1) not only by agreements that limit it as between the parties, but also by agreements that prevent or restrict the competition that might take place between one of them and third parties. For this purpose, it is irrelevant whether the parties to the agreement are or are not on a footing of equality as regards their position and function in the economy. This applies all the more, since, by such an agreement, the parties might seek, by preventing or limiting the competition of third parties in respect of the products, to create or guarantee for their benefit an unjustified advantage at the expense of the consumer or user, contrary to the general aims of Article 85. It is thus possible that, without involving an abuse of a dominant position, an agreement between economic operators at different levels may affect trade between Member States and at the same time have as its object or effect the prevention, restriction or distortion of competition, thus falling under the prohibition of Article 85(1). In addition, it is pointless to compare on the one hand the situation, to which Article 85 applies, of a producer bound by a sole distributorship agreement to the distributor of his products with on the other hand that of a producer who includes within his undertaking the distribution of his own products by some means, for example, by commercial representatives, to which Article 85 does not apply. These situations are distinct in law and, moreover, need to be assessed differently, since two marketing organizations, one of which is integrated into the manufacturer’s undertaking whilst the other is not, may not necessarily have the same efficiency. The wording of Article 85 causes the prohibition to apply, provided that the other conditions are met, to an agreement between several undertakings. Thus it does not apply where a sole undertaking integrates its own distribution network into its business organization. It does not thereby follow, however, that the contractual situation based on an agreement between a manufacturing and a distributing undertaking is rendered legally acceptable by a simple process of economic analogy—which is in any case incomplete and in contradiction with the said Article. Furthermore, although in the first case the Treaty intended in Article 85 to leave untouched the internal organization of an undertaking and to render it liable to be called in question, by means of Article 86, only in cases where it reaches such a degree of seriousness as

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to amount to an abuse of a dominant position, the same reservation could not apply when the impediments to competition result from agreement between two different undertakings that then as a general rule simply require to be prohibited. Finally, an agreement between producer and distributor that might tend to restore the national divisions in trade between Member States might be such as to frustrate the most fundamental objections of the Community. The Treaty, whose preamble and content aim at abolishing the barriers between States, and that in several provisions gives evidence of a stern attitude with regard to their reappearance, could not allow undertakings to reconstruct such barriers. Article 85(1) is designed to pursue this aim, even in the case of agreements between undertakings placed at different levels in the economic process. The submissions set out above are consequently unfounded.… The applicants and the German Government maintain that since the Commission restricted its examination solely to Grundig products the decision was based upon a false concept of competition and of the rules on prohibition contained in Article 85(1), since this concept applies particularly to competition between similar products of different makes; the Commission, before declaring Article 85(1) to be applicable, should, by basing itself upon the “rule of reason,” have considered the economic effects of the disputed contrast upon competition between the different makes. There is a presumption that vertical sole distributorship agreements are not harmful to competition and in the present case there is nothing to invalidate that presumption. On the contrary, the contract in question has increased the competition between similar products of different makes. The principle of freedom of competition concerns the various stages and manifestations of competition. Although competition between producers is generally more noticeable than that between distributors of products of the same make, it does not thereby follow that an agreement tending to restrict the latter kind of competition should escape the prohibition of Article 85(1) merely because it might increase the former. Besides, for the purpose of applying Article 85(1), there is no need to take account of the concrete effects of an agreement once it appears that it has as its object the prevention, restriction or distortion of competition. Therefore the absence in the contested decision of any analysis of the effects of the agreement on competition between similar products of different makes does not, of itself, constitute a defect in the decision. It thus remains to consider whether the contested decision was right in founding the prohibition of the disputed agreement under Article 85(1) on the restriction on competition created by the agreement in the sphere of the distribution of Grundig products alone. The infringement that was found to exist by the contested decision results from the absolute territorial protection created the said contract in favor of Consten on the basis of French law. The applicants thus wished to eliminate any possibility of competition at the wholesale level in Grundig products in the territory specified in the contrast essentially by two methods. First, Grundig undertook not to deliver even indirectly to third parties products intended for the area covered by the contract. The restrictive nature of that undertaking

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is obvious if it is considered in the light of the prohibition on exporting that was imposed not only on Consten but also on all the other sole concessionaires of Grundig, as well as the German wholesalers. Secondly, the registration in France by Consten of the GINT trade mark, which Grundig affixes to all its products, is intended to increase the protection inherent in the disputed agreement, against the risk of parallel imports into France of Grundig products, by adding the protection deriving from the law on industrial property rights. Thus no third party could import Grundig products from other Member States of the Community for resale in France without running serious risks. The defendant properly took into account the whole distribution system thus set up by Grundig. In order to arrive at a true representation of the contractual position the contract must be placed in the economic and legal context in the light of which it was concluded by the parties. Such a procedure is not to be regarded as an unwarrantable interference in legal transactions or circumstances that were not the subject of the proceedings before the Commission. The situation as ascertained above results in the isolation of the French market and makes it possible to charge for the products in question prices that are sheltered from all effective competition. In addition, the more producers succeed in their efforts to render their own makes of product individually distinct in the eyes of the consumer, the more the effectiveness of competition between producers tends to diminish. Because of the considerable impact of distribution costs on the aggregate cost price, it seems important that competition between dealers should also be stimulated. The efforts of the dealer are stimulated by competition between distributors of products of the same make. Since the agreement thus aims at isolating the French market for Grundig products and maintaining artificially, for products of a very well-known brand, separate national markets within the Community, it is therefore such as to distort competition in the Common Market. It was therefore proper for the contested decision to hold that the agreement constitutes an infringement of Article 85(1). No further considerations, whether of economic data (price differences between France and Germany, representative character of the type of appliance considered, level of overheads borne by Consten) or of the corrections of the criteria upon which the Commission relied in its comparisons between the situations of the French and German markets, and no possible favorable effects of the agreement in other respects, can in any way lead, in the face of abovementioned restrictions, to a different solution under Article 85(1).… The applicants complain that the Commission infringed Articles 36, 222 and 234 of the EEC Treaty and furthermore exceeded the limits of its powers by declaring that the agreement on the registration in France of the GINT trademark served to ensure absolute territorial protection in favor of Consten and by excluding thereby, in Article 3 of the operative part of the contested decision, any possibility of Consten’s asserting its rights under national trademark law, in order to oppose parallel imports. The applicants maintain more particularly that the criticized effect on competition is due not to the agreement but to the registration of the trademark in accordance with French law, which gives rise to an original inherent right of the holder of the trademark from which the absolute territorial protection derives under national law.

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Consten’s right under the contract to the exclusive user in France of the GINT trade mark, which may be used in a similar manner in other countries, is intended to make it possible to keep under surveillance and to place an obstacle in the way of parallel imports. Thus, the agreement by which Grundig, as the holder of the trademark by virtue of an international registration, authorized Consten to register it in France in its own name tends to restrict competition. Although Consten is, by virtue of the registration of the GINT trademark, regarded under French law as the original holder of the rights relating to that trademark, the fact nevertheless remains that it was by virtue of an agreement with Grundig that it was able to effect the registration. That agreement therefore is one that may be caught by the prohibition in Article 85(1). The prohibition would be ineffective if Consten could continue to use the trademark to achieve the same object as that pursued by the agreement that has been held to be unlawful.…

29. Miller Insituform, Inc. v. Insituform of N. Am., Inc., 830 F.2d 606 (6th Cir. 1987) United States Court of Appeals for the Sixth Circuit Opinion delivered by Gilmore, District Judge. Plaintiffs appeal the district court’s dismissal of their claim brought under section II of the Sherman Act, 15 U.S.C. §2, alleging that defendant Insituform of North America (INA) unlawfully attempted to monopolize the relevant market by revoking plaintiffs’ license to sell and install a patented process for the rehabilitation of pipe lines. The district court granted summary judgment for defendant INA on the antitrust claims, and dismissed the remaining pendent state law claims without prejudice for want of federal jurisdiction. The only issue on appeal is whether, by terminating an agreement to sublicense a patent, the exclusive licensee of the patent violates section 2 of the Sherman Act, which prohibits monopolization or attempts to monopolize. We hold there is no violation of section 2 under these circumstances, and affirm the district court’s order of summary judgment dismissing appellants’ complaint. The Insituform process is a patented process for the rehabilitation of pipe lines. The patent is owned by Insituform International, N.V., a Netherlands Antilles Corporation. In June of 1980, Insituform International entered into a licensing agreement with INA, conveying to INA the exclusive right to the patented process throughout the United States, except in California. Subsequently, INA granted exclusive sublicenses to certain designated territories throughout the United States. One such sublicense was granted to plaintiff Miller Insituform, Inc. (MII) for the territories of Tennessee, Kentucky, and certain portions of Ohio. Subsequent to this sublicense agreement, INA allegedly conspired to take back control of MII’s exclusive territory. On or about May

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9, 1984, INA terminated the sublicense agreement, allegedly because MII had failed to provide a balance sheet showing a net worth of at least $500,000, as was required under the terms of the license agreement. Appellants assert INA’s termination of the sublicense agreement was without justification, and was a calculated move by INA to retake appellants’ territory for the benefit of INA and other sublicensees. They claim that INA has an ownership interest in one or more of its other sublicensees, and that, in effect, it has thereby entered the market, enabling it to control prices. They claim INA accomplished this by terminating the sublicense agreement with appellants on the pretext that appellants had failed to satisfy a $500,000 net worth requirement. INA argues that, even assuming, arguendo, it controlled 100 per cent of the relevant market, no section 2 violation could occur because INA had the right under 35 U.S.C. §154 to exclude all others from using the Insituform process whenever, and for whatever reason, it chose. Simply stated, it argues that, by virtue of the patent laws, INA enjoyed a lawful monopoly and could therefore exclude others from using the Insituform process, and even enter into the market and practice the process itself (vertical integration) without committing actionable antitrust violations. The issue here, therefore, is whether INA’s action in terminating its sublicense agreement with MII constituted a violation of section 2 of the Sherman Act. At issue is the “obvious tension between the patent laws and antitrust laws.” United States v. Westinghouse Electric Corp., 648 F.2d 642 (9th Cir.1981). While this Circuit has not dealt specifically with the issue, other circuits have reached the conclusion that a patentee is free to control licensing for the exclusive use of its patent without running afoul of the prohibitions against monopoly contained in the Sherman Act. This case requires consideration of two federal statutory schemes, the antitrust laws and the patent laws. Under section 2 of the Sherman Act, 15 U.S.C. §2, it is a violation of the antitrust laws to monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States.… A section 2 Sherman Act violation has two elements: (1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident. United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966).

But, under the patent laws, 35 U.S.C. § 154, it is provided: Every patent shall contain … a grant to the patentee, his heirs or assigns, for the term of seventeen years, … of the right to exclude others from making, using, or selling the invention throughout the United States, …

It is thus clear that a patentee holds a legal monopoly. Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 135 (1969). As one court has observed, there is a contradiction in terms between the antitrust and patent laws: There is an obvious tension between the patent laws and antitrust laws. One body of law creates and protects monopoly power while the other seeks to proscribe

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it…. “The patent laws which give a 17-year monopoly on ‘making, using, or selling the invention’ are in pari materia with the antitrust laws and modify them pro tanto.” Simpson v. Union Oil Co., 377 U.S. 13, 24 (1964). Westinghouse, supra, at 646-47.

Although a patentee has a limited monopoly granted by the patent laws, merely holding a patent fails to render one totally immune from the antitrust laws. The Ninth Circuit pointed out that where a patentee seeks to expand the limited monopoly granted by the patent laws by misuse, agreement, or accumulation, it is subject to the antitrust laws. See Westinghouse, supra. The Supreme Court has also emphasized that there are limits on the control a patent holder may exercise over his licensee: Among other restrictions upon him, he may not condition the right to use his patent on the licensee’s agreement to purchase, use, or sell, or not to purchase, use, or sell another article of commerce not within the scope of his patent monopoly. Zenith Radio, supra, at 136.

The Second Circuit has held that no liability exists under section 2 of the Sherman Act on the part of one who has lawfully acquired the patent, and subsequently unilaterally refuses to license the patent. SCM Corp. v. Xerox Corp., 645 F.2d 1195 (2d Cir.1981), cert. denied, 455 U.S. 1016 (1982). Noting the conflict between these two statutory schemes as a result of the patent holder’s power under the patent laws to exclude others from exploiting his invention, that court observed: [T]he primary purpose of the antitrust laws-to preserve competition-can be frustrated, albeit temporarily, by a holder’s exercise of the patent’s inherent exclusionary power during its term.

Id. at 1203. The SCM court concluded “where a patent has been lawfully acquired, subsequent conduct permissible under the patent laws cannot trigger any liability under the antitrust laws.” Id. at 1206. It is clear that the instant case presents, at most, claims for violation of state law ranging from breach of contract to fraud and misrepresentation, not a violation of section 2 of the Sherman Act. A patent holder who lawfully acquires a patent cannot be held liable under section 2 of the Sherman Act for maintaining the monopoly power he lawfully acquired by refusing to license the patent to others. SCM Corp., supra. Similarly, we conclude that the holder of a patent retains the power to exclude others from manufacturing, using, and selling his inventions without running afoul of the antitrust laws. Here, by terminating the sublicense agreement with the appellant, appellee merely exercised his power to exclude others from using the Insituform process, as was its right under 35 U.S.C. § 154. In so doing, it did not violate section 2 of the Sherman Act. Appellants contend that INA’s termination of the agreement constituted a misuse of patent, rendering INA liable for antitrust violations. We reject this argument. A material issue of fact may exist as to whether INA was justified in terminating the contract, but mere breach of contract is not envisioned or included in the term “misuse of patent.” The mere failure to observe state contractual obligations does not rise to the

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level of misuse of a patent that will render one liable for violations of section 2 of the Sherman Act. Appellants also argue that INA has entered into the Insituform process through partial ownership of some of its other sublicensees. Apparently, appellants’ point is that assuming both the position of licensor and of competitor with its licensees renders INA potentially liable for antitrust violations. INA has recognized this theory of appellants as charging “vertical integration,” but persuasively argues that this theory is inapplicable to a patent monopolist. We agree. There is no adverse effect on competition since, as a patent monopolist, INA, from the start, had exclusive right to manufacture, use, and sell his invention….

[B]

Tying

23. The opinions selected concern tying of intellectual property rights (also called “bundling” or “package licensing”), as opposed to tying of unprotected goods or services with the goods or services covered by intellectual property. The legal regime is not different, but in the context of tying of intellectual property rights the accurate assessment of the border that separates their legitimate exercise and the illegitimate imposition of burdensome package licensing to distributors that may lead to the elimination of choices becomes more acute.

30. Illinois Tool Works Inc. v. Independent Ink, Inc., 547 U.S. 28 (2006) SUPREME COURT OF THE UNITED STATES Justice Stevens delivered the opinion of the Court. In Jefferson Parish Hospital Dist. No. 2 v. Hyde, 466 U.S. 2 we repeated the well-settled proposition that “if the Government has granted the seller a patent or similar monopoly over a product, it is fair to presume that the inability to buy the product elsewhere gives the seller market power.” Id. at 16. This presumption of market power, applicable in the antitrust context when a seller conditions its sale of a patented product (the “tying” product) on the purchase of a second product (the “tied” product), has its foundation in the judicially created patent misuse doctrine. See United States v. Loew’s Inc., 371 U.S. 38, 46 (1962). In 1988, Congress substantially undermined that foundation, amending the Patent Act to eliminate the market power presumption in patent misuse cases. See 102 Stat. 4676, codified at 35 U.S.C. § 271(d). The question presented to us today is whether the presumption of market power in a patented product should survive as a matter of antitrust law despite its demise in patent law. We conclude that the mere fact that a tying product is patented does not support such a presumption. Petitioners, Trident, Inc., and its parent, Illinois Tool Works Inc., manufacture and market printing systems that include three relevant components: (1) a patented

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piezoelectric impulse ink jet printhead; (2) a patented ink container, consisting of a bottle and valved cap, which attaches to the printhead; and (3) specially designed, but unpatented, ink. Petitioners sell their systems to original equipment manufacturers (OEMs) who are licensed to incorporate the printheads and containers into printers that are in turn sold to companies for use in printing barcodes on cartons and packaging materials. The OEMs agree that they will purchase their ink exclusively from petitioners, and that neither they nor their customers will refill the patented containers with ink of any kind. Respondent, Independent Ink, Inc., has developed an ink with the same chemical composition as the ink sold by petitioners. After an infringement action brought by Trident against Independent was dismissed for lack of personal jurisdiction, Independent filed suit against Trident seeking a judgment of noninfringement and invalidity of Trident’s patents. In an amended complaint, it alleged that petitioners are engaged in illegal tying and monopolization in violation of §§ 1 and 2 of the Sherman Act. 15 U.S.C. §§1, 2…. American courts first encountered tying arrangements in the course of patent infringement litigation. See, e.g., Heaton-Peninsular Button-Fastener Co. v. Eureka Specialty Co., 77 F. 288 (CA6 1896). Such a case came before this Court in Henry v. A. B. Dick Co., 224 U.S. 1 (1912), in which, as in the case we decide today, unpatented ink was the product that was “tied” to the use of a patented product through the use of a licensing agreement. Without commenting on the tying arrangement, the Court held that use of a competitor’s ink in violation of a condition of the agreement—that the rotary mimeograph “may be used only with the stencil, paper, ink and other supplies made by A. B. Dick Co.”—constituted infringement of the patent on the machine. Id. at 25-26. Chief Justice White dissented, explaining his disagreement with the Court’s approval of a practice that he regarded as an “attempt to increase the scope of the monopoly granted by a patent … which tend[s] to increase monopoly and to burden the public in the exercise of their common rights.” Id. at 70. Two years later, Congress endorsed Chief Justice White’s disapproval of tying arrangements, enacting §3 of the Clayton Act. See 38 Stat. 731 (applying to “patented or unpatented” products); see also Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502, 517-518 (1917) (explaining that, in light of §3 of the Clayton Act, A. B. Dick “must be regarded as overruled”). And in this Court’s subsequent cases reviewing the legality of tying arrangements we, too, embraced Chief Justice White’s disapproval of those arrangements. See, e.g., Standard Oil Co. of Cal. v. United States, 337 U.S. 293, 305-306 (1949); Mercoid Corp. v. Mid-Continent Investment Co., 320 U.S. 661, 664-665 (1944). In the years since A. B. Dick, four different rules of law have supported challenges to tying arrangements. They have been condemned as improper extensions of the patent monopoly under the patent misuse doctrine, as unfair methods of competition under §5 of the Federal Trade Commission Act, 15 U.S.C. §45, as contracts tending to create a monopoly under §3 of the Clayton Act, 15 U.S.C. §14, and as contracts in restraint of trade under §1of the Sherman Act. In all of those instances, the justification for the challenge rested on either an assumption or a showing that the defendant’s position of power in the market for the tying product was being used to restrain competition in the market for the tied product. As we explained in Jefferson Parish, 466

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U.S. at 12, “[o]ur cases have concluded that the essential characteristic of an invalid tying arrangement lies in the seller’s exploitation of its control over the tying product to force the buyer into the purchase of a tied product that the buyer either did not want at all, or might have preferred to purchase elsewhere on different terms.” Over the years, however, this Court’s strong disapproval of tying arrangements has substantially diminished. Rather than relying on assumptions, in its more recent opinions the Court has required a showing of market power in the tying product …. In rejecting the application of a per se rule that all tying arrangements constitute antitrust violations, we explained: [W]e have condemned tying arrangements when the seller has some special ability—usually called “market power”—to force a purchaser to do something that he would not do in a competitive market. … Per se condemnation—condemnation without inquiry into actual market conditions—is only appropriate if the existence of forcing is probable. Thus, application of the per se rule focuses on the probability of anticompetitive consequences. … For example, if the Government has granted the seller a patent or similar monopoly over a product, it is fair to presume that the inability to buy the product elsewhere gives the seller market power. United States v. Loew’s Inc., 371 U.S. at 45-47. Any effort to enlarge the scope of the patent monopoly by using the market power it confers to restrain competition in the market for a second product will undermine competition on the merits in that second market. Thus, the sale or lease of a patented item on condition that the buyer make all his purchases of a separate tied product from the patentee is unlawful. Id. at 13-16 (footnote omitted).

Notably, nothing in our opinion suggested a rebuttable presumption of market power applicable to tying arrangements involving a patent on the tying good. See infra, at 44; cf. 396 F.3d at 1352. Instead, it described the rule that a contract to sell a patented product on condition that the purchaser buy unpatented goods exclusively from the patentee is a per se violation of § 1 of the Sherman Act. Justice O’Connor wrote separately in Jefferson Parish, concurring in the judgment on the ground that the case did not involve a true tying arrangement because, in her view, surgical services and anesthesia were not separate products. 466 U.S. at 43. In her opinion, she questioned not only the propriety of treating any tying arrangement as a per se violation of the Sherman Act, id. at 35, but also the validity of the presumption that a patent always gives the patentee significant market power, observing that the presumption was actually a product of our patent misuse cases rather than our antitrust jurisprudence, id. at 37-38, n. 7. It is that presumption, a vestige of the Court’s historical distrust of tying arrangements, that we address squarely today…. It is Congress’ most recent narrowing of the patent misuse defense, however, that is directly relevant to this case. Four years after our decision in Jefferson Parish repeated the patent-equals-market-power presumption, 466 U.S. at 16, Congress amended the Patent Code to eliminate that presumption in the patent misuse context, 102 Stat. 4676. The relevant provision reads: (d) No patent owner otherwise entitled to relief for infringement or contributory infringement of a patent shall be denied relief or deemed guilty of misuse or illegal extension of the patent right by reason of his having done one or more of the following: … (5) conditioned the license of any rights to the patent or the

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Nuno Pires de Carvalho sale of the patented product on the acquisition of a license to rights in another patent or purchase of a separate product, unless, in view of the circumstances, the patent owner has market power in the relevant market for the patent or patented product on which the license or sale is conditioned. 35 U.S.C. § 271(d)(5) (emphasis added).

The italicized clause makes it clear that Congress did not intend the mere existence of a patent to constitute the requisite “market power.” Indeed, fairly read, it provides that without proof that Trident had market power in the relevant market, its conduct at issue in this case was neither “misuse” nor an “illegal extension of the patent right.” While the 1988 amendment does not expressly refer to the antitrust laws, it certainly invites a reappraisal of the per se rule announced in International Salt. A rule denying a patentee the right to enjoin an infringer is significantly less severe than a rule that makes the conduct at issue a federal crime punishable by up to 10 years in prison. See 15 U.S.C. §1. It would be absurd to assume that Congress intended to provide that the use of a patent that merited punishment as a felony would not constitute “misuse.” Moreover, given the fact that the patent misuse doctrine provided the basis for the market power presumption, it would be anomalous to preserve the presumption in antitrust after Congress has eliminated its foundation…. After considering the congressional judgment reflected in the 1988 amendment, we conclude that tying arrangements involving patented products should be evaluated under the standards applied in cases like Fortner II and Jefferson Parish rather than under the per se rule applied in Morton Salt and Loew’s. While some such arrangements are still unlawful, such as those that are the product of a true monopoly or a marketwide conspiracy, see, e.g., United States v. Paramount Pictures, Inc., 334 U.S. 131, 145-146 (1948), that conclusion must be supported by proof of power in the relevant market rather than by a mere presumption thereof. Rather than arguing that we should retain the rule of per se illegality, respondent contends that we should endorse a rebuttable presumption that patentees possess market power when they condition the purchase of the patented product on an agreement to buy unpatented goods exclusively from the patentee…. Respondent recognizes that a large number of valid patents have little, if any, commercial significance, but submits that those that are used to impose tying arrangements on unwilling purchasers likely do exert significant market power. Hence, in respondent’s view, the presumption would have no impact on patents of only slight value and would be justified, subject to being rebutted by evidence offered by the patentee, in cases in which the patent has sufficient value to enable the patentee to insist on acceptance of the tie. Respondent also offers a narrower alternative, suggesting that we differentiate between tying arrangements involving the simultaneous purchase of two products that are arguably two components of a single product—such as the provision of surgical services and anesthesiology in the same operation, Jefferson Parish, 466 U.S. at 43 (O’Connor, J., concurring in judgment), or the licensing of one copyrighted film on condition that the licensee take a package of several films in the same transaction, Loew’s, 371 U.S. 38, 83—and a tying arrangement involving the purchase of unpatented goods over a period of time, a so-called “requirements tie.” …According to

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respondent, we should recognize a presumption of market power when faced with the latter type of arrangements because they provide a means for charging large volume purchasers a higher royalty for use of the patent than small purchasers must pay, a form of discrimination that “is strong evidence of market power.” … The opinion that imported the “patent equals market power” presumption into our antitrust jurisprudence, however, provides no support for respondent’s proposed alternative. In International Salt, it was the existence of the patent on the tying product, rather than the use of a requirements tie, that led the Court to presume market power. 332 U.S. at 395 (“The appellant’s patents confer a limited monopoly of the invention they reward”). Moreover, the requirements tie in that case did not involve any price discrimination between large volume and small volume purchasers or evidence of noncompetitive pricing. Instead, the leases at issue provided that if any competitor offered salt, the tied product, at a lower price, “the lessee should be free to buy in the open market, unless appellant would furnish the salt at an equal price.” Id. at 396. Congress, the antitrust enforcement agencies, and most economists have all reached the conclusion that a patent does not necessarily confer market power upon the patentee. Today, we reach the same conclusion, and therefore hold that, in all cases involving a tying arrangement, the plaintiff must prove that the defendant has market power in the tying product. In this case, respondent reasonably relied on our prior opinions in moving for summary judgment without offering evidence defining the relevant market or proving that petitioners possess power within it. When the case returns to the District Court, respondent should therefore be given a fair opportunity to develop and introduce evidence on that issue, as well as any other issues that are relevant to its remaining §1 claims ….

31. U.S. Philips Corp. v. ITC, 424 F.3d 1179 (Fed. Cir. 2005) UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT Opinion by Bryson, Circuit Judge. U.S. Philips Corporation appeals from a final order of the United States International Trade Commission, in which the Commission held six of Philips’s patents for the manufacture of compact discs to be unenforceable because of patent misuse. The Commission ruled that Philips had employed an impermissible tying arrangement because it required prospective licensees to license packages of patents rather than allowing them to choose that individual patents they wished to license and making the licensing fee correspond to the particular patents designated by the licensees …. Philips owns patents to technology for manufacturing recordable compact discs (“CD-Rs”) and rewritable compact discs (“CD-RWs”) in accordance with the technical standards set forth in a publication called the Recordable CD Standard (the “Orange Book”), jointly authored by Philips and Sony Corporation. Since the 1990s, Philips has been licensing those patents through package licenses. Philips specified that the same

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royalty was due for each disc manufactured by the licensee using patents included in the package, regardless of how many of the patents were used. Potential licensees who sought to license patents to the technology for manufacturing CD-Rs or CD-RWs were not allowed to license those patents individually and were not offered a lower royalty rate for licenses to fewer than all the patents in a package. Initially, Philips offered four different pools of patents for licensing: (1) a joint CD-R patent pool that included patents owned by Philips and two other companies (Sony and Taiyo Yuden); (2) a joint CD-RW patent pool that included patents owned by Philips and two other companies (Sony and Ricoh); (3) a CD-R patent pool that included only patents owned by Philips; and (4) a CD-RW patent pool that included only patents owned by Philips. After 2001, Philips offered additional package options by grouping its patents into two categories, which Philips denominated “essential” and “nonessential” for producing compact discs compliant with the technical standards set forth in the Orange Book. In the late 1990s, Philips entered into package licensing agreements with Princo Corporation and Princo America Corporation (collectively, “Princo”); GigaStorage Corporation Taiwan and GigaStorage Corporation USA (collectively, “GigaStorage”); and Linberg Enterprise Inc. (“Linberg”). Soon after entering into the agreements, however, Princo, GigaStorage, and Linberg stopped paying the licensing fees. Philips filed a complaint with the International Trade Commission that Princo, GigaStorage, and Linberg, among others, were violating section 337(a)(1)(B) of the Tariff Act of 1930, 19 U.S.C. § 1337(a)(1)(B), by importing into the United States certain CD-Rs and CD-RWs that infringed six of Philips’s patents. The Commission instituted an investigation and identified 19 respondents, including GigaStorage and Linberg. Additional respondents, including Princo, were added through intervention. In the course of the proceedings before an administrative law judge, the respondents raised patent misuse as an affirmative defense, alleging that Philips had improperly forced them, as a condition of licensing patents that were necessary to manufacture CD-Rs or CD-RWs, to take licenses to other patents that were not necessary to manufacture those products. In particular, the respondents argued that a number of the patents that Philips had included in the category of “essential” patents were actually not essential for manufacturing compact discs compliant with the Orange Book standards, because there were commercially viable alternative methods of manufacturing CD-Rs and CD-RWs that did not require the use of the technology covered by those patents. The allegedly nonessential patents included U.S. Patent Nos. 5,001,692 (“the Farla patent”), 5,740,149 (“the Iwasaki patent”), Re. 34,719 (“the Yamamoto patent”), and 5,060,219 (“the Lokhoff patent”) …. Philips gives its licensees the option of using any of the patents in the package, at the licensee’s option. Philips charges a uniform licensing fee to manufacture discs covered by its patented technology, regardless of which, or how many, of the patents in the package the licensee chooses to use in its manufacturing process. In particular, Philips’s package licenses do not require that licensees actually use the technology covered by any of the patents that the Commission characterized as nonessential …. In this case, unlike in Loew’s, there is no evidence that a portion of the royalty was attributable to the patents that the Commission characterized as nonessential.

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While the administrative law judge found that GigaStorage “inquired into obtaining a license to less than all of the patents on Philips’s patent list,” the administrative law judge noted that GigaStorage did so because it “hoped that by eliminating some patents the royalty rate would be lower.” There is no evidence that GigaStorage had any basis for its expectation that a smaller patent package might result in a lower royalty rate. In fact, the administrative law judge found that Philips had responded to that overture from GigaStorage by explaining that “the royalty is the same regardless of the number of patents used.” Moreover, the administrative law judge found that the royalty rate for licensing Philips’s patents “remains the same regardless of which option(s) in the agreement one selects,” and that the royalty rate “does not increase or decrease if more or fewer patents are used.” Thus, it is clear that the royalty charged by Philips was not increased because of the inclusion of the Farla, Iwasaki, Yamamoto, and Lokhoff patents. 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 …. 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 Aktiengesellschaft, 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. In the case of patent-to-product tying, the patent owner uses the market power conferred by the patent to compel customers to purchase a product in a separate market that the customer might otherwise purchase from a competitor. United States v. U.S. Gypsum Co., 333 U.S. 364, 400 (1948); Int’l Salt Co. v. United States, 332 U.S. 392, 395 (1947); Morton Salt Co. v. G.S. Suppiger Co., 314 U.S. 488, 493 (1942). The patent owner is thus able to use the market power conferred by the patent to foreclose competition in the market for the product. By contrast, a package licensing agreement that includes both essential and nonessential patents does not impose any requirement on the licensee. It does not bar the licensee from using any alternative technology that may be offered by a competitor of the licensor. Nor does it foreclose the competitor from licensing his alternative technology; it merely puts the competitor in the same position he would be in if he were competing with unpatented technology. A package license is in effect a promise by the patentee not to sue his customer for infringing any patents on whatever technology the customer employs in making commercial use of the licensed patent. That surrender of rights might mean that the customer will choose not to license the alternative technology offered by the patentee’s competition, but it does not compel the customer to use the patentee’s technology. The package license is thus not anticompetitive in the way that a compelled purchase of a tied product would be. Contrary to the Commission’s characterization, the intervenors were not “forced” to “take” anything from Philips that they did not want, nor were they restricted from obtaining licenses from other sources to produce the relevant

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technology. Philips simply provided that for a fixed licensing fee, it would not sue any licensee for engaging in any conduct covered by the entire group of patents in the package. By analogy, if Philips had decided to surrender its “nonessential” patents or had simply announced that it did not intend to enforce them, there would have been no way for the manufacturers to decline or reject Philips’s decision. Yet the economic effect of the package licensing arrangement for Philips’s patents is not fundamentally different from the effect that such decisions would have had on third parties seeking to compete with the technology covered by those “nonessential” patents. Thus, we conclude that the Commission erred when it characterized the package license agreements as a way of forcing the intervenors to license technology that they did not want in order to obtain patent rights that they did. The Commission stated that it would not have found the package licenses to constitute improper tying if Philips had offered to license its patents on an individual basis, as an alternative to licensing them in packages. The Commission’s position, however, must necessarily be based on an assumption that, if the patents were offered on an individual basis, individual patents would be offered for a lower price than the patent packages as a whole. If that assumption were not implicit in the Commission’s conclusion, the Commission would be saying in effect that it would be unlawful for Philips to charge the same royalty for its essential patents that it charges for its patent packages and to offer the nonessential patents for free. Yet that sort of pricing policy plainly would not be unlawful. See Directory Sales Mgmt. Corp. v. Ohio Bell Tel. Co., 833 F.2d 606, 609-10 (6th Cir. 1987). To the extent that the Commission’s decision is based on an assumption that individual licenses would necessarily be available for a lower price than package licenses, that assumption is directly contrary to the evidence and even to the administrative law judge’s findings of fact. As noted above, the administrative law judge found that the royalty rate under Philips’s package licenses depended on the number of discs the manufacturer produced under the authority of the license, not the number of individual patents the manufacturer used to produce those discs. That is, the royalty rate did not vary depending on whether the licensees used only the essential patents or used all of the patents in the package. Thus, it seems evident that if Philips were forced to offer licenses on an individual basis, it would continue to charge the same per unit royalty regardless of the number of patents the manufacturer chose to license. That alteration in Philips’s practice would have absolutely no effect on the would-be competitors who wished to offer alternatives to the technology represented by Philips’s so-called nonessential patents, since those patents would effectively be offered for free, and the competitors would therefore still have to face exactly the same barriers—the availability of a free alternative to the technology that they were trying to license for a fee. More generally, the Commission’s assumption that a license to fewer than all the patents in a package would presumably carry a lower fee than the package itself ignores the reality that the value of any patent package is largely, if not entirely, based on the patents that are essential to the technology in question. A patent that is nonessential because it covers technology that can be fully replaced by alternative technology that is available for free is essentially valueless. A patent that is nonessential because it

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covers technology that can be fully replaced by alternative technology that is available through a license from another patent owner has value, but its value is limited by the price of the alternative technology. Short of imposing an obligation on the licensor to make some sort of allocation of fees across a group of licenses, there is no basis for the Commission to conclude that a smaller group of the licenses—the so-called “essential” licenses—would have been available for a lower fee if they had not been “tied to” the so-called nonessential patents. It is entirely rational for a patentee who has a patent that is essential to particular technology, as well as other patents that are not essential, to charge what the market will bear for the essential patent and to offer the others for free. Because a license to the essential patent is, by definition, a prerequisite to practice the technology in question, the patentee can charge whatever maximum amount a willing licensee is able to pay to practice the technology in question. If the patentee allocates royalty fees between its essential and nonessential patents, it runs the risk that licensees will take a license to the essential patent but not to the nonessential patents. The effect of that choice will be that the patentee will not be able to obtain the full royalty value of the essential patent. For the patentee in this situation to offer its nonessential patents as part of a package with the essential patent at no additional charge is no more anticompetitive than if it had surrendered the nonessential patents or had simply announced a policy that it would not enforce them against persons who licensed the essential patent. In either case, those offering technology that competed with the nonessential patents would be unhappy, because they would be competing against free technology. But the patentee would not be using his essential patent to obtain power in the market for the technology covered by the nonessential patents. This package licensing arrangement cannot fairly be characterized as an exploitation of power in one market to obtain a competitive advantage in another …. In light of the efficiencies of package patent licensing and the important differences between product-to-patent tying arrangements and arrangements involving group licensing of patents, we reject the Commission’s conclusion that Philips’s conduct shows a “lack of any redeeming virtue” and should be “conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use.” N. Pac. Ry. Co. v. United States, 356 U.S. 1, 5 (1958). We therefore hold that the analysis that led the Commission to apply the rule of per se illegality to Philips’s package licensing agreements was legally flawed …. Patents within a patent package can be regarded as “nonessential” only if there are “commercially feasible” alternatives to those patents. See Int’l Mfg. Co. v. Landon, 336 F.2d 723, 729 (9th Cir. 1964). If there are no commercially practicable alternatives to the allegedly nonessential patents, packaging those patents together with so-called essential patents can have no anticompetitive effect in the marketplace, because no competition for a viable alternative product is foreclosed. In such a case, the only effect of finding per se patent misuse is to give licensees a way of avoiding their obligations under the licensing agreements, with no corresponding benefit to competition in any real-world market.

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The Department of Justice has recognized that the availability of commercially viable alternative technology is relevant to the analysis of package licensing agreements. In particular, the Department has stated that patent packages do not have the undesirable effects of tying if they include patents to technology for which there is no practical or realistic alternative. …That principle is consistent with the main purpose of the separate-products inquiry in tying cases generally, which is to ensure that conduct is not condemned as anticompetitive “unless there is sufficient demand for the purchase of [the tied product] separate from the [tying product] to identify a distinct product market in which it is efficient to offer [the tied product].” Jefferson Parish, 466 U.S. at 21-22; see Mallinckrodt, 976 F.2d at 704 (tying is misuse only when the patentee uses its patent to obtain “market benefit” beyond that conferred by the patent). In this case, the evidence did not show that there were commercially viable substitutes for the Farla, Iwasaki, Yamamoto, and Lokhoff patents that disc manufacturers wished to use in making compact discs compliant with the Orange Book standards. There was thus insufficient evidence that including the four “nonessential” patents in the Philips patent packages had an actual anticompetitive effect. That is, the evidence did not show that there were commercially viable substitutes for those four “nonessential” patents that disc manufacturers wished to use in making compact discs compliant with the Orange Book standards …. Beyond the absence of factual support for the Commission’s findings, the Commission’s analysis of the four “nonessential” patents demonstrates a more fundamental problem with applying the per se rule of illegality to patent packages such as the ones at issue in this case. If a patent holder 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 for purposes of manufacturing compact discs compliant with the Orange Book standard …. 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. Not only would such a rule render licenses subject to invalidation on grounds unknown at the time of licensing, but it would also provide a strong incentive to litigation by any licensee, since the reward for showing that even a single license in a package was “nonessential” would be to render all the patents in the package unenforceable. For that reason as well, we reject the Commission’s ruling that package agreements of the sort entered into by Philips and the intervenors must be invalidated on the ground that they constitute per se patent misuse.…

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Finally, the Commission failed to consider the efficiencies that package licensing may produce because of the innovative character of the technology at hand. Given that the technology surrounding the Orange Book standard was still evolving, there were many uncertainties regarding what patents might be needed to produce the compact discs. As noted, package license agreements in which the royalty was based on the number of units produced, not the number of patents used to produce them, can resolve in advance all potential patent disputes between the licensor and the licensee, whereas licensing patent rights on a patent-by-patent basis can result in continuing disputes over whether the licensee’s technology infringes certain ancillary patents owned by the licensor that are not part of the group elected by the licensee. We therefore conclude that the line of analysis that the Commission employed in reaching its conclusion that Philips’s package licensing agreements are more anticompetitive than procompetitive, and thus are unlawful under the rule of reason, was predicated on legal errors and on factual findings that were not supported by substantial evidence. For these reasons, we cannot uphold the Commission’s decision that Philips’s patents are unenforceable because of patent misuse under the rule of reason.…

32. United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001) COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA United States and individual states brought antitrust action against manufacturer of personal computer operating system and Internet web browser. The United States District Court for the District of Columbia, Thomas Penfield Jackson, J., concluded that manufacturer had committed monopolization, attempted monopolization, and tying violations of the Sherman Act, 87 F. Supp. 2d 30, and issued remedial order requiring manufacturer to submit proposed plan of divestiture, 97 F. Supp. 2d 59. Manufacturer appealed, and states petitioned for certiorari. The Supreme Court declined to hear direct appeal, denied petition, and remanded, 530 U.S. 1301, 121 S. Ct. 25, 147 L. Ed. 2d 1048. The Court of Appeals held that: (1) manufacturer committed monopolization violation; (2) manufacturer did not commit attempted monopolization violation; (3) rule of reason, rather than per se analysis, applied to tying claim; (4) remand was required to determine if manufacturer committed tying violation; (5) vacation of remedies decree was required; and (6) district judge’s comments to the press while the case was pending required his disqualification on remand. Affirmed in part, reversed in part, and remanded in part.… Microsoft also contests the District Court’s determination of liability under § 1 of the Sherman Act. The District Court concluded that Microsoft’s contractual and technological bundling of the IE web browser (the “tied” product) with its Windows operating system (“OS”) (the “tying” product) resulted in a tying arrangement that was per se unlawful. […] We hold that the rule of reason, rather than per se analysis, should govern the legality of tying arrangements involving platform software products. The

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Supreme Court has warned that “‘[i]t is only after considerable experience with certain business relationships that courts classify them as per se violations.…’” Broad. Music, Inc. v. CBS, 441 U.S. 1, 9 (1979) (quoting United States v. Topco Assocs., 405 U.S. 596, 607-08 (1972)). While every “business relationship” will in some sense have unique features, some represent entire, novel categories of dealings. As we shall explain, the arrangement before us is an example of the latter, offering the first up-close look at the technological integration of added functionality into software that serves as a platform for third-party applications. There being no close parallel in prior antitrust cases, simplistic application of per se tying rules carries a serious risk of harm. Accordingly, we vacate the District Court’s finding of a per se tying violation and remand the case. Plaintiffs may on remand pursue their tying claim under the rule of reason. The facts underlying the tying allegation substantially overlap with those set forth … in connection with the §2 monopoly maintenance claim. The key District Court findings are that (1) Microsoft required licensees of Windows 95 and 98 also to license IE as a bundle at a single price … (2) Microsoft refused to allow OEMs to uninstall or remove IE from the Windows desktop …; (3) Microsoft designed Windows 98 in a way that withheld from consumers the ability to remove IE by use of the Add/Remove Programs utility …; and (4) Microsoft designed Windows 98 to override the user’s choice of default web browser in certain circumstances … The court found that these acts constituted a per se tying violation.… Although the District Court also found that Microsoft commingled operating system-only and browser-only routines in the same library files, … it did not include this as a basis for tying liability despite plaintiffs’ request that it do so … There are four elements to a per se tying violation: (1) the tying and tied goods are two separate products; (2) the defendant has market power in the tying product market; (3) the defendant affords consumers no choice but to purchase the tied product from it; and (4) the tying arrangement forecloses a substantial volume of commerce. See Eastman Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451, 461-62 (1992); Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 12-18 (1984). Microsoft does not dispute that it bound Windows and IE in the four ways the District Court cited. Instead it argues that Windows (the tying good) and IE browsers (the tied good) are not “separate products,” … and that it did not substantially foreclose competing browsers from the tied product market, … (Microsoft also contends that it does not have monopoly power in the tying product market, …, but, for reasons given in section II.A, we uphold the District Court’s finding to the contrary.) We first address the separate-products inquiry, a source of much argument between the parties and of confusion in the cases. Our purpose is to highlight the poor fit between the separate-products test and the facts of this case. We then offer further reasons for carving an exception to the per se rule when the tying product is platform software. In the final section we discuss the District Court’s inquiry if plaintiffs pursue a rule of reason claim on remand. The requirement that a practice involve two separate products before being condemned as an illegal tie started as a purely linguistic requirement: unless products are separate, one cannot be “tied” to the other. Indeed, the nature of the products involved in early tying cases—intuitively distinct items such as a movie projector and

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a film, Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502—led courts either to disregard the separate-products question, see, e.g., United Shoe Mach. Corp. v. United States, 258 U.S. 451 708 (1922), or to discuss it only in passing, see, e.g., Motion Picture Patents, 243 U.S. at 508, 512, 518. It was not until Times-Picayune Publishing Co. v. United States, 345 U.S. 594 (1953), that the separate-products issue became a distinct element of the test for an illegal tie. Id. at 614. Even that case engaged in a rather cursory inquiry into whether ads sold in the morning edition of a paper were a separate product from ads sold in the evening edition. The first case to give content to the separate-products test was Jefferson Parish, 466 U.S. 2. That case addressed a tying arrangement in which a hospital conditioned surgical care at its facility on the purchase of anesthesiological services from an affiliated medical group. The facts were a challenge for casual separate-products analysis because the tied service-anesthesia-was neither intuitively distinct from nor intuitively contained within the tying service-surgical care. A further complication was that, soon after the Court enunciated the per se rule for tying liability in International Salt Co. v. United States, 332 U.S. 392, 396 (1947), and Northern Pacific Railway Co. v. United States, 356 U.S. 1, 5-7 (1958), new economic research began to cast doubt on the assumption, voiced by the Court when it established the rule, that “‘tying agreements serve hardly any purpose beyond the suppression of competition,’” id. at 6, 78 (quoting Standard Oil of Cal. v. United States, 337 U.S. 293, 305-06 (1949)); see also Jefferson Parish, 466 U.S. at 15 n. 23 (citing materials); Fortner Enters. v. U.S. Steel Corp., 394 U.S. 495, 524-25 (1969) (Fortas, J., dissenting) (“Fortner I”). The Jefferson Parish Court resolved the matter in two steps. First, it clarified that “the answer to the question whether one or two products are involved” does not turn “on the functional relation between them…” Jefferson Parish, 466 U.S. at 19; see also id. at 19 n. 30. In other words, the mere fact that two items are complements, that “one … is useless without the other,” id., does not make them a single “product” for purposes of tying law. Accord Eastman Kodak, 504 U.S. at 463. Second, reasoning that the “definitional question [whether two distinguishable products are involved] depends on whether the arrangement may have the type of competitive consequences addressed by the rule [against tying],” Jefferson Parish, 466 U.S. at 21, the Court decreed that “no tying arrangement can exist unless there is a sufficient demand for the purchase of anesthesiological services separate from hospital services to identify a distinct product market in which it is efficient to offer anesthesiological services separately from hospital service,” id. at 21-22 (emphasis added); accord Eastman Kodak, 504 U.S. at 462. The Court proceeded to examine direct and indirect evidence of consumer demand for the tied product separate from the tying product. Direct evidence addresses the question whether, when given a choice, consumers purchase the tied good from the tying good maker, or from other firms. The Court took note, for example, of testimony that patients and surgeons often requested specific anesthesiologists not associated with a hospital. Jefferson Parish, 466 U.S. at 22. Indirect evidence includes the behavior of firms without market power in the tying good market, presumably on the notion that (competitive) supply follows demand. If competitive firms always bundle the tying and tied goods, then they are a single product.… Here the Court noted that only 27% of

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anesthesiologists in markets other than the defendant’s had financial relationships with hospitals, and that, unlike radiologists and pathologists, anesthesiologists were not usually employed by hospitals, i.e., bundled with hospital services. Jefferson Parish, 466 U.S. at 22 n. 36. With both direct and indirect evidence concurring, the Court determined that hospital surgery and anesthesiological services were distinct goods. To understand the logic behind the Court’s consumer demand test, consider first the postulated harms from tying. The core concern is that tying prevents goods from competing directly for consumer choice on their merits, i.e., being selected as a result of “buyers’ independent judgment,” id. at 13 (internal quotes omitted). With a tie, a buyer’s “freedom to select the best bargain in the second market [could be] impaired by his need to purchase the tying product, and perhaps by an inability to evaluate the true cost of either product.…” Id. at 15. Direct competition on the merits of the tied product is foreclosed when the tying product either is sold only in a bundle with the tied product or, though offered separately, is sold at a bundled price, so that the buyer pays the same price whether he takes the tied product or not. In both cases, a consumer buying the tying product becomes entitled to the tied product; he will therefore likely be unwilling to buy a competitor’s version of the tied product even if, making his own price/quality assessment, that is what he would prefer. But not all ties are bad. Bundling obviously saves distribution and consumer transaction costs.… This is likely to be true, to take some examples from the computer industry, with the integration of math co-processors and memory into microprocessor chips and the inclusion of spell checkers in word processors.… Cal. Computer Prods., Inc. v. IBM Corp., 613 F.2d 727, 744 & n. 29 (9th Cir. 1979) (memory). Bundling can also capitalize on certain economies of scope. A possible example is the “shared” library files that perform OS and browser functions with the very same lines of code and thus may save drive space from the clutter of redundant routines and memory when consumers use both the OS and browser simultaneously.… Indeed, if there were no efficiencies from a tie (including economizing on consumer transaction costs such as the time and effort involved in choice), we would expect distinct consumer demand for each individual component of every good. In a competitive market with zero transaction costs, the computers on which this opinion was written would only be sold piecemeal-keyboard, monitor, mouse, central processing unit, disk drive, and memory all sold in separate transactions and likely by different manufacturers. Recognizing the potential benefits from tying, see Jefferson Parish, 466 U.S. at 21 n. 33, the Court in Jefferson Parish forged a separate-products test that, like those of market power and substantial foreclosure, attempts to screen out false positives under per se analysis. The consumer demand test is a rough proxy for whether a tying arrangement may, on balance, be welfare-enhancing, and unsuited to per se condemnation. In the abstract, of course, there is always direct separate demand for products: assuming choice is available at zero cost, consumers will prefer it to no choice. Only when the efficiencies from bundling are dominated by the benefits to choice for enough consumers, however, will we actually observe consumers making independent purchases. In other words, perceptible separate demand is inversely proportional to net efficiencies. On the supply side, firms without market power will bundle two goods

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only when the cost savings from joint sale outweigh the value consumers place on separate choice. So bundling by all competitive firms implies strong net efficiencies. If a court finds either that there is no noticeable separate demand for the tied product or, there being no convincing direct evidence of separate demand, that the entire “competitive fringe” engages in the same behavior as the defendant, …, then the tying and tied products should be declared one product and per se liability should be rejected. Before concluding our exegesis of Jefferson Parish’s separate-products test, we should clarify two things. First, Jefferson Parish does not endorse a direct inquiry into the efficiencies of a bundle. Rather, it proposes easy-to-administer proxies for net efficiency. In describing the separate-products test we discuss efficiencies only to explain the rationale behind the consumer demand inquiry. To allow the separateproducts test to become a detailed inquiry into possible welfare consequences would turn a screening test into the very process it is expected to render unnecessary.… Second, the separate-products test is not a one-sided inquiry into the cost savings from a bundle. Although Jefferson Parish acknowledged that prior lower court cases looked at cost-savings to decide separate products, see id. at 22 n. 35, the Court conspicuously did not adopt that approach in its disposition of tying arrangement before it. Instead it chose proxies that balance costs savings against reduction in consumer choice. With this background, we now turn to the separate products inquiry before us. The District Court found that many consumers, if given the option, would choose their browser separately from the OS.… Turning to industry custom, the court found that, although all major OS vendors bundled browsers with their OSs, these companies either sold versions without a browser, or allowed OEMs or end-users either not to install the bundled browser or in any event to “uninstall” it.… The court did not discuss the record evidence as to whether OS vendors other than Microsoft sold at a bundled price, with no discount for a browserless OS, perhaps because the record evidence on the issue was in conflict.… Microsoft does not dispute that many consumers demand alternative browsers. But on industry custom Microsoft contends that no other firm requires non-removal because no other firm has invested the resources to integrate web browsing as deeply into its OS as Microsoft has.… (We here use the term “integrate” in the rather simple sense of converting individual goods into components of a single physical object (e.g., a computer as it leaves the OEM, or a disk or sets of disks), without any normative implication that such integration is desirable or achieves special advantages. Compare United States v. Microsoft Corp., 147 F.3d 935, 950 (D.C. Cir. 1998) (“Microsoft II”).) Microsoft contends not only that its integration of IE into Windows is innovative and beneficial but also that it requires non-removal of IE. In our discussion of monopoly maintenance we find that these claims fail the efficiency balancing applicable in that context. But the separate-products analysis is supposed to perform its function as a proxy without embarking on any direct analysis of efficiency. Accordingly, Microsoft’s implicit argument-that in this case looking to a competitive fringe is inadequate to evaluate fully its potentially innovative technological integration, that such a comparison is between apples and oranges-poses a legitimate objection to the operation of Jefferson Parish’s separate-products test for the per se rule.

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In fact there is merit to Microsoft’s broader argument that Jefferson Parish’s consumer demand test would “chill innovation to the detriment of consumers by preventing firms from integrating into their products new functionality previously provided by standalone products-and hence, by definition, subject to separate consumer demand.” … The per se rule’s direct consumer demand and indirect industry custom inquiries are, as a general matter, backward-looking and therefore systematically poor proxies for overall efficiency in the presence of new and innovative integration.… The direct consumer demand test focuses on historic consumer behavior, likely before integration, and the indirect industry custom test looks at firms that, unlike the defendant, may not have integrated the tying and tied goods. Both tests compare incomparables—the defendant’s decision to bundle in the presence of integration, on the one hand, and consumer and competitor calculations in its absence, on the other. If integration has efficiency benefits, these may be ignored by the Jefferson Parish proxies. Because one cannot be sure beneficial integration will be protected by the other elements of the per se rule, simple application of that rule’s separate-products test may make consumers worse off. In light of the monopoly maintenance section, obviously, we do not find that Microsoft’s integration is welfare-enhancing or that it should be absolved of tying liability. Rather, we heed Microsoft’s warning that the separate-products element of the per se rule may not give newly integrated products a fair shake. We now address directly the larger question as we see it: whether standard per se analysis should be applied “off the shelf” to evaluate the defendant’s tying arrangement, one that involves software that serves as a platform for third-party applications. There is no doubt that “[i]t is far too late in the history of our antitrust jurisprudence to question the proposition that certain tying arrangements pose an unacceptable risk of stifling competition and therefore are unreasonable ‘per se.’” Jefferson Parish, 466 U.S. at 9 (emphasis added). But there are strong reasons to doubt that the integration of additional software functionality into an OS falls among these arrangements. Applying per se analysis to such an amalgamation creates undue risks of error and of deterring welfare-enhancing innovation. The Supreme Court has warned that “‘[i]t is only after considerable experience with certain business relationships that courts classify them as per se violations.…’” … Yet the sort of tying arrangement attacked here is unlike any the Supreme Court has considered. The early Supreme Court cases on tying dealt with arrangements whereby the sale or lease of a patented product was conditioned on the purchase of certain unpatented products from the patentee. See Motion Picture Patents, 243 U.S. 502 (1917); United Shoe Mach., 258 U.S. 451 (1922); IBM Corp. v. United States, 298 U.S. 131 (1936); Int’l Salt, 332 U.S. 392 (1947). Later Supreme Court tying cases did not involve market power derived from patents, but continued to involve contractual ties. See Times-Picayune, 345 U.S. 594 (1953) (defendant newspaper conditioned the purchase of ads in its evening edition on the purchase of ads in its morning edition); N. Pac. Ry., 356 U.S. 1 (1958) (defendant railroad leased land only on the condition that products manufactured on the land be shipped on its railways); United States v. Loew’s Inc., 371 U.S. 38 (1962) (defendant distributor of copyrighted feature films conditioned the sale of desired films on the purchase of undesired films); U.S. Steel Corp. v. Fortner

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Enters., Inc., 429 U.S. 610 (1977) (“Fortner II”) (defendant steel company conditioned access to low interest loans on the purchase of the defendant’s prefabricated homes); Jefferson Parish, 466 U.S. 2 (1984) (defendant hospital conditioned use of its operating rooms on the purchase of anesthesiological services from a medical group associated with the hospital); Eastman Kodak, 504 U.S. 451 (1992) (defendant photocopying machine manufacturer conditioned the sale of replacement parts for its machines on the use of the defendant’s repair services). In none of these cases was the tied good physically and technologically integrated with the tying good. Nor did the defendants ever argue that their tie improved the value of the tying product to users and to makers of complementary goods. In those cases where the defendant claimed that use of the tied good made the tying good more valuable to users, the Court ruled that the same result could be achieved via quality standards for substitutes of the tied good. See, e.g., Int’l Salt, 332 U.S. at 397-98; IBM, 298 U.S. at 138-40. Here Microsoft argues that IE and Windows are an integrated physical product and that the bundling of IE APIs with Windows makes the latter a better applications platform for third-party software. It is unclear how the benefits from IE APIs could be achieved by quality standards for different browser manufacturers. We do not pass judgment on Microsoft’s claims regarding the benefits from integration of its APIs. We merely note that these and other novel, purported efficiencies suggest that judicial “experience” provides little basis for believing that, “because of their pernicious effect on competition and lack of any redeeming virtue,” a software firm’s decisions to sell multiple functionalities as a package should be “conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use.” N. Pac. Ry., 356 U.S. at 5 (emphasis added). Nor have we found much insight into software integration among the decisions of lower federal courts. Most tying cases in the computer industry involve bundling with hardware. See, e.g., Digital Equip. Corp. v. Uniq Digital Techs., Inc., 73 F.3d 756, 761 (7th Cir. 1996) (Easterbrook, J.) (rejecting with little discussion the notion that bundling of OS with a computer is a tie of two separate products); Datagate, Inc. v. Hewlett-Packard Co., 941 F.2d 864, 870 (9th Cir. 1991) (holding that plaintiff’s allegation that defendant conditioned its software on purchase of its hardware was sufficient to survive summary judgment); Digidyne Corp. v. Data Gen. Corp., 734 F.2d 1336, 1341-47 (9th Cir. 1984) (holding that defendant’s conditioning the sale of its OS on the purchase of its CPU constitutes a per se tying violation); Cal. Computer Prods., 613 F.2d at 743-44 (holding that defendant’s integration into its CPU of a disk controller designed for its own disk drives was a useful innovation and not an impermissible attempt to monopolize); ILC Peripherals Leasing Corp. v. IBM Corp., 448 F. Supp. 228, 233 (N.D. Cal. 1978) (finding that defendant’s integration of magnetic disks and a head/disk assembly was not an unlawful tie), aff’d per curiam sub. nom. Memorex Corp. v. IBM Corp., 636 F.2d 1188 (9th Cir. 1980); see also Transamerica Computer Co. v. IBM Corp., 698 F.2d 1377, 1382-83 (9th Cir. 1983) (finding lawful defendant’s design changes that rendered plaintiff peripheral maker’s tape drives incompatible with the defendant’s CPU). The hardware case that most resembles the present one is Telex Corp. v. IBM Corp., 367 F. Supp. 258 (N.D. Okla. 1973), rev’d on other grounds, 510 F.2d

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894 (10th Cir. 1975). Just as Microsoft integrated web browsing into its OS, IBM in the 1970s integrated memory into its CPUs, a hardware platform. A peripheral manufacturer alleged a tying violation, but the District Court dismissed the claim because it thought it inappropriate to enmesh the courts in product design decisions. Id. at 347. The court’s discussion of the tying claim was brief and did not dwell on the effects of the integration on competition or efficiencies. Nor did the court consider whether per se analysis of the alleged tie was wise. We have found four antitrust cases involving arrangements in which a software program is tied to the purchase of a software platform—two district court cases and two appellate court cases, including one from this court. The first case, Innovation Data Processing, Inc. v. IBM Corp., 585 F. Supp. 1470 (D.N.J. 1984), involved an allegation that IBM bundled with its OS a utility used to transfer data from a tape drive to a computer’s disk drive. Although the court mentioned the efficiencies achieved by bundling, it ultimately dismissed the per se tying claim because IBM sold a discounted version of the OS without the utility. Id. at 1475-76. The second case, A.I. Root Co. v. Computer/Dynamics, Inc., 806 F.2d 673 (6th Cir. 1986), was brought by a business customer who claimed that an OS manufacturer illegally conditioned the sale of its OS on the purchase of other software applications. The court quickly disposed of the case on the ground that defendant Computer/Dynamics had no market power. Id. at 675-77. There was no mention of the efficiencies from the tie. The third case, Caldera, Inc. v. Microsoft Corp., 72 F. Supp. 2d 1295 (D. Utah 1999), involved a complaint that the technological integration of MS-DOS and Windows 3.1 into Windows 95 constituted a per se tying violation. The court formulated the “single product” issue in terms of whether the tie constituted a technological improvement, ultimately concluding that Microsoft was not entitled to summary judgment on that issue. Id. at 1322-28. The software case that bears the greatest resemblance to that at bar is, not surprisingly, Microsoft II, 147 F.3d 935, where we examined the bundling of IE with Windows 95. But the issue there was whether the bundle constituted an “integrated product” as the term was used in a 1994 consent decree between the Department of Justice and Microsoft. Id. at 939. We did not consider whether Microsoft’s bundling should be condemned as per se illegal. We certainly did not make any finding that bundling IE with Windows had “no purpose except stifling of competition,” White Motor, 372 U.S. at 263, an important consideration in defining the scope of any of antitrust law’s per se rules, see Cont’l T.V., 433 U.S. at 57-59. While we believed our interpretation of the term “integrated product” was consistent with the test for separate products under tying law, we made clear that the “antitrust question is of course distinct.” Microsoft II, 147 F.3d at 950 n. 14. We even cautioned that our conclusion that IE and Windows 95 were integrated was “subject to reexamination on a more complete record.” Id. at 952. To the extent that the decision completely disclaimed judicial capacity to evaluate “high-tech product design,” id., it cannot be said to conform to prevailing antitrust doctrine (as opposed to resolution of the decree-interpretation issue then before us). In any case, mere review of asserted breaches of a consent decree hardly constitutes enough “experience” to warrant application of per se analysis. See Broad. Music, 441 U.S. at 10-16 (refusing to apply per se analysis to defendant’s blanket

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licenses even though those licenses had been thoroughly investigated by the Department of Justice and were the subject of a consent decree that had been reviewed by numerous courts). While the paucity of cases examining software bundling suggests a high risk that per se analysis may produce inaccurate results, the nature of the platform software market affirmatively suggests that per se rules might stunt valuable innovation. We have in mind two reasons. First, as we explained in the previous section, the separate-products test is a poor proxy for net efficiency from newly integrated products. Under per se analysis the first firm to merge previously distinct functionalities (e.g., the inclusion of starter motors in automobiles) or to eliminate entirely the need for a second function (e.g., the invention of the stain-resistant carpet) risks being condemned as having tied two separate products because at the moment of integration there will appear to be a robust “distinct” market for the tied product.… Rule of reason analysis, however, affords the first mover an opportunity to demonstrate that an efficiency gain from its “tie” adequately offsets any distortion of consumer choice. See Grappone, Inc. v. Subaru of New England, Inc., 858 F.2d 792, 799 (1st Cir. 1988) (Breyer, J.); see also Town Sound & Custom Tops, Inc. v. Chrysler Motor Corp., 959 F.2d 468, 482 (3d Cir. 1992); Kaiser Aluminum & Chem. Sales, Inc. v. Avondale Shipyards, Inc., 677 F.2d 1045, 1048-49 n. 5 (5th Cir. 1982). The failure of the separate-products test to screen out certain cases of productive integration is particularly troubling in platform software markets such as that in which the defendant competes. Not only is integration common in such markets, but it is common among firms without market power. We have already reviewed evidence that nearly all competitive OS vendors also bundle browsers. Moreover, plaintiffs do not dispute that OS vendors can and do incorporate basic internet plumbing and other useful functionality into their OSs. […] Firms without market power have no incentive to package different pieces of software together unless there are efficiency gains from doing so. The ubiquity of bundling in competitive platform software markets should give courts reason to pause before condemning such behavior in less competitive markets. Second, because of the pervasively innovative character of platform software markets, tying in such markets may produce efficiencies that courts have not previously encountered and thus the Supreme Court had not factored into the per se rule as originally conceived. For example, the bundling of a browser with OSs enables an independent software developer to count on the presence of the browser’s APIs, if any, on consumers’ machines and thus to omit them from its own package. […] It is true that software developers can bundle the browser APIs they need with their own products, […], but that may force consumers to pay twice for the same API if it is bundled with two different software programs. It is also true that OEMs can include APIs with the computers they sell, id., but diffusion of uniform APIs by that route may be inferior. First, many OEMs serve special subsets of Windows consumers, such as home or corporate or academic users. If just one of these OEMs decides not to bundle an API because it does not benefit enough of its clients, ISVs that use that API might have to bundle it with every copy of their program. Second, there may be a substantial

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lag before all OEMs bundle the same set of APIs-a lag inevitably aggravated by the first phenomenon. In a field where programs change very rapidly, delays in the spread of a necessary element (here, the APIs) may be very costly. Of course, these arguments may not justify Microsoft’s decision to bundle APIs in this case, particularly because Microsoft did not merely bundle with Windows the APIs from IE, but an entire browser application (sometimes even without APIs, […]). A justification for bundling a component of software may not be one for bundling the entire software package, especially given the malleability of software code. […]. Furthermore, the interest in efficient API diffusion obviously supplies a far stronger justification for simple pricebundling than for Microsoft’s contractual or technological bars to subsequent removal of functionality. But our qualms about redefining the boundaries of a defendant’s product and the possibility of consumer gains from simplifying the work of applications developers makes us question any hard and fast approach to tying in OS software markets. There may also be a number of efficiencies that, although very real, have been ignored in the calculations underlying the adoption of a per se rule for tying. We fear that these efficiencies are common in technologically dynamic markets where product development is especially unlikely to follow an easily foreseen linear pattern. Take the following example from ILC Peripherals, 448 F. Supp. 228, a case concerning the evolution of disk drives for computers. When IBM first introduced such drives in 1956, it sold an integrated product that contained magnetic disks and disk heads that read and wrote data onto disks. Id. at 231. Consumers of the drives demanded two functions-to store data and to access it all at once. In the first few years consumers’ demand for storage increased rapidly, outpacing the evolution of magnetic disk technology. To satisfy that demand IBM made it possible for consumers to remove the magnetic disks from drives, even though that meant consumers would not have access to data on disks removed from the drive. This componentization enabled makers of computer peripherals to sell consumers removable disks. Id. at 231-32. Over time, however, the technology of magnetic disks caught up with demand for capacity, so that consumers needed few removable disks to store all their data. At this point IBM reintegrated disks into their drives, enabling consumers to once again have immediate access to all their data without a sacrifice in capacity. Id. A manufacturer of removable disks sued. But the District Court found the tie justified because it satisfied consumer demand for immediate access to all data, and ruled that disks and disk heads were one product. Id. at 233. A court hewing more closely to the truncated analysis contemplated by Northern Pacific Railway would perhaps have overlooked these consumer benefits. These arguments all point to one conclusion: we cannot comfortably say that bundling in platform software markets has so little “redeeming virtue,” N. Pac. Ry., 356 U.S. at 5, and that there would be so “very little loss to society” from its ban, that “an inquiry into its costs in the individual case [can be] considered … unnecessary.” Jefferson Parish, 466 U.S. at 33-34 (O’Connor, J., concurring). We do not have enough empirical evidence regarding the effect of Microsoft’s practice on the amount of consumer surplus created or consumer choice foreclosed by the integration of added functionality into platform software to exercise sensible judgment regarding that entire class of behavior. (For some issues we have no data.) “We need to know more than we

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do about the actual impact of these arrangements on competition to decide whether they … should be classified as per se violations of the Sherman Act.” White Motor, 372 U.S. at 263. Until then, we will heed the wisdom that “easy labels do not always supply ready answers,” Broad. Music, 441 U.S. at 8, and vacate the District Court’s finding of per se tying liability under Sherman Act §1. We remand the case for evaluation of Microsoft’s tying arrangements under the rule of reason.… That rule more freely permits consideration of the benefits of bundling in software markets, particularly those for OSs, and a balancing of these benefits against the costs to consumers whose ability to make direct price/quality tradeoffs in the tied market may have been impaired. See Jefferson Parish, 466 U.S. at 25 nn. 41-42 (noting that per se rule does not broadly permit consideration of procompetitive justifications); id. at 34-35 (O’Connor, J., concurring); N. Pac. Ry., 356 U.S. at 5. Our judgment regarding the comparative merits of the per se rule and the rule of reason is confined to the tying arrangement before us, where the tying product is software whose major purpose is to serve as a platform for third-party applications and the tied product is complementary software functionality. While our reasoning may at times appear to have broader force, we do not have the confidence to speak to facts outside the record, which contains scant discussion of software integration generally. Microsoft’s primary justification for bundling IE APIs is that their inclusion with Windows increases the value of third-party software (and Windows) to consumers.… Because this claim applies with distinct force when the tying product is platform software, we have no present basis for finding the per se rule inapplicable to software markets generally. Nor should we be interpreted as setting a precedent for switching to the rule of reason every time a court identifies an efficiency justification for a tying arrangement. Our reading of the record suggests merely that integration of new functionality into platform software is a common practice and that wooden application of per se rules in this litigation may cast a cloud over platform innovation in the market for PCs, network computers and information appliances.… 24. The Kentucky Fried Chicken opinion concerns tying in the context of a franchising agreement. The Fifth Circuit, in spite of not seeing a case of tying, but rather of quality control, made the important remark that “ties themselves are not as completely objectionable in the franchise context as in the contexts in which tying law originally developed.” In the same direction, a WIPO questionnaire distributed in 2010 asked Member States the following question: “Would the authorities allow certain anticompetitive practices in the context of franchising agreements for the sake of social considerations?” A significant number of responses were affirmative (13 out of 29). The United States government answered “no,” but possibly U.S. courts, such as the Fifth Circuit, would have a different view.5

5. See Survey on Measures to Address the Interface between Antitrust and Franchising Agreements, CDIP/4/4 REV./STUDY/INF/4, of June 23, 2011, available at .

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Nuno Pires de Carvalho 33. Kentucky Fried Chicken Corp. v. Diversified Packaging Corp., 549 F.2d 368 (5th Cir. 1977)

UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT Opinion by Goldberg, Circuit Judge. This case presents us with something mundane, something novel, and something bizarre. The mundane includes commercial law issues now well delimited by precedent. The novel aspects of the case center on intriguing and difficult interrelationships between trademark and antitrust concepts. And the bizarre element is the facially implausible—some might say unappetizing—contention that the man whose chicken is “finger-lickin’ good” has unclean hands. Kentucky Fried Chicken Corporation, a franchisor of fast-food restaurants, brought this action claiming that defendants were infringing its trademarks and engaging in unfair competition by their manner of selling boxes and other supplies to Kentucky Fried franchisees. Defendants placed Kentucky Fried’s trademarks on the supplies without Kentucky Fried’s consent, and they allegedly misled franchisees with respect to the supplies’ source and quality. Defendants counterclaimed, asserting that Kentucky Fried’s franchise agreements, which required franchisees to buy supplies from approved sources, constituted an illegal tying arrangement. The district court, in a penetrating opinion reprinted at 376 F. Supp. 1136 (S.D. Fla.1974), ruled in Kentucky Fried’s favor on every issue and enjoined defendants’ activities. Although some of the issues are not without difficulty, and although we find that franchisors must walk a narrow path when including in their franchise agreements clauses requiring franchisees to buy supplies from approved sources, we affirm. Colonel Harland Sanders founded the Kentucky Fried Chicken business in the early 1950s. The Colonel prepared chicken in accordance with his own secret recipe, and among the Colonel’s achievements has been to convince much of the American public that his product bears a close resemblance to the southern fried chicken that preceded peanuts as the south’s most famous cuisine. The Colonel no longer owns the business, having transferred it in five different segments. The plaintiff, Kentucky Fried Chicken Corporation, now conducts the business in 47 states, and four unrelated entities conduct the business in the other three states. Although Kentucky Fried owns some retail stores, its primary manner of conducting business, and the one of importance here, is franchising local outlets for its product. The franchise agreements require franchisees to purchase various supplies and equipment from Kentucky Fried or from sources it approves in writing. The agreements provide that such approval “shall not be unreasonably withheld.” Before purchasing supplies from a source not previously approved, a franchisee must submit a written request for approval, and Kentucky Fried may require that samples from the supplier be submitted for testing. Of crucial importance is the fact that Kentucky Fried has never refused a request to approve a supplier. The supplies that are subject to the approved-source requirement include those around which this litigation revolves: three sizes of carry-out chicken boxes, napkins,

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towelettes, and plastic eating utensils technically known as “sporks.” Kentucky Fried sells these items to its franchisees, but under the franchise agreement the franchisees may also purchase any or all of these supplies from other approved sources. There are nine independent approved sources of cartons and a tenth that is a subsidiary of Kentucky Fried. The specifications for these supplies require, among other things, that they bear various combinations of Kentucky Fried’s trademarks. The marks, now widely known to the American public, include (1) “it’s finger-lickin’ good,” (2) “Colonel Sanders’ Recipe,” (3) the portrait of Harland Sanders, (4) “Kentucky Fried Chicken,” and (5) “Colonel Sanders’ Recipe, Kentucky Fried Chicken.” Upon its formation in 1972, defendant Diversified Container Corporation (Container) began using Kentucky Fried’s marks without its consent. Container used the marks on chicken cartons, napkins and towelettes that it advertised and sold to Kentucky Fried franchisees. Unlike other suppliers who sought and received approval, Container never requested that Kentucky Fried approve it as a source of these products, and in important respects Container’s products failed to meet Kentucky Fried’s specifications. Container garnered buyers for its low quality imitations of Kentucky Fried’s supplies by making inaccurate and misleading statements. Container’s advertisements invited franchisees to “buy direct and save” and represented that Container’s products met “all standards.” Container affixed Kentucky Fried’s trademarks to the shipping boxes in which it delivered chicken cartons to franchisees. And when asked by franchisees whether Container was an “approved supplier” of cartons, Container employees evaded the question and said that Container sold “approved boxes.” Kentucky Fried brought this suit to enjoin Container’s activities, relying upon the related theories of unfair competition and trademark infringement. Kentucky Fried did not seek damages. Defendants counterclaimed seeking treble damages for purported antitrust violations. The case was tried to the court, which resolved all claims in Kentucky Fried’s favor. The court’s findings of fact are incorporated in its memorandum opinion. See 376 F. Supp. 1136. The court entered an appropriate injunction. On this appeal the central issues are whether the district court correctly held defendants liable on the unfair competition and trademark infringement theories and whether the court correctly held that Kentucky Fried’s franchise arrangements were not shown to violate the antitrust laws.… We find a kernel of truth in all Kentucky Fried’s contentions and therefore affirm. Container’s antitrust counterclaim forces us to confront three contentions: (1) that Kentucky Fried’s conduct constitutes a tie-in and thus a per se antitrust violation, (2) that if Kentucky Fried’s approved-source requirement is not a tie it should nonetheless be held to constitute a new category of per se offense, and (3) that in any event Kentucky Fried’s arrangement contravenes the rule of reason. We reject each contention of the triad. Container’s primary contention is that Kentucky Fried has established a tying arrangement in violation of §1 of the Sherman Act, 15 U.S.C. §1. That section prohibits “every contract, combination … or conspiracy in restraint of trade or commerce.” For the most part an arrangement runs afoul of the §1 mandate only if its restraint on trade

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is unreasonable. See, e.g., Standard Oil Co. v. United States, 221 U.S. 1 (1911); Chicago Board of Trade v. United States, 246 U.S. 231 (1918). A §1 plaintiff must therefore generally establish the anticompetitive impact of the conduct it challenges. Certain categories of business arrangements, however, exhibit a high likelihood of anticompetitive impact and offer virtually no prospect at all of enhancing competition. With respect to such arrangements, antitrust plaintiffs need not demonstrate unreasonableness; the conduct constitutes a per se violation of the Sherman Act.… The per se label indicates that a plaintiff need not demonstrate that the effects of the tie are unreasonable. Indeed, not only is the plaintiff relieved from establishing that the effects are unreasonable, but in addition the defendant is not free to demonstrate that the effects are reasonable or even affirmatively desirable. The competitive impact of the arrangement simply is not an issue for trial. Unless a defendant can establish certain narrow affirmative defenses, a finding that the defendant’s conduct falls within the category of per se tying arrangements disposes of the case in the plaintiff’s favor.6 Here, as elsewhere, however, the per se label can sometimes prove misleading. Per se analysis is susceptible to the unwarranted inference that a plaintiff prevails in a tying case merely by finding some way to characterize the defendant’s conduct as a tie. A tie can be generally defined as an arrangement under which a seller agrees to sell one product (the “tying product”) only on the condition that the buyer also purchase a second product (the “tied product”). See Northern Pacific, supra, 356 U.S. at 5-6. To bring a defendant’s conduct within the category of ties that are per se violations of the Sherman Act, however, a plaintiff must go beyond some colorable characterization of the arrangement as fitting this rough definition. A plaintiff must show that the challenged arrangement is in fact a tie: that two separate products are involved and that, in addition to complying with the literal terms of the imprecise definition, the seller’s behavior follows the general pattern found unacceptable in the earlier tying cases. To measure an arrangement against that general pattern we must take into account the principal evils of tie-ins: they may foreclose the tying party’s competitors from a segment of the tied product market, and they may deprive the tie’s victims of the advantages of shopping around. See Northern Pacific, supra, 356 U.S. at 6. Furthermore, an arrangement falls within the category of per se tying violations only if the seller has sufficient economic power with respect to the tying product appreciably to restrain free competition in the market for the tied product and only if a “not insubstantial” amount of interstate commerce is affected. See, e.g., Fortner Enterprises, Inc. v. United States Steel Corp., 394 U.S. 495 (1969); Northern Pacific, supra; Carpa, Inc. v. Ward Foods, Inc., 536 F.2d 39 (5th Cir. 1976). The problem in the case at bar is to determine whether Kentucky Fried’s arrangement is in fact a tie—i.e., whether its behavior follows the general pattern found unacceptable in earlier tying cases. We begin with an analysis of tying in the

6. As mentioned in several of the U.S. opinions selected, the Supreme Court has abandoned the per se approach to tying, and instead submitted the antitrust analysis of tying agreements to the rule of reason. See Jefferson Parish Hosp. Dist. v. Hyde, 466 U.S. 2 (1984). Jefferson Paris is about tying of medical services, but its reasoning applies to tying of intellectual property rights.

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context of franchise operations. The issue has taken on considerable significance in recent years; franchising has increased while tying strictures have grown tighter. In the commonly recurring situation, the tying product is the franchise itself, and the tied products may be such things as the equipment the franchisee will use to conduct the business, the ingredients of the goods the franchisee will ultimately sell to consumers, or the supplies the franchisee will distribute to the public in connection with the main product. As an original matter it is less than self-evident that such arrangements should be treated as garden-variety tie-ins, to be analyzed in accordance with the same tying principles developed in other contexts. Unlike that of the tying party in a prototypal tying case, a franchisor’s own success may depend in large measure on the success of the tie’s “victim,” the franchisee. The franchisor will succeed only by establishing a favorable reputation among the consuming public, and in building that reputation the franchisor must depend largely on the quality of the franchisee’s performance. A franchisor will rarely have an opportunity to explain to a dissatisfied customer that the fault was only that of the particular franchisee. The franchisor may therefore have legitimate as well as illegitimate reasons for restraining the franchisee’s choices in the tied product market. The tie may have a benevolent or malevolent loop. Although in the archetypal case “tying arrangements serve hardly any purpose beyond the suppression of competition,” Standard Oil Co. v. United States, 337 U.S. 293 (1949), in the franchising context ties may well serve acceptable purposes. Nevertheless, tying principles are fully applicable to franchise sales. See Carpa, Inc. v. Ward Foods, Inc., 536 F.2d 39 (5th Cir. 1976); Warriner Hermetics, Inc. v. Copeland Refrigerator Corp., 463 F.2d 1002 (5th Cir. 1972); cert. denied, 409 U.S. 1086, 93 S. Ct. 688, 34 L. Ed. 2d 673 (1972); Siegel v. Chicken Delight, Inc., 448 F.2d 43 (9th Cir. 1971). As these cases make clear, when a franchisor conditions the sale of a franchise on the buyer’s agreement to buy additional products from the franchisor, the law of tying comes into play. In order to establish a per se violation, the tying claimant need only demonstrate the requisite economic power and “not insubstantial” effect on commerce. Moreover, a franchisor who requires franchisees to use trademarked supplies does not escape the impact of tying principles to any extent. The franchisor’s right to prevent others from selling supplies bearing its trademarks must yield to the antitrust laws’ command to open the tied market to competitors. See Chicken Delight, supra, 448 F.2d at 52; cf. Timken Roller Bearing Co. v. United States, 341 U.S. 593, 599 (1951). Despite this relatively low threshold for invoking the per se doctrine, however, the franchisor retains a potentially significant defense—one designed to accommodate the franchisor’s interests in the franchisee’s performance. The franchisor is free to demonstrate that the tie constitutes a necessary device for controlling the quality of the end product sold to the consuming public. See Carpa, supra, 536 F.2d at 46-47; Warriner Hermetics, supra, 463 F.2d at 1016; cf. Dehydrating Process Co. v. A. O. Smith Corp., 292 F.2d 653 (1st Cir.), cert. denied, 368 U.S. 931 (1961) (not in franchising context); United States v. Jerrold Electronics Corp., 187 F. Supp. 545 (E.D. Pa. 1960), aff’d per curiam, 365 U.S. 567 (1961) (same). Product protection through tying can have a legal legitimacy. As part of this defense, however, the franchisor must establish that the tie constitutes the method of maintaining quality that imposes the least burden

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on commerce. If there are less burdensome alternatives, a franchisor is obligated to employ them rather than the tie. See Carpa, supra, 536 F.2d at 47; Warriner Hermetics, supra, 463 F.2d at 1016; cf. Copper Liquor, Inc. v. Adolph Coors Co., 506 F.2d 934 (5th Cir. 1975) (not in tying context). The burden of proof on this issue rests with the franchisor seeking to justify the tie, and the burden is a heavy one. The defense fails in the usual situation because specification of the type and quality of the product to be used in connection with the tying device is protection enough.… The only situation, indeed, in which the protection of good will may necessitate the use of tying clauses is where specifications for a substitute would be so detailed that they could not practicably be supplied. Standard Oil Co. v. United States, 337 U.S. 293, 306 (1949). With this background we turn to Container’s claim that Kentucky Fried’s arrangement constitutes a tie. The legal tightrope upon which we walk is very taut. Kentucky Fried does not expressly require franchisees to purchase from it the allegedly tied products. Instead, the franchise agreements permit franchisees to purchase the supplies from any source Kentucky Fried approves in writing. At the time of trial there were ten approved sources for cartons, only one of which was an affiliate of Kentucky Fried. Franchisees were free to recommend additional suppliers for approval, and the franchise agreement mandated that Kentucky Fried’s approval “not be unreasonably withheld.” The difference between this arrangement and a traditional tie is readily apparent. Here the franchise agreement does not require franchisees to take the “tied” product (supplies) from Kentucky Fried in order to obtain the “tying” product (the franchise). Franchisees need not purchase a single unit of the supplies in question from Kentucky Fried; they can take their entire requirements from other sources. Container, however, argues that the effect of the agreement is the same as a traditional tie because Kentucky Fried coerces franchisees into purchasing from it the supplies in question. We agree with Container that if such coercion were proved, the per se doctrine would apply. A tie need not be reduced to writing to come within the per se proscription. A tie claimant establishes a tie when it proves that a franchisor makes a practice of coercing franchisees into purchasing supplies or other products from the franchisor. See Response of Carolina, Inc. v. Leasco Response, Inc., 537 F.2d 1307, 1326-31 (5th Cir. 1976). In such cases sale of the franchise is, as a practical matter, conditioned upon sale of the tied supplies. The claimant then need only establish the tying prerequisites—sufficient economic power with respect to the tying product appreciably to restrain free competition in the market for the tied product and a “not insubstantial” amount of affected commerce in the tied product market. Kentucky Fried concedes that these prerequisites are satisfied here. Kentucky Fried denies, however, that Container succeeded in proving that franchisees were coerced into taking their supplies from Kentucky Fried. The burden of proof on this issue rests on Container; demonstrating the existence of a tie is part of the claimant’s case in chief. See Response of Carolina, Inc. v. Leasco, Inc., supra, 537 F.2d at 1328. The district court resolved the question against Container, concluding that Kentucky Fried had not coerced its franchisees in this regard. Coercion is a question of

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fact, and [HN11] we therefore review the district court’s conclusion only to determine whether it is clearly erroneous. See Fed. R. Civ. P. 52. Our review of the record convinces us that Container has not only failed to demonstrate clear error but has also failed to adduce any support at all for its allegation of coercion. Coercion can be circumstantially established; it need not be an instrument under seal or proven with sound and music. Coercion cannot, however, be merely conjured. It is neither a fantasy nor a figment. It is a fact that must be established, whether inferentially or deductively. A fundamental distinction must be drawn between coercing franchisees to purchase from Kentucky Fried and coercing franchisees to purchase from approved sources. The record is barren of any suggestion that Kentucky Fried engaged in the former type of coercion to any extent at all. Thus Kentucky Fried left franchisees free to purchase the purportedly “tied” products from sources other than Kentucky Fried, sources in which Kentucky Fried had no interest and on whose sales Kentucky Fried earned no commission. We conclude that this arrangement simply does not constitute a tie. A monolithic tie may bring down the wrath of per se guilt, but not every use of string tangles with the antitrust laws. The principal evils of tie-ins are the foreclosure of competitors in the tied market and the denial to buyers of the advantages of shopping around. See Northern Pacific Railway Co. v. United States, 356 U.S. 1, 6 (1958). Kentucky Fried’s system, at least on its face, presents neither of these evils in anything like the degree associated with tie-ins. Competitors in the supplies market are not foreclosed from reaching a single potential buyer. Such competitors are subject to the approval requirement, but the record contains no showing that the approval requirement has had the effect in practice of foreclosing competitors in the supplies market. Kentucky Fried’s uncontradicted assertion is that it has never withheld approval from a single supplier who requested it. We might speculate that a new entrant’s arrival might be delayed, but nothing in this record demonstrates that the delay would be substantial, and Container does not aver that the perceived onerousness of this delay prevented it from seeking approval. This record shows no closure of competition; it was an invitational affair. The rope hung loosely. It was not a noose. Turning to the second principal evil presented by tie-ins, we find that it, too, is lacking. The franchisees retain the option to shop around. The option is limited to approved suppliers, but there are ten such suppliers of cartons, and franchisees are free to nominate additional suppliers whenever they can be found. There is no allegation that Kentucky Fried exerts any influence over the terms at which its competitors sell to franchisees, and there has been no showing that the competing suppliers have combined to reduce the benefits of competition to the franchisees. Franchisees might fare better if fifty or a hundred suppliers competed for their business, but a market with ten suppliers and unrestrained entry surely poses a far different problem than the market available to the victim of a traditional tie: one supplier and no entry. We conclude that the tie-in’s second principal evil, like the first, is not present in the approved-source system disclosed by this record. When the victim of an alleged tie-in is not required to buy a single unit of the tied product from the tying party or from

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any source in which the tying party has an interest or on whose sales the tying party earns a commission, the arrangement simply does not constitute a tie. Kentucky Fried has not imposed a tie-in. That the arrangement is not a tie does not, of course, prevent per se treatment; tying is not the only per se antitrust violation. We deem it inappropriate, however, to add approved-source requirements to the list of per se violations. When business arrangements exhibit consistently adverse competitive effects or are totally without redeeming virtue, per se treatment is desirable. Proving the adverse consequences in particular circumstances may prove difficult and, at any rate, will consume valuable court time. The chance that anticompetitive effects will go undetected and the cost in judicial resources make the prudent course to condemn all arrangements in a given category rather than to attempt to sort the harmful from the harmless. See, e.g., Northern Pacific, supra, 356 U.S. at 5. We are not prepared to say, however, that approved-source requirements are so universally devoid of redeeming virtue that they warrant per se treatment. As we noted in developing the background law of franchise tying, ties themselves are not as completely objectionable in the franchise context as in the contexts in which tying law originally developed. Moreover, franchise arrangements may sometimes create better competitive markets than would otherwise exist. A system under which an independent franchisee’s choices are somewhat restricted may nevertheless prove superior to a system in which retail outlets are owned by the national firm. If, for example, Kentucky Fried had chosen not to franchise local outlets but rather to own them outright, the antitrust laws would leave it relatively free to supply the individual stores solely through the national office. Competition at the national level for Kentucky Fried’s supplies business would continue, just as competition to sell Kentucky Fried the supplies it will in turn sell to franchisees is currently unencumbered. But competition at the local level would be as nonexistent under a system of national ownership of local stores as it would be under a franchise system utilizing explicit ties. These principles are insufficient to take franchise tying out of the per se arena. The existence of the quality defense assures that if a tie is ever truly essential to maintenance of the franchise method of conducting business, the tie will be permissible. To be sure, cases will undoubtedly occur in which ties, while in no sense essential to retention of a franchise arrangement, will prove beneficial to or convenient for the franchisor, and in such cases we could speculate that the somewhat harsh treatment of ties might induce a company to opt for national ownership rather than franchising. We can safely assume, however, that for the most part the application of tying principles to franchise operations will not affect a business’s decision whether to engage in franchising. When we turn from tying to approved-source requirements, however, the situation is somewhat different. The threat that franchisors will abandon franchising does not affect us, but the potential pro-competitive effects of franchising lead us to proceed cautiously lest we unduly shackle franchisors without achieving discernible competitive benefits. We must encourage business ingenuity so long as it is not competitively stifling. We deal here not with tie-ins, whose adverse effects and lack of redeeming virtue are by now quite familiar, but instead with approved-source

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requirements. When we become more familiar with large-scale franchising and with approved-source requirements, we may discern that the latter are wholly unnecessary to the former. Indeed, we may one day learn that approved-source requirements are consistently hurtful of competition or that sorting the anti-competitive provisions from the innocuous ones is a task too elusive or time consuming to warrant the effort. It will be time enough, however, to declare such requirements to be per se violations when that day arrives. It is enough to decide today’s cases today and leave future cases to the wisdom and experience of future years. Economic decisions derive from contemporary economic analysis. The Supreme Court adopted this cautious approach when first confronted with vertical territorial restrictions, saying: We do not know enough of the economic and business stuff out of which these arrangements emerge to be certain.… We need to know more than we do about the actual impact of these arrangements on competition to decide whether they have such a “pernicious effect on competition and lack … any redeeming virtue” [Northern Pac. R. Co. v. United States, 356 U.S. 1, 5 (1958)] and therefore should be classified as per se violations of the Sherman Act.

White Motor Co. v. United States, 372 U.S. 253, 263 (1963). We think we should likewise adopt that prudent course here. We are unable at this time to declare approved-source provisions per se violations. Our conclusion is that Kentucky Fried has not committed a per se antitrust violation: it has not established a de facto tie through coercive tactics, and its approved-source provision is not a per se violation. Container’s attack on Kentucky Fried’s arrangement is not yet exhausted, however, for the rule of reason remains. An antitrust claimant who unsuccessfully seeks to establish a per se violation may nonetheless prevail by showing that its adversary’s conduct unreasonably restrains competition. See Fortner Enterprises, Inc. v. United States Steel Corp., 394 U.S. 495, 499-500. The burden of proving unreasonable effects rests with the antitrust plaintiff. In the case at bar Container has failed to carry this burden. First, Container has not demonstrated that Kentucky Fried’s arrangement adversely affects competition. Indeed, Container has presented no evidence at all of the actual competitive effect of Kentucky Fried’s system. Antitrust claims need not be established by Euclidean proof, but they cannot be merely fantasized. For all that appears in this record, competition among suppliers of the franchisees is as open and vigorous as it would be under a system in which Kentucky Fried exerted no control at all over franchisees. Kentucky Fried has excluded not a single supplier from the market; it has narrowed the negotiations between franchisees and their suppliers in not a single respect. The approved-source provision is hardly a boon to competition, but on this record we can only conclude that this approved-source requirement is as innocuous as any could be. Unless we were willing to condemn all approved-source requirements, we could not condemn this one. We have refused, however, to make such provisions per se violations, and Container’s failure to adduce evidence of this provision’s adverse impact therefore defeats its claim.

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Moreover, Container’s proof is deficient in another respect. Even if a franchisor’s conduct adversely affects competition, the conduct does not contravene the rule of reason if it is designed to control the quality of the franchisee’s product and if the gain in quality is more beneficial than the attendant detriment to competition. Here, Kentucky Fried seeks to justify its approved-source requirement as a device for controlling quality. Kentucky Fried’s argument possesses a substantial measure of intuitive appeal. A customer dissatisfied with one Kentucky Fried outlet is unlikely to limit his or her adverse reaction to the particular outlet; instead, the adverse reaction will likely be directed to all Kentucky Fried stores. The quality of a franchisee’s product thus undoubtedly affects Kentucky Fried’s reputation and its future success. Moreover, this phenomenon is not limited to the quality of the chicken itself. Finger-lickin’ good chicken alone does not a satisfied customer make. Kentucky Fried has a legitimate interest in whether cartons are so thin that the grease leaks through or heat readily escapes, in whether the packet of utensils given a carry-out customer contains everything it should and in whether the towelette contains a liquid that will adequately perform the Herculean task of removing Augean refuse from the customer’s face and hands. Kentucky Fried contends that by approving sources only if they comply with minimum standards, it ensures that the various supplies will not be of such poor quality that customers will be alienated. Container strongly counters that the quality control program is a sham, but aside from its own vociferous lamentations Container marshals no support for its contention. In this respect it is important to note that Container bears the burden of proof; we are now analyzing quality control as an element of Container’s claim that the approved-source provision is an unreasonable restraint of trade. We must emphasize the distinction between quality control as an affirmative defense to a per se tying violation—with the defendant bearing the burden of proof and having to establish that the tie-in is the least burdensome method for effectively controlling quality—and quality control as a factor in determining whether the defendant’s conduct accords with the rule of reason. We deal here with the latter situation. Kentucky Fried’s reliance on the quality control rationale therefore is not necessarily misplaced solely because less burdensome alternatives for controlling quality are available. The presence of such alternatives is a factor to be considered in the reasonableness analysis, but it is not necessarily the decisive factor. Container has failed to establish that Kentucky Fried’s system is not a reasonable means of controlling quality. Kentucky Fried must not be compelled to subject its chicken to the vagaries of unsuitable packaging. We therefore conclude that Container has not prevailed on its rule-of-reason contention, both because it has failed to demonstrate adverse competitive impacts and because it has failed to show that Kentucky Fried’s system is not a reasonable method for achieving quality control. The district court correctly held for Kentucky Fried with respect to Container’s antitrust counterclaim. This knot was not conceived as a loophole in our antitrust statutes.…

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We have held that Kentucky Fried’s approved-source requirement, as revealed in this record, is not illegal, and that Kentucky Fried established its right to the district court’s injunction. In addressing these knotty problems we have attempted to untangle intersecting strands of antitrust, trademark and unfair competition law. We have concluded that the antitrust laws did not give Container the right to debilitate Kentucky Fried’s business.…

[C]

Covenants Not to Challenge

25. In principle, the legitimacy of covenants not to challenge the validity of the licensed intellectual property right and the legitimacy of certain settlements in the course of intellectual property-related litigation are conceptually different, but they are nevertheless linked, as the Supreme Court of the United States, in Actavis (see case no. 68) has acknowledged. The reason for that somewhat unexpected association is that, when settling the litigation of the validity of an intellectual property right, the defendant frequently withdraws his/her claim, thereby ceasing the dispute. So, the effects of covenants not to challenge and most settlements are the same. Where a court understands that there is a prevailing public policy to encourage challenges to intellectual property rights, covenants not to challenge appear to run against those policies as much as settlements. But where a court sees that the policy encouraging settlements should be favored for the sake of legal certainty and procedural economy, then covenants might be seen with the same approval.

34. Windsurfing International, Inc. v. European Commission, in Case 193/83, judgment of the Court (Fourth Chamber) on 25 February 1986 COURT OF JUSTICE OF THE EUROPEAN UNION By an application lodged at the Court Registry on 13 September 1983, the undertaking Windsurfing International Inc. which has its registered office in Torrance, California, USA, brought an action under the second paragraph of Article 173 of the EEC Treaty for a declaration that the Commission decision of 11 July 1983, relating to a proceeding under Article 85 of the EEC Treaty (Official Journal 1983, L 229, p. 1), is void in so far as it contains the finding that a number of clauses in the licensing agreements concluded between the applicant and certain German undertakings constituted infringements of the competition rules in the EEC Treaty, or alternatively for the annulment of the fine imposed upon the applicant by the decision or at least a reduction in its amount.… The fifth disputed clause relates to the obligation on the licensees to acknowledge the word marks “Windsurfer” and “Windsurfing” as well as a design mark or “logo” as valid trademarks.

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Windsurfing International maintains that at the time when the licensing agreements were concluded registered trademarks and generic names for the sport and the product already existed in most countries. It was perfectly open to the licensor to request the licensees to use those generic names and not its own trademarks, which patent infringers, on the other hand, tried to use generically. However, nothing in the agreements precluded the licensees from requesting the courts to declare the trademarks invalid. The Commission comments that the no-challenge clause is different from the clause prohibiting the use of the applicant’s trademark. The acknowledgment of a trademark’s validity logically implies that no attempt will be made to establish its invalidity, and this is contrary to Article 85. Furthermore, an undertaking to that effect is foreign to the licensing agreement as a whole. As the Commission has not challenged the ban on the use of the trademarks belonging to Windsurfing International and Ten Cate as generic designations, the clauses in the agreements with Shark and Ostermann should not be regarded as numbering among the disputed clauses because, apart from the ban on their use, they do not require that the trademarks’ validity should not be challenged. Windsurfing International contends that the requirement at issue was solely intended to ensure that the trademarks would be acknowledged as long as they had not been declared invalid in order to prevent them from becoming generic designations. That contention cannot be accepted in view of the fact that, during a meeting with representatives of the Commission in January 1981, the applicant’s representative himself recognized that the clause contained in Article 12 of the agreement with SAN (which, it may be added, is identical in content to clauses contained in the agreements with Akutec, Klepper and Marker) was to be regarded as a no-challenge clause in trademark law. In any event, Windsurfing International’s interest in halting the process whereby its trademarks were being turned into generic designations of the product could not be safeguarded by means of a clause that clearly did not come within the specific subject-matter of the patent and was imposed on the licensees in the agreements relating to the exploitation of the patent even though the subject matter of the clause was quite different. On the basis of those considerations, it must be concluded that the clause requiring the licensees to acknowledge Windsurfing International’s trademarks was of such a nature as to restrict the licensees’ competitiveness and therefore satisfied the first of the conditions for the application of Article 85(1).…

35. Lear v. Adkins, 395 U.S. 653 (1969) SUPREME COURT OF THE UNITED STATES Mr. Justice Harlan delivered the opinion of the Court.

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In January of 1952, John Adkins, an inventor and mechanical engineer, was hired by Lear, Incorporated, for the purpose of solving a vexing problem the company had encountered in its efforts to develop a gyroscope that would meet the increasingly demanding requirements of the aviation industry. The gyroscope is an essential component of the navigational system in all aircraft, enabling the pilot to learn the direction and attitude of his airplane. With the development of the faster airplanes of the 1950’s, more accurate gyroscopes were needed, and the gyro industry consequently was casting about for new techniques that would satisfy this need in an economical fashion. Shortly after Adkins was hired, he developed a method of construction at the company’s California facilities that improved gyroscope accuracy at a low cost. Lear almost immediately incorporated Adkins’ improvements into its production process to its substantial advantage. The question that remains unsettled in this case, after eight years of litigation in the California courts, is whether Adkins will receive compensation for Lear’s use of those improvements that the inventor has subsequently patented. At every stage of this lawsuit, Lear has sought to prove that, despite the grant of a patent by the Patent Office, none of Adkins’ improvements were sufficiently novel to warrant the award of a monopoly under the standards delineated in the governing federal statutes. Moreover, the company has sought to prove that Adkins obtained his patent by means of a fraud on the Patent Office. In response, the inventor has argued that since Lear had entered into a licensing agreement with Adkins, it was obliged to pay the agreed royalties regardless of the validity of the underlying patent. The Supreme Court of California unanimously vindicated the inventor’s position. While the court recognized that generally a manufacturer is free to challenge the validity of an inventor’s patent, it held that “one of the oldest doctrines in the field of patent law establishes that so long as a licensee is operating under a license agreement he is estopped to deny the validity of his licensor’s patent in a suit for royalties under the agreement. The theory underlying this doctrine is that a licensee should not be permitted to enjoy the benefit afforded by the agreement while simultaneously urging that the patent which forms the basis of the agreement is void.” 67 Cal. 2d 882, 891 (1967). Almost 20 years ago, in its last consideration of the doctrine, this Court also invoked an estoppel to deny a licensee the right to prove that his licensor was demanding royalties for the use of an idea that was in reality a part of the public domain. Automatic Radio Manufacturing Co. v. Hazeltine Research, Inc., 339 U.S. 827, 836 (1950). We granted certiorari in the present case, 391 U.S. 912, to reconsider the validity of the Hazeltine rule in the light of our recent decisions emphasizing the strong federal policy favoring free competition in ideas that do not merit patent protection. Sears, Roebuck v. Stiffel Co., 376 U.S. 225 (1964); Compco Corp. v. Day-Brite Lighting, Inc., 376 U.S. 234 (1964). At the very beginning of the parties’ relationship, Lear and Adkins entered into a rudimentary one-page agreement that provided that although “all new ideas, discoveries, inventions, etc., related to … vertical gyros become the property of Mr. John S. Adkins,” the inventor promised to grant Lear a license as to all ideas he might develop “on a mutually satisfactory royalty basis.” As soon as Adkins’ labors yielded tangible

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results, it quickly became apparent to the inventor that further steps should be taken to place his rights to his ideas on a firmer basis. On February 4, 1954, Adkins filed an application with the Patent Office in an effort to gain federal protection for his improvements. At about the same time, he entered into a lengthy period of negotiations with Lear in an effort to conclude a licensing agreement that would clearly establish the amount of royalties that would be paid. These negotiations finally bore fruit on September 15, 1955, when the parties approved a complex 17-page contract that carefully delineated the conditions upon that Lear promised to pay royalties for Adkins’ improvements. The parties agreed that if “the U.S. Patent Office refuses to issue a patent on the substantial claims [contained in Adkins’ original patent application] or if such a patent so issued is subsequently held invalid, then in any of such events Lear at its option shall have the right forthwith to terminate the specific license so affected or to terminate this entire Agreement ….” §6.… As the contractual language indicates, Adkins had not obtained a final Patent Office decision as to the patentability of his invention at the time the licensing agreement was concluded. Indeed, he was not to receive a patent until January 5, 1960. This long delay has its source in the special character of Patent Office procedures. The regulations do not require the Office to make a final judgment on an invention’s patentability on the basis of the inventor’s original application. While it sometimes happens that a patent is granted at this early stage, it is far more common for the Office to find that although certain of the applicant’s claims may be patentable, certain others have been fully anticipated by the earlier developments in the art. In such a situation, the Patent Office does not attempt to separate the wheat from the chaff on its own initiative. Instead, it rejects the application, giving the inventor the right to make an amendment that narrows his claim to cover only those aspects of the invention that are truly novel. It often happens, however, that even after an application is amended, the Patent Office finds that some of the remaining claims are unpatentable. When this occurs, the agency again issues a rejection that is subject to further amendment. And so the process of rejection and amendment continues until the Patent Office Examiner either grants a patent or concludes that none of the inventor’s claims could possibly be patentable, at which time a final rejection is entered on the Office’s records. Thus, when Adkins made his original application in 1954, it took the average inventor more than three years before he obtained a final administrative decision on the patentability of his ideas, with the Patent Office acting on the average application from two to four times. The progress of Adkins’ effort to obtain a patent followed the typical pattern. In his initial application, the inventor made the ambitious claim that his entire method of constructing gyroscopes was sufficiently novel to merit protection. The Patent Office, however, rejected this initial claim, as well as two subsequent amendments, which progressively narrowed the scope of the invention sought to be protected. Finally, Adkins narrowed his claim drastically to assert only that the design of the apparatus used to achieve gyroscope accuracy was novel. In response, the Office issued its 1960 patent, granting a 17-year monopoly on this more modest claim.

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During the long period in which Adkins was attempting to convince the Patent Office of the novelty of his ideas, however, Lear had become convinced that Adkins would never receive a patent on his invention and that it should not continue to pay substantial royalties on ideas that had not contributed substantially to the development of the art of gyroscopy. In 1957, after Adkins’ patent application had been rejected twice, Lear announced that it had searched the Patent Office’s files and had found a patent that it believed had fully anticipated Adkins’ discovery. As a result, the company stated that it would no longer pay royalties on the large number of gyroscopes it was producing at its plant in Grand Rapids, Michigan (the Michigan gyros). Payments were continued on the smaller number of gyros produced at the company’s California plant (the California gyros) for two more years until they too were terminated on April 8, 1959. As soon as Adkins obtained his patent in 1960, he brought this lawsuit in the California Superior Court. He argued to a jury that both the Michigan and the California gyros incorporated his patented apparatus and that Lear’s failure to pay royalties on these gyros was a breach both of the 1955 contract and of Lear’s quasi-contractual obligations. Although Lear sought to raise patent invalidity as a defense, the trial judge directed a verdict of $ 16,351.93 for Adkins on the California gyros, holding that Lear was estopped by its licensing agreement from questioning the inventor’s patent. The trial judge took a different approach when it came to considering the Michigan gyros. Noting that the company claimed that it had developed its Michigan designs independently of Adkins’ ideas, the court instructed the jury to award the inventor recovery only if it was satisfied that Adkins’ invention was novel, within the meaning of the federal patent laws. When the jury returned a verdict for Adkins of $888,122.56 on the Michigan gyros, the trial judge granted Lear’s motion for judgment notwithstanding the verdict, finding that Adkins’ invention had been completely anticipated by the prior art. Neither side was satisfied with this split decision, and both appealed to the California District Court of Appeal, which adopted a quite different approach. The court held that Lear was within its contractual rights in terminating its royalty obligations entirely in 1959, and that if Adkins desired to recover damages after that date he was “relegated to an action for infringement” in the federal courts.… So far as pre-1959 royalties were concerned, the court held that the contract required the company to pay royalties on both the California and Michigan gyros regardless of the validity of the inventor’s patent.… Once again both sides appealed, this time to the California Supreme Court, which took yet another approach to the problem presented. The court rejected the District Court of Appeal’s conclusion that the 1955 license gave Lear the right to terminate its royalty obligations in 1959. Since the 1955 agreement was still in effect, the court concluded, relying on the language we have already quoted, that the doctrine of estoppel barred Lear from questioning the propriety of the Patent Office’s grant.… The court’s adherence to estoppel, however, was not without qualification. After noting Lear’s claim that it had developed its Michigan gyros independently, the court tested this contention by considering “whether what is being built by Lear [in Michigan] springs entirely” (emphasis supplied) from the prior art.… Applying this test, it found

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that Lear had in fact “utilized the apparatus patented by Adkins throughout the period in question,” … and reinstated the jury’s $ 888,000 verdict on this branch of the case. Since the California Supreme Court’s construction of the 1955 licensing agreement is solely a matter of state law, the only issue open to us is raised by the court’s reliance upon the doctrine of estoppel to bar Lear from proving that Adkins’ ideas were dedicated to the common welfare by federal law. In considering the propriety of the State Court’s decision, we are well aware that we are not writing upon a clean slate. The doctrine of estoppel has been considered by this Court in a line of cases reaching back into the middle of the 19th century. Before deciding what the role of estoppel should be in the present case and in the future, it is, then, desirable to consider the role it has played in the past. The California Supreme Court rejected this argument on its merits: Lear relies on authorities holding that a licensee may terminate a license agreement upon notice to his licensor even though, prior to termination, there has been no adjudication of invalidity of the patent which is the subject of the agreement and that thereafter the licensee may challenge the validity of the patent. (See, e.g., Armstrong Co. v. Shell Co. of Cal. (1929) 98 Cal. App. 769, 778-779). This rule has no application if the agreement sets forth the particular circumstances under which termination must occur. As stated above, such provisions must be complied with in order to effect a valid cancellation. 67 Cal. 2d at 899-900 n. 15.

We clearly have jurisdiction to consider whether this decision is wrong. In doing so, we have the duty to consider the broader implications of Lear’s contention, and vindicate, if appropriate, its claim to relief on somewhat different grounds than it chose to advance below, especially when the California court recognized, in language we have already quoted, supra, at 656, that matters of basic principle are at stake. While the roots of the doctrine have often been celebrated in tradition, we have found only one 19th century case in this Court that invoked estoppel in a considered manner. And that case was decided before the Sherman Act made it clear that the grant of monopoly power to a patent owner constituted a limited exception to the general federal policy favoring free competition. Kinsman v. Parkhurst, 18 How. 289 (1856). Curiously, a second decision often cited as supporting the estoppel doctrine points clearly in the opposite direction. St. Paul Plow Works v. Starling, 140 U.S. 184 (1891), did not even question the right of the lower courts to admit the licensee’s evidence showing that the patented device was not novel. A unanimous Court merely held that, where there was conflicting evidence as to an invention’s novelty, it would not reverse the decision of the lower court upholding the patent’s validity. In the very next year, this Court found the doctrine of patent estoppel so inequitable that it refused to grant an injunction to enforce a licensee’s promise never to contest the validity of the underlying patent. “It is as important to the public that competition should not be repressed by worthless patents, as that the patentee of a really valuable invention should be protected in his monopoly ….” Pope Manufacturing Co. v. Gormully, 144 U.S. 224, 234 (1892). Although this Court invoked an estoppel in 1905 without citing or considering Pope’s powerful argument, United States v. Harvey Steel Co., 196 U.S. 310, the doctrine was not to be applied again in this Court until it was revived in Automatic Radio

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Manufacturing Co. v. Hazeltine Research, Inc., supra, which declared, without prolonged analysis, that licensee estoppel was “the general rule.” 339 U.S. at 836. In so holding, the majority ignored the teachings of a series of decisions this Court had rendered during the 45 years since Harvey had been decided. During this period, each time a patentee sought to rely upon his estoppel privilege before this Court, the majority created a new exception to permit judicial scrutiny into the validity of the Patent Office’s grant. Long before Hazeltine was decided, the estoppel doctrine had been so eroded that it could no longer be considered the “general rule,” but was only to be invoked in an ever-narrowing set of circumstances.… The uncertain status of licensee estoppel in the case law is a product of judicial efforts to accommodate the competing demands of the common law of contracts and the federal law of patents. On the one hand, the law of contracts forbids a purchaser to repudiate his promises simply because he later becomes dissatisfied with the bargain he has made. On the other hand, federal law requires that all ideas in general circulation be dedicated to the common good unless they are protected by a valid patent.… When faced with this basic conflict in policy, both this Court and courts throughout the land have naturally sought to develop an intermediate position that somehow would remain responsive to the radically different concerns of the two different worlds of contract and patent. The result has been a failure. Rather than creative compromise, there has been a chaos of conflicting case law, proceeding on inconsistent premises. Before renewing the search for an acceptable middle ground, we must reconsider on their own merits the arguments that may properly be advanced on both sides of the estoppel question. It will simplify matters greatly if we first consider the most typical situation in which patent licenses are negotiated. In contrast to the present case, most manufacturers obtain a license after a patent has issued. Since the Patent Office makes an inventor’s ideas public when it issues its grant of a limited monopoly, a potential licensee has access to the inventor’s ideas even if he does not enter into an agreement with the patent owner. Consequently, a manufacturer gains only two benefits if he chooses to enter a licensing agreement after the patent has issued. First, by accepting a license and paying royalties for a time, the licensee may have avoided the necessity of defending an expensive infringement action during the period when he may be least able to afford one. Second, the existence of an unchallenged patent may deter others from attempting to compete with the licensee. Under ordinary contract principles the mere fact that some benefit is received is enough to require the enforcement of the contract, regardless of the validity of the underlying patent. Nevertheless, if one tests this result by the standard of good-faith commercial dealing, it seems far from satisfactory. For the simple contract approach entirely ignores the position of the licensor who is seeking to invoke the court’s assistance on his behalf. Consider, for example, the equities of the licensor who has obtained his patent through a fraud on the Patent Office. It is difficult to perceive why good faith requires that courts should permit him to recover royalties despite his licensee’s attempts to show that the patent is invalid. Compare Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172 (1965).

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Even in the more typical cases, not involving conscious wrongdoing, the licensor’s equities are far from compelling. A patent, in the last analysis, simply represents a legal conclusion reached by the Patent Office. Moreover, the legal conclusion is predicated on factors as to which reasonable men can differ widely. Yet the Patent Office is often obliged to reach its decision in an ex parte proceeding, without the aid of the arguments that could be advanced by parties interested in proving patent invalidity. Consequently, it does not seem to us to be unfair to require a patentee to defend the Patent Office’s judgment when his licensee places the question in issue, especially since the licensor’s case is buttressed by the presumption of validity that attaches to his patent. Thus, although licensee estoppel may be consistent with the letter of contractual doctrine, we cannot say that it is compelled by the spirit of contract law, which seeks to balance the claims of promisor and promisee in accord with the requirements of good faith. Surely the equities of the licensor do not weigh very heavily when they are balanced against the important public interest in permitting full and free competition in the use of ideas that are in reality a part of the public domain. Licensees may often be the only individuals with enough economic incentive to challenge the patentability of an inventor’s discovery. If they are muzzled, the public may continually be required to pay tribute to would-be monopolists without need or justification. We think it plain that the technical requirements of contract doctrine must give way before the demands of the public interest in the typical situation involving the negotiation of a license after a patent has issued.7

7. See also the dissenting vote of Justice Douglas, with whom Justice Black concurred, in Automatic Radio Manufacturing Co., Inc. v. Hazeltine Research, Inc., 339 U.S. 827 (1950) (see case no. 41): Dissenting Chief Justice Stone wrote for the Court in Sola Electric Co. v. Jefferson Electric Co., 317 U.S. 173, holding that a licensee is not estopped to challenge a price-fixing clause by showing the patent is invalid. And see Katzinger Co. v. Chicago Mfg. Co., 329 U.S. 394; MacGregor v. Westinghouse Co., 329 U.S. 402. He also wrote for the Court in Scott Paper Co. v. Marcalus Co., 326 U.S. 249, holding that estoppel did not bar the assignor of a patent from defending a suit for infringement of the assigned patent on the ground that the alleged infringing device was that of a prior-art expired patent. These decisions put the protection of the public interest in free enterprise above reward to the patentee. The limitations which they made on the estoppel doctrine represented an almost complete cycle back to the salutary teaching of Pope Mfg. Co. v. Gormully, 144 U.S. 224, 234, that, “It is as important to the public that competition should not be repressed by worthless patents, as that the patentee of a really valuable invention should be protected in his monopoly.” To estop the licensee from attacking the validity of patents is to forget that “It is the public interest which is dominant in the patent system.” Mercoid Corp. v. Mid-Continent Investment Co., supra, at 665. It is said that if the purpose was to enlarge the monopoly of the patent – for example, through price fixing—then estoppel would not bar the licensee from challenging the validity of the patents. But what worse enlargement of monopoly is there than the attachment of a patent to an unpatentable article? When we consider the constitutional standard, what greater public harm than that is there in the patent system? It is only right and just that the licensee be allowed to challenge the validity of the patents. A great pooling of patents is made; and whole industries are knit together in the fashion of the unholy alliances revealed in United States v. Line Material Co., 333 U.S. 287, and United States v. Gypsum Co., 333 U.S. 364. One who wants the use of one patent may have to take hundreds. The whole package may contain many patents that

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We are satisfied that Automatic Radio Manufacturing Co. v. Hazeltine Research, Inc., supra, itself the product of a clouded history, should no longer be regarded as sound law with respect to its “estoppel” holding, and that holding is now overruled. The case before us, however, presents a far more complicated estoppel problem than the one that arises in the most common licensing context. The problem arises out of the fact that Lear obtained its license in 1955, more than four years before Adkins received his 1960 patent. Indeed, from the very outset of the relationship, Lear obtained special access to Adkins’ ideas in return for its promise to pay satisfactory compensation. Thus, during the lengthy period in which Adkins was attempting to obtain a patent, Lear gained an important benefit not generally obtained by the typical licensee. For until a patent issues, a potential licensee may not learn his licensor’s ideas simply by requesting the information from the Patent Office. During the time the inventor is seeking patent protection, the governing federal statute requires the Patent Office to hold an inventor’s patent application in confidence. If a potential licensee hopes to use the ideas contained in a secret patent application, he must deal with the inventor himself, unless the inventor chooses to publicize his ideas to the world at large. By promising to pay Adkins royalties from the very outset of their relationship, Lear gained immediate access to ideas that it may well not have learned until the Patent Office published the details of Adkins’ invention in 1960. At the core of this case, then, is the difficult question whether federal patent policy bars a State from enforcing a contract regulating access to an unpatented secret idea. The present regulations issued by the Patent Office unequivocally guarantee that: “Pending patent applications are preserved in secrecy … unless it shall be necessary to the proper conduct of business before the Office” to divulge their contents. 37 CFR §1.14(a) (1967). The parties do not contend that Adkins’ patent application was publicized by the Office during the period it was under consideration. Adkins takes an extreme position on this question. The inventor does not merely argue that since Lear obtained privileged access to his ideas before 1960, the company should be required to pay royalties accruing before 1960 regardless of the validity of the patent that ultimately issued. He also argues that since Lear obtained special benefits before 1960, it should also pay royalties during the entire patent period (1960-1977), without regard to the validity of the Patent Office’s grant. We cannot accept so broad an argument. Adkins’ position would permit inventors to negotiate all important licenses during the lengthy period while their applications were still pending at the Patent Office, thereby disabling entirely all those who have the strongest incentive to show

have been foisted on the public. No other person than the licensee will be interested enough to challenge them. He alone will be apt to see and understand the basis of their illegality. The licensee protects the public interest in exposing invalid or expired patents and freeing the public of their toll. He should be allowed that privilege. He would be allowed it were the public interest considered the dominant one. Ridding the public of stale or specious patents is one way of serving the end of the progress of science. We depart from a great tradition in this field (and see Graver Tank & Mfg. Co. v. Linde Air Products, 339 U.S. 605) when we affirm this judgment.

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that a patent is worthless. While the equities supporting Adkins’ position are somewhat more appealing than those supporting the typical licensor, we cannot say that there is enough of a difference to justify such a substantial impairment of overriding federal policy. Nor can we accept a second argument that may be advanced to support Adkins’ claim to at least a portion of his post-patent royalties, regardless of the validity of the Patent Office grant. The terms of the 1955 agreement provide that royalties are to be paid until such time as the “patent … is held invalid,” § 6, and the fact remains that the question of patent validity has not been finally determined in this case. Thus, it may be suggested that although Lear must be allowed to raise the question of patent validity in the present lawsuit, it must also be required to comply with its contract and continue to pay royalties until its claim is finally vindicated in the courts. The parties’ contract, however, is no more controlling on this issue than is the State’s doctrine of estoppel, which is also rooted in contract principles. The decisive question is whether overriding federal policies would be significantly frustrated if licensees could be required to continue to pay royalties during the time they are challenging patent validity in the courts. It seems to us that such a requirement would be inconsistent with the aims of federal patent policy. Enforcing this contractual provision would give the licensor an additional economic incentive to devise every conceivable dilatory tactic in an effort to postpone the day of final judicial reckoning. We can perceive no reason to encourage dilatory court tactics in this way. Moreover, the cost of prosecuting slow-moving trial proceedings and defending an inevitable appeal might well deter many licensees from attempting to prove patent invalidity in the courts. The deterrent effect would be particularly severe in the many scientific fields in which invention is proceeding at a rapid rate. In these areas, a patent may well become obsolete long before its 17-year term has expired. If a licensee has reason to believe that he will replace a patented idea with a new one in the near future, he will have little incentive to initiate lengthy court proceedings, unless he is freed from liability at least from the time he refuses to pay the contractual royalties. Lastly, enforcing this contractual provision would undermine the strong federal policy favoring the full and free use of ideas in the public domain. For all these reasons, we hold that Lear must be permitted to avoid the payment of all royalties accruing after Adkins’ 1960 patent issued if Lear can prove patent invalidity. Adkins’ claim to contractual royalties accruing before the 1960 patent issued is, however, a much more difficult one, since it squarely raises the question whether, and to what extent, the States may protect the owners of unpatented inventions who are willing to disclose their ideas to manufacturers only upon payment of royalties. The California Supreme Court did not address itself to this issue with precision, for it believed that the venerable doctrine of estoppel provided a sufficient answer to all of Lear’s claims based upon federal patent law. Thus, we do not know whether the Supreme Court would have awarded Adkins recovery even on his pre-patent royalties if it had recognized that previously established estoppel doctrine could no longer be properly invoked with regard to royalties accruing during the 17-year patent period. Our decision today will, of course, require the state courts to reconsider the theoretical basis of their decisions enforcing the contractual rights of inventors and it is impossible

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to predict the extent to which this re-evaluation may revolutionize the law of any particular State in this regard. Consequently, we have concluded, after much consideration, that even though an important question of federal law underlies this phase of the controversy, we should not now attempt to define in even a limited way the extent, if any, to which the States may properly act to enforce the contractual rights of inventors of unpatented secret ideas. Given the difficulty and importance of this task, it should be undertaken only after the state courts have, after fully focused inquiry, determined the extent to which they will respect the contractual rights of such inventors in the future. Indeed, on remand, the California courts may well reconcile the competing demands of patent and contract law in a way that would not warrant further review in this Court.… Mr. Justice Black, with whom the Chief Justice and Mr. Justice Douglas join, concurring in part and dissenting in part. I concur in the judgment and opinion of the Court, except for what is said in Part III, C, of the Court’s opinion.… I still entertain the belief I expressed for the Court in Stiffel and Compco that no State has a right to authorize any kind of monopoly on what is claimed to be a new invention, except when a patent has been obtained from the Patent Office under the exacting standards of the patent laws. One who makes a discovery may, of course, keep it secret if he wishes, but private arrangements under which self-styled “inventors” do not keep their discoveries secret, but rather disclose them, in return for contractual payments, run counter to the plan of our patent laws, which tightly regulate the kind of inventions that may be protected and the manner in which they may be protected. The national policy expressed in the patent laws, favoring free competition and narrowly limiting monopoly, cannot be frustrated by private agreements among individuals, with or without the approval of the State.…

36. Idaho Potato Commission v. M&M Produce, 335 F.3d 130 (2d Cir. 2003) UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT Opinion by Feinberg, Circuit Judge. Plaintiff Idaho Potato Commission (“IPC”) appeals from a May 2002 Memorandum and Order (“May 2002 Order”) of the United States District Court for the Southern District of New York (Brieant, J.), vacating a $41,962 jury award for the IPC in its certification mark infringement suit under the Lanham Act, 15 U.S.C. § 1051 et seq., against M&M Produce Farm and Sales, M&M Packaging, Inc., and Matthew and Mark Rogowski individually (collectively “M&M”). The district court held that under the circumstances of this case there was no basis for monetary damages absent a showing of counterfeiting. On appeal, the IPC argues that the Lanham Act does not require the owner of a certification mark to prove counterfeiting in order to recover monetary damages from an infringer.

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Defendant M&M cross-appeals from the court’s August 1998 Memorandum and Order (“August 1998 Order”) denying M&M summary judgment on its counterclaims and holding that M&M was barred from seeking cancellation of the IPC marks by a no-challenge provision in its licensing agreement with the IPC. M&M argues on appeal that the no-challenge provision should not be enforced because it violates the public policy embodied in the Lanham Act. M&M also argues that it was entitled to summary judgment on its counterclaims and attorneys’ fees. For reasons stated below, we vacate the district court’s August 1998 Order and remand for consideration of M&M’s counterclaims on the merits. We also remand for clarification of the court’s May 2002 Order on damages should M&M’s counterclaims fail on the merits. The IPC is an agency created by Idaho statute to promote the sale of Idaho russet potatoes and to prevent the substitution of potatoes grown in other regions as Idaho potatoes. To further these goals, the IPC has registered a number of certification marks with the United States Patent and Trademark Office, two of which are relevant to this appeal: (1) the word “IDAHO” in a distinctive font; and (2) the phrase “GROWN IN IDAHO” written inside an outline of the boundaries of the state of Idaho (collectively “the IPC marks”). Each mark certifies that “goods so marked are grown in the State of Idaho.” The IPC controls its marks through an elaborate licensing system that seeks to ensure the quality and geographic authenticity of potatoes packed in containers bearing the IPC marks. This system requires everyone in the chain of distribution, from in-state growers to out-of-state repackers and resellers, to be licensed in order to use the IPC certification marks on their packaging. Licensed vendors are also prevented from selling Idaho potatoes to non-licensed customers for repacking or reselling. The standard licensing agreements provide licensees with the right to use the IPC marks, an important benefit because certified Idaho potatoes sell for more than non-Idaho potatoes. In return, licensees agree, among other things, to use the IPC marks only on potatoes that are certified as grown in Idaho and that meet the IPC’s other quality standards. Licensees also agree to maintain purchase and sale records so that the IPC can check periodically for compliance and prevent “counterfeiting” (putting non-Idaho potatoes in bags bearing the IPC marks.) M&M is a small business in New York owned and operated by two brothers, Matthew and Mark Rogowski. M&M’s main business is growing onions on a small farm, but because onions are a seasonal crop, the brothers also repack potatoes to stay in business throughout the year. In 1990, M&M entered into a licensing agreement with the IPC and was given the right to use the IPC’s certification marks, subject to the terms in the agreement. While M&M was a licensee, it would purchase potatoes in bulk from licensed Idaho potato vendors and would repackage those potatoes into small fivepound bags bearing the certification marks. In 1994, M&M received a notice of audit from the IPC requesting M&M’s records with regard to all Idaho potatoes bought and sold. Because M&M did not produce sufficient records, the IPC considered M&M in breach of the licensing agreement and requested that M&M return its license. In February 1995, M&M voluntarily gave up the license and consequently no longer had the right to use the IPC marks.

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After returning the license, however, M&M continued repacking Idaho potatoes in bags with the IPC marks. M&M’s major source of potatoes after February 1995 was G&T Terminal Packing, Inc. (“G&T”), a licensed reseller of Idaho potatoes. G&T is a large reseller of produce serving such supermarket chains as Pathmark, Twin County, Key Food, Grand Union and Wakefern. The business relationship between M&M and G&T after M&M lost its license was complex. G&T would purchase potatoes in bulk directly from Idaho vendors. When G&T would receive an order for potatoes from one of its supermarket customers, it would call that order in to M&M. G&T would then “sell” potatoes to M&M, which would in turn repack the potatoes into smaller bags printed with G&T’s name and the IPC marks and then deliver the repacked potatoes to G&T’s customer. After delivering the potatoes, M&M would “sell” the potatoes back to G&T for a small profit and return the delivery ticket to G&T. The district court explained the business relationship between these two vendors, in which G&T was essentially selling and buying back the same potatoes, as follows: In economic reality, G&T, a licensee of the IPC, was merely using M&M as an agent or independent contractor to repack G&T’s potatoes in five pound bags with G&T’s name on them as seller, and then deliver the potatoes to various customers of G&T in accordance with the directions of G&T, returning the delivery tickets to G&T. The supermarkets in most cases did not deal with M&M.

During an October 1997 compliance audit of G&T, the IPC learned of the continuing business relationship between G&T and M&M. In November 1997, the IPC filed the current lawsuit against M&M alleging: (1) trademark infringement in violation of 15 U.S.C. §1114, (2) false designation of origin and dilution in violation of 15 U.S.C. §1125, and (3) unlawful and unfair competition in violation of various New York and Idaho statutes and common law. In response, M&M filed counterclaims for, among other things, cancellation of the IPC marks under federal and state law. M&M argued that the IPC marks should be cancelled for numerous reasons, including that the IPC abused its marks by: discriminately refusing to certify potatoes that were grown in Idaho, imposing standards for certification beyond the geographic origin the marks are registered to certify, and using its certification marks for purposes other than to certify, all in violation of the Lanham Act. M&M also alleged that the IPC lacks the independence necessary for certification mark owners under the Lanham Act. The pre-trial procedural history of this case is long and complicated. We give only a brief description of those proceedings relevant to the current appeal. In April 1998, this case was consolidated for pre-trial purposes with two other cases involving a challenge to the IPC marks—one a counterclaim brought by Majestic Produce Corp., the other a direct claim brought by Hapco Farms, Inc. In its August 1998 Order, the district court denied a joint motion for summary judgment filed by Hapco, Majestic and M&M. With regard to M&M, the court held that M&M was estopped from challenging the IPC marks by a provision in its licensing agreement in which M&M (1) acknowledged that the marks “are valid, registered marks;” and (2) agreed that it would “not

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during the term of the agreement, or at any time thereafter, attack the title or any rights” of the IPC in the relevant marks. Citing a number of trademark cases, the district court held that “courts have consistently enforced estoppel in circumstances directly analogous to this case.” It further rejected any arguable distinction between trademarks and certification marks in this context explaining that “the owners of certification marks can license their marks, just as trademark holders can, and are therefore clearly entitled to licensee estoppel where the licensing agreement specifically provides for it.” … The IPC appeals from the May 2002 Order vacating its damages award against M&M. M&M cross-appeals from the August 1998 Order holding M&M estopped from attacking the validity of the IPC marks. Because the jury’ verdict against M&M was predicated on the IPC’s ownership of valid certification marks, we first discuss M&M’s cross-appeal challenging the district court’s August 1998 ruling that M&M was not entitled to summary judgment and was estopped by the licensing agreement from attacking those marks.… The facts relevant to the issue are not in dispute. M&M signed a licensing agreement with the IPC in which M&M recognized the validity of the IPC marks and promised not to attack the rights of the IPC in those marks during the term of the agreement or at any time thereafter. The basic question on the facts before us, therefore, is whether such a provision in a certification mark licensing agreement is enforceable against a licensee when the licensee no longer holds a license. This question has apparently not yet been squarely decided by any federal circuit court. M&M contends that the no-challenge provision in its licensing agreement should not be enforced because it violates the public policy embodied in the Lanham Act. It argues that by requiring licensees to forever waive their statutory right to challenge the IPC’s marks, the IPC effectively avoids enforcement of the Lanham Act. M&M relies principally on the Supreme Court’s opinion in Lear, Inc. v. Adkins, 395 U.S. 653 (1969), which held that the contract doctrine of licensee estoppel was trumped by the federal policy embodied in the patent laws. Id. at 670-71. M&M argues that Lear should apply to certification mark licenses as it does to patent licenses because the public interest in both is similar. Thus, M&M asks us to adopt the rule stated by the United States Patent and Trademark Office, Trademark Trial and Appeal Board that “there can be no licensee estoppel involving a certification mark.” Midwest Plastic Fabricators, Inc. v. Underwriters Labs., Inc., 1989 TTAB LEXIS 39, 12 U.S.P.Q.2d 1267, 1270 n. 6 (T.T.A.B. 1989) aff’d on other grounds, 906 F.2d 1568, 1573 (Fed. Cir. 1990) (explicitly avoiding the licensee estoppel issue).… Courts applying the principles articulated in Lear to patent disputes have enforced no-challenge contract provisions only when the interests in doing so outweigh the public interest in discovering invalid patents. Thus, in Flex-Foot, the United States Court of Appeals for the Federal Circuit recently enforced an estoppel provision in a settlement agreement only after determining that the public policy in favor of settlements outweighed the public interest in patents. The court stated that “the important policy of enforcing settlement agreements and res judicata must themselves be

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weighed against the federal patent laws’ prescription of full and free competition in the use of ideas that are in reality a part of the public domain.” 238 F.3d at 1368. The court concluded that when an accused patent infringer contractually agrees to voluntarily dismiss litigation challenging the rights of a patent holder after having “had an opportunity to conduct discovery on validity issues,” the accused infringer is contractually estopped from raising any challenge in a subsequent proceeding. Id. at 1370. Other courts, including this one, have weighed these interests to reach differing results, but each has recognized the applicability of the balancing test first articulated in Lear. See, e.g., Warner-Jenkinson Co. v. Allied Chem. Corp., 567 F.2d 184, 187-88 (2d Cir. 1977) (licensee could litigate the validity of patent even though licensing agreement was entered into as part of a settlement of earlier litigation); Schlegel Mfg. Co. v. U.S.M. Corp., 525 F.2d 775, 781 (6th Cir. 1975) (enforcing consent decree, which recited that plaintiff’s patent was valid); Kraly v. Nat’l Distillers & Chem. Corp., 502 F.2d 1366, 1369 (7th Cir. 1974) (concluding that a licensee was not estopped from challenging the validity of a patent even where a consent decree incorporated an understanding that the patent would not be challenged); Massillon-Cleveland-Akron Sign Co. v. Golden State Adver. Co., 444 F.2d 425, 427 (9th Cir. 1971) (holding that covenant in settlement agreement whereby defendants agreed not to contest validity of patent was unenforceable because in direct conflict with strong federal policy). The Lear balancing test has also been frequently applied to trademark licensing contracts. As the district court here correctly noted, courts in this context have generally precluded licensees from challenging the validity of a mark they have obtained the right to use. However, courts have done so only after considering the public interest in trademarks. For example, in Beer Nuts, Inc. v. King Nut Co., the Sixth Circuit explicitly used the Lear balancing test in upholding a written agreement not to challenge the validity of a trademark. 477 F.2d 326, 329 (1973). The court distinguished the public policy of trademarks—guarding the public from being deceived into purchasing an unwanted product—from that of patents and held, “When the balancing test is employed in the instant situation, we conclude that the public interest in [trademarks] … is not so great that it should take precedence over the rule of the law of contracts that a person should be held to his undertakings.” Id.; see also MWS Wire Indus., Inc. v. California Fine Wire Co., 797 F.2d 799, 803 (9th Cir. 1986) (relying on Beer Nuts and holding that “to permit [defendant] to reopen the question of the validity of the trademark at this juncture would severely undercut the policy favoring the amicable resolution of trademark disputes without resort to the courts”). Even when courts have not expressly applied the Lear test, they have recognized that agreements related to intellectual property necessarily involve the public interest and have enforced such agreements only to the extent that enforcement does not result in a public injury. Thus, the First Circuit in T&T Manufacturing Co. v. A.T. Cross Co. asked “whether there is any significant harm to the public” before holding that a settlement agreement related to trademarks was enforceable. 587 F.2d 533, 538 (1st Cir. 1978). The court noted generally that: “It should never be overlooked that trademark … cases are affected with a public interest. A dealer’s good will is protected, not merely for his profit, but in order that the purchasing public may not be enticed into

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buying A’s product when it wants B’s product.” Id. (quoting Gen. Baking Co. v. Gorman, 3 F.2d 891 (1st Cir. 1925)). The Ninth Circuit has applied the same rule. See Visa Int’l Serv. Assn. v. Bankcard Holders of America, 784 F.2d 1472, 1473 (9th Cir. 1986) (“In general, a party entering into a settlement agreement with respect to a trademark will be held to his contract unless enforcement of the contract would result in injury to the public through confusion.”). The IPC maintains that the Lear balancing test is inapplicable because unlike the contract in Lear, which was silent concerning the rights of the licensee to challenge the patent, the contract signed by M&M specifically precluded M&M from challenging the IPC’s marks. However, this distinction does not negate the applicability of the Lear balancing test to the contract in this case. Lear itself recognized that federal policy embodied in the law of intellectual property can trump even explicit contractual provisions. The licensor in Lear argued that based on the licensee’s explicit contractual agreement to pay royalties until invalidity of the patent had been determined by a court, the licensee was required to pay royalties for the duration of the litigation even if the patent in question was eventually declared invalid. 395 U.S. at 673. The Lear Court disagreed and refused to enforce the contract on the same basis that it refused to apply licensee estoppel: “The parties’ contract, however, is no more controlling on this issue than is the State’s doctrine of estoppel, which is also rooted in contract principles.” Id. Lear makes clear that courts should weigh the federal policy embodied in the law of intellectual property against even explicit contractual provisions and render unenforceable those provisions that would undermine the public interest. Also, as discussed above, other courts have applied Lear to explicit contract provisions. See, e.g., Massillon-Cleveland-Akron Sign Co., 444 F.2d at 427. Thus, the explicit contractual provision in the licensing agreement between the IPC and M&M is no barrier to application of the Lear balancing test. We turn now to application of this balancing test to the current dispute. In doing so, we must identify the public interest in certification marks and the public injury that might result from enforcement of the estoppel provision in the contract between M&M and the IPC. The IPC argues, and the district court agreed, that the trademark cases enforcing no-challenge provisions noted above are controlling with regard to certification marks because “certification marks are generally treated the same as trademarks.” Levy v. Kosher Overseers Ass’n of America, Inc., 104 F.3d 38, 39 (2d Cir. 1997); see also American Bd. of Psychiatry and Neurology, Inc. v. Johnson-Powell, 129 F.3d 1, 3 (1st Cir. 1997) (“A registered certification mark receives the same protection as a trademark.”). Although we recognize that trademarks and certification marks are “generally treated the same,” we conclude that the difference between the public interests in certification marks and trademarks compels a different result in this context. In the trademark context, as already noted, “[a] dealer’s good will is protected … in order that the purchasing public may not be enticed into buying A’s product when it wants B’s product.” T&T Mfg., 587 F.2d at 538. Thus, agreements that allow the continued use of confusingly similar trademarks injure the public, and the important issue in litigation over trademark contracts is the public confusion that might result from enforcing the contract. See 15 U.S.C. §1052(d) ([HN4] permitting refusal of registration if a mark “so resembles [another] mark … as to be likely, when used on or

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in connection with the goods of the applicant, to cause confusion, or to cause mistake, or to deceive”). Significantly, trademark owners are granted a monopoly over their marks and can choose to license the marks to others on whatever conditions they deem appropriate, so long as confusion does not result. The same is not true of certification marks. Certification mark licensing programs are “a form of limited compulsory licensing,” 3 McCarthy on Trademarks and Unfair Competition §19.96, and the certifier has a “duty … to certify the goods or services of any person who meets the standards and conditions which the mark certifies.” In re University of Mississippi, 1 U.S.P.Q.2d 1909, 1911 (T.T.A.B. 1987). That the owner of a certification mark “cannot refuse to license the mark to anyone on any ground other than the standards it has set” … is an important distinction between the policies embodied in trademarks and certification marks. It is true that certification marks are designed to facilitate consumer expectations of a standardized product, much like trademarks are designed to ensure that a consumer is not confused by the marks on a product. See, e.g., Institut Nat’l Des Appellations d’Origine v. Brown-Forman Corp., 47 U.S.P.Q.2d 1875, 1889-90 (T.T.A.B. 1998) (holding that same likelihood of confusion test applied in the context of trademarks also applies to certification marks). But the certification mark regime protects a further public interest in free and open competition among producers and distributors of the certified product. It protects the market players from the influence of the certification mark owner, see 15 U.S.C. § 1064(5) (listing grounds for cancellation of a certification mark when the neutrality of the rights holder is compromised), and aims to ensure the broadest competition, and therefore the best price and quality, within the market for certified products. See 15 U.S.C. § 1064(5)(D) (permitting cancellation of any certification mark owned by a registrant who “discriminately refuses to certify or to continue to certify the goods or services of any person who maintains the standards or conditions which such mark certifies”). From our review of the cases, it appears to us that this interest is akin to the public interest in the “full and free use of ideas in the public domain” embodied in the patent laws. Lear, 395 U.S. at 674. We believe that the estoppel provision in the contract between M&M and the IPC injures this public interest in a number of ways. First, the provision places a non–quality control-related restriction on the sellers of the certified product and other licensees that benefits the mark owner in contravention of the mark owner’s obligation not to interfere with a free market for products meeting the certification criteria. Second, as in Lear, parties that have entered into a licensee relationship with the IPC may often be the only individuals with enough economic incentive to challenge the IPC’s licensing scheme, and thus the only individuals with enough incentive to force the IPC to conform to the law. See id. at 670. Finally, to decide the issue of public injury we must look to the public interest implicated by the merits of the licensee’s challenges. See, e.g., Beer Nuts, 477 F.2d at 328 (looking to merits of licensee’s case and finding that enforcement of no-challenge provision would “impede the efficacy of the defense that the words are merely descriptive,” but enforcing the contract because no likelihood of confusion existed). M&M alleges, among other things, that: (1) the IPC is a corporate entity dominated by

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producers of the certified products and that such domination violates the provisions in 15 U.S.C. § 1064(5)(B); (2) the IPC uses the goodwill derived from the certification marks as a trademark in violation of §1064(5)(C); (3) the IPC imposes certification standards other than those that the certification mark is registered to certify in violation of §1064(5)(D); and (4) the IPC discriminately refuses to certify potatoes that meet the standards for certification, also in violation of §1064(5)(D). All of these challenges implicate the public interest in maintaining a free market for the certified product unaffected by the possible competing economic interests of the certification mark owner. We believe these public interests are more substantial and more likely to be harmed if M&M is not allowed to press its claims than the public interests and de minimis harm alleged in the trademark-related cases that upheld contractual nochallenge provisions. See, e.g., Beer Nuts, 477 F.2d at 329 (holding that public interest in guarding against depletion of general vocabulary insufficient to override contract law); T&T Mfg., 587 F.2d at 539 (holding likelihood of confusion not significant); Times Mirror, 103 F. Supp. 2d at 738 (finding that no public injury had been demonstrated). Also, this case lacks a strong countervailing public interest other than the general interest in enforcing written contracts (like the interest in settlements) that persuaded courts to enforce contractual no-challenge provisions in other agreements. See, e.g., Flex-Foot, 238 F.3d at 1368. We therefore conclude that the district court erred in finding M&M contractually estopped as a matter of law from challenging the IPC marks. We express no view as to whether on remand M&M will be able to prove its counterclaims for cancellation of the marks. We hold only that M&M is not estopped from making and attempting to prove such claims in the first instance.…

[D]

Royalties

[1]

Setting the Level of Royalties 26. The freedom of intellectual property owners to set the prices of licensing (royalties) is perhaps one of the most controversial issues and that generates the most disparate views. On the one hand, in some jurisdictions it is understood that intellectual property owners should be allowed to charge royalties as high as the market can bear. In the opposite side of the spectrum, other jurisdictions understand that the right of intellectual property owners of setting royalties is limited and should be regulated. In these jurisdictions, the notion of excessive or abusive royalties is an accepted concept, both by statutes and by court opinions. The selected opinions that follow illustrate both views. In the middle of the spectrum, courts may refer to the need for setting “reasonable” or “adequate” royalties, but this debate emerges normally in the context of special circumstances, such as compulsory licenses (see art. 31(h) of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) of 1994).

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37. Philips Electronics NV v. Ingman Ltd. and another (1998) CHANCERY DIVISION (PATENTS COURT) (UNITED KINGDOM) Opinion by Laddie J. 1. The plaintiff, Philips Electronics NV, is the proprietor of a number of patents relating to the design and manufacture of compact discs (“CDs”). Among the portfolio of patents owned or controlled by the plaintiff are UK Patents Nos. 2,076,569 and 2,083,322. They are the patents in suit in this action. Because of international standardization, in practice anyone who wants to make CDs is likely to infringe one or more of the plaintiff’s patents. The plaintiff offers licenses on standard terms to anyone wanting to enter this market. 2. The defendants, Ingman Limited and The Video Duplicating Company Limited, are involved in the manufacture of CDs. They were offered a license on the standard terms by the plaintiff. They asserted that the terms of that license would be commercially unfair to them. They refused a license but carried on making CDs. In July of last year, the plaintiff commenced the present proceedings, asserting that the defendants were infringing the patents in suit. 3. The defendants deny infringement but their major defense is pleaded … on two bases. First they allege that the patents are invalid.… The second substantive defense arises out of the provisions of the Treaty of Rome. They allege that the plaintiff is using these proceedings to force them into signing a standard form license that offends against art 85 of the Treaty. Furthermore they say that the plaintiff is using the present proceedings as part of an abuse of a dominant position it holds within the European Union. Such activity offends against art 86 of the Treaty. Based on these two arguments, the defendants say that they have a defense to the present infringement proceedings.… 18. CDs are comparatively high capacity storage devices. They can be made to contain large quantities of digital information. There are a number of different formats for CDs. They are referred to as CD-A, CD-ROM, CD-I, and CDV. They differ from one another in some respects but they share many common technical features. Each is designed to cater for a different type of market. For example CD-A (meaning CD-Audio) is the form of CD used for storing musical recordings whereas CD-I is a form of CD used in certain types of computer controlled games. The plaintiff and Sony Corporation each embarked on the development of the technology. In about 1980 they entered into an agreement (“The Philips/Sony agreement”). Under it the two companies were to co-operate, inter alia, in the development of industry standards for CDs. In the course of that work they would obtain further patent protection. The patents would be pooled and would be enforced by Philips alone. It was agreed that the patents would be licensed, again by Philips alone, to all-comers on standard terms that were agreed between them. Philips would pursue infringers.

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19. The plaintiff started offering licenses (“the Standard Licence”) on the basis of terms agreed between them and Sony under the Philips/Sony agreement in about 1983. The plaintiff and Sony also set about trying to ensure that their method of producing CDs became the industry standard. In this they were successful. In particular the Philips/Sony standards for CD-A and CD-ROM, the two CD formats with which the defendants are concerned, became accepted as industry standards by CENELEC (The European Committee for Electrotechnical Standardisation) and the European Association for Standardising Information and Communication Systems. 20. Needless to say, a CD player can only play a CD that is compatible with it. The manufacturers of the players need to make their equipment capable of playing most of the CDs on the market while the manufacturers of CDs need to ensure that their products can be played on the majority of players on the market. This can be achieved if the manufacturers of CDs and players adhere to the same standards. Since the international standards involve the use of technology that is covered by various Philips or Sony patents, any person trying to enter the market has to obtain a license from and pay royalties to Philips. It is not economically viable for a producer of CDs to enter the market without adhering to those standards. 21. The Standard Licence includes standard royalty and grant back provisions. Although the defendants assert that the patents in suit are invalid and have not been infringed, they plead that they have at all times been prepared and remain prepared to accept a license on reasonable terms under the patents in suit. The problem is, of course, that terms that they would consider reasonable are not those that are provided for in the Standard Licence and that have been accepted by all the other licensees in the industry. Mr. Lasok QC, who appears for the plaintiff, puts the defendants’ position rather unflatteringly. They complain in their pleadings of the highly competitive nature of the CD market and its low profit margins. He says that what they do not want is an even reduction of the royalties to be paid by all licensees. They want a preferential reduction of royalties that favors them and improves their competitiveness. It is not possible for the plaintiff to agree a more favorable royalty rate because each licensee is entitled contractually to parity with other licensees as to the royalty rate with the consequence that if the plaintiff was to give the defendants a more favorable royalty rate, all other licensees would be entitled to the same rate.… 23. For the purpose of this action, it is necessary to consider three matters; first what is the dominant position allegedly held by the plaintiff, secondly what breach of the dominant position is alleged and thirdly what consequences flow from that breach if it is made out. The broad introductory paragraph to art 86 provides that: Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market in so far as it may affect trade between Member States.

24. The existence of a dominant position itself is not prohibited. Further, the holder of a dominant position in one market is not penalized if he abuses a nondominant position in another market. It is only abuse of the dominant position that is prohibited

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and then only to the extent that, “it may affect trade between Member States”—that is only to the extent that the identified abuse of the identified dominant position may affect trade.… 26. Although the defense pleads that the plaintiff holds a dominant position in the market for licensing technology, there is no doubt that what is meant by that is the licensing of patented technology. That is the basis on which the argument before me has proceeded. No doubt the plaintiff and Sony have generated technology in the CD field but what is complained about is the plaintiff’s control over the patents that are an essential requirement for entering into the CD market defined by the international standards. Other technology is readily available to those interested in entering the market. These defendants did not need any technology from Sony or the plaintiff to commence the manufacture of the CDs that are pleaded as infringements. What they need is an appropriate patent license. There is no suggestion by the defendants that the plaintiff holds a dominant position in the licensing of technology other than patented technology. 27. The defendants plead that the plaintiff’s dominance in this market has been abused in a number of ways. Although it will be necessary to consider the details of this plea later, by far and away the most important breach alleged is the rate of royalty required. This is referred to at numerous places in the defense. The most extensive plea is as follows: The rates of royalty are abusive for the following reasons: … (3)(iv) The rate of royalty is excessive and the Defendant relies upon the facts and matters set out at paragraphs 43.2 to 43.4 above. The Defendant will rely also upon the fact that a typical rate of royalty in the electronics industry including the Licence to replicate media is between about 0.5% and 3% and the rate demanded herein is in excess thereof.…

28. The third of these needs some explanation. It is not suggested that any licensee obtains a license at other than the standard royalty. However it is said that the Standard Licence grants a license for the entire range of patents and technical information held by the plaintiff. The defendants are therefore obliged to take a license for patents that they do not need, for example the patents relating to CD-I. It is therefore suggested, although not asserted expressly in the pleading, that the defendants are being asked to pay more than they should. In that sense they are paying more than other licensees who take the Standard Licence but need to operate under all the patents.… 29. The same royalty objections are set out in paragraph 43.2 of the defense: The Standard Licence is in breach of Article 86 in that … [i]t has the effect of limiting production contrary to Article 86(b) in that the rate of royalty curtails the ability of potential manufacturers such as the defendant from producing economically or at all. Initially, the royalty of 3 cents per item represented about 1% of manufacturing costs. However, today, 3 cents per item represents a much higher percentage of manufacturing costs (nearer 10%) in circumstances where the Production Market referred to at paragraph 38.2 has become intensely price sensitive, where margins have decreased and where many of the patents set out in

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Exhibits I through IV have expired. Moreover, the royalty has a disproportionate effect on those licensees who are replicators only (i.e., companies that are not the owners or controllers of the copyright in the material recorded on the discs but only licensees in relation thereto).

30. So, according to the defendants, those who took their licenses some time ago should continue to pay at the old rate of 3% but they, as new entrants, should pay much less. What they are not suggesting is that all rates should move down equally for all licensees. 31. In view of the alleged abuses of the plaintiff’s dominant position, the defendants say that they are entitled to a license on reasonable terms.… 33. The plaintiff says that this defense and the counterclaim based on it are unarguable. The Treaty of Rome recognizes the continued existence and value of intellectual property rights. It is not true to say, as the defendants do, that under Article 86 the plaintiff, by virtue of his position as a patent owner, is bound to grant licenses on fair and reasonable terms. It can, if it wishes, refuse to grant licenses at all. Before turning to consider the case law, it may be useful to say something about the nature of patent rights. 34. A patent does not entitle the proprietor to exploit his invention. His patented invention may infringe an earlier patent belonging to someone else. But a patent entitles the proprietor to the exclusive right to prevent others from exploiting his invention. This exclusive right is the central defining characteristic of a patent. It is what gives it its legal and commercial value. The function of patents is to promote research and development. To do this our legal system, and the legal systems of most countries, provide a mechanism for rewarding those who put time, effort and skill into research and development. The reward takes the form of a right to exclude competitors from using or exploiting any inventive product of such research and development. The purpose and effect of that right of exclusivity is to enable the owner of the patent to take advantage of the absence of competition so as to increase his prices and thereby increase his profits or market or both. It is the hope and promise of that financial reward that is designed to justify the risk involved in investing in research and development. Alternatively the proprietor of the right may choose to obtain his financial reward by charging whatever price the market will bear to third parties who wish to be given the right to exploit the invention. In either case it is the power and ability to reap financial rewards from the right to exclude or control competition that underpins the patent system and is its perceived justification. If, as the defendants suggest, the Treaty of Rome obliges a patentee to grant licenses on fair and reasonable terms, it will have a serious impact on the patent system. Not only would the patentee not be able to decline licenses at all but his ability to benefit financially from having taken the research and development risk would be seriously compromised. A license negotiated between a patentee and a potential licensee in circumstances where the patentee can decline to grant a license at all is likely to be on very different terms to one negotiated in circumstances where the licensee knows that he is entitled to a license

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and the court or some other third party can be called on to settle reasonable terms if the patentee asks for too much.…

38. Kooninklijke Philips Electronics N. V. v. National Institute of Industrial Property (INPI), Appeal in writ of mandamus 2006.51.01.504157-8 (2008) FEDERAL REGIONAL COURT OF THE SECOND REGION, BRAZIL (SECOND SPECIALIZED CHAMBER) Opinion delivered by Federal Appellate Judge Liliane Roriz. 1. There are a number of different and specific aspects involved in the formation of an international technology-transfer contract. On the one hand, there is the holder of the technology—the transferor or licensor, usually located in a country that is a producer of technology in the so-called first world, and, on the other hand, there is the recipient, or licensee, almost always based in a developing or less-developed country. The main aims of the former party are to maximize remuneration for his technology, optimizing its exploitation, and to promote the use of said technology as a way of entering new markets. The main aims of the latter party are to obtain innovative technology and technological capacity in itself. 2. When considering the contracts submitted to it for annotation or registration, the National Institute of Industrial Property (INPI) can and must assess the conditions under which said contracts were signed, in light of the mandate bestowed upon it by Act No. 5.648, of December 11, 1970, creating the INPI. Fundamentally, the INPI’s task is to give effect to industrial property legislation, but without losing sight of the social, economic, legal and technical functions of said legislation and always bearing in mind the desired aim of the economic development of the country. 3. In repealing the sole paragraph of Article No. 2 of Act No. 5.648/70, Act No. 9.279/1996 merely withdrew the INPI’s competence in terms of judging whether contracts were appropriate and opportune, that is to say, the power to decide which technologies would be the most appropriate with regard to the economic development of the country. This decision is now uniquely the preserve of the contracting parties. The INPI has, however, retained the power to remove unfair terms, in particular those involving payment in foreign currencies, given the need to carry out payments of values abroad. In this regard, the INPI operates at least as the delegated agent of the tax authorities. 4. The large-scale dissemination of production on a global scale gave rise to a dramatic drop in prices (owing to oversupply), a situation that led to excessive costs, with the implementation of the contract being jeopardized should the fixed value of each product marketed be maintained. 5. The figure of 5 per cent set for royalty payments is both reasonable and proportionate given that it is both the maximum percentage coefficient authorized in terms of tax

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deductions, in line with Article 12 of Act No. 4.131/62, and the most frequent maximum value, as well as having been adopted as a reference with regard to technology-licensing and transfer contracts.…

[2]

Discriminatory Royalties 39. KFTC Decision No. 2009-281 (Qualcomm case) KOREAN FAIR TRADE COMMISSION8

This case concerns anticompetitive acts of Qualcomm in the modem/RF chip markets. The anticompetitive acts in question are (1) charging discriminatory royalties and offering loyalty rebates on modem chips and RF chips using its monopoly status in the concerned technology market, and (2) imposing unfair conditions on a counterparty to a licensing contract, exploiting its status as owner of the technology incorporated into a standard of mobile communications.… The CDMA and GSM market stemmed from owners of original technologies that structure respective communication systems. Most of the patents concerning CDMA communication system are owned by Qualcomm and, quite differently, original technologies for the GSMA are owned by Nokia, Sony, Ericsson, etc. Companies that own such original technologies license their technologies, in return for royalties, to other technology owners, modem chip manufacturers and mobile handset makers. Sometimes technology owners are cross-licensing their technologies at zero or reduced royalty rates. Manufacturers of mobile handset components such as modem chips get a license from technology-owning companies to use the technologies necessary for manufacturing components incorporated into mobile handsets, and sell those components to handset makers. Sometimes, technology owners themselves make handset components. Mobile handset makers assemble hardware and software to make the products, and pay royalties for patent technologies embedded in their products. Royalties are charged in different ways according to patent policies of the technology-owing companies. The handset makers then sell their products to mobile carriers or consumers, and mobile carriers provide consumers with mobile communication service. According to the aforementioned process, the relevant markets for the mobile communications business can be categorized into technology licensing market concerning original technologies for mobile communications, mobile handset hardware components market, mobile handset software market, mobile handset market, and mobile communication service market. Here, the technology licensing market and

8. Reported by Lee, In Ho (Professor, Seoul National University), reproduced with permission from the KFTC.

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handset component market can be divided into various separate markets depending on each type of technology and components.… Standardization is a process of developing standard methods in order to ensure interoperability among products. For example, standardization of electric plugs enhance consumer convenience in using electronic goods by making electronic goods have plugs of the same, standardized shape regardless of brands. A standard may be set forth naturally through competition among products without a specific agreement as in the case of the Windows operating system, or developed by companies or business associations in an industry or at the initiative of the government or public agencies. Standardization brings about several positive effects. First, it reduces risks involved with investment in certain technologies and purchase of goods using concerned technologies. Until a standard is set, either through the standard development process or competition among products, uncertainty remains over companies’ investment in technologies or purchase of goods using certain technologies, because where certain technologies lose in the competition, investment in or goods using those technologies become useless. On the contrary, if the government or a standard-setting body establishes certain technologies as a standard, those technologies are sure to be used by many people and consequently risks involved with the investment in those technologies or purchase of goods using the concerned technologies will be reduced. Second, as for standardization in an industry with high network effect, the use of standards by many people will increase the scale of production related to the standards, resulting in the cost-cutting effect from the economy of scale. Third, the consequent enhancement in interoperability strengthens competition in the downstream market using the standardized technologies. More suppliers can supply goods that meet the standards, and consumers can easily replace goods thanks to interoperability of goods. As a result, the downstream market would be subject to stronger competition, which would ultimately benefit consumers with higher-quality goods and lower prices. However, once a standard is set, consumers and companies are highly likely to be locked in the standard. If a specific technology is included in a standard and such technology is essential to the practice of the standard, then the company holding a patent on the technology would get more superior bargaining power. That is because, once a standard is established, technologies incorporated into the standard spread rapidly with lower uncertainty while other technologies with similar function go downhill. Nevertheless, if competition is strong with easiness in changing standards among multiple standards or between existing and newly adopted standards, the dominance of a patent holder of the standardized technology would be weaker. Once a standard is set forth, a patent holder of the technology incorporated into a standard comes to have market dominance that would otherwise be impossible. In order to prevent patent holders of essential technologies included in a standard from abusing its dominance, standard-setting organizations impose certain requirements on the patent holders such as disclosing patent information in the standard development process and licensing its patent technologies in a fair manner. More specifically, patent

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holders are required to waive their rights to the patents or allow the patents to be used for free, or provide an assurance or commitment to licensing their patents on reasonable and non-discriminatory (RAND) terms. The European Telecommunications Standards Institute (hereinafter “ETSI”) requires the fair, reasonable, and nondiscriminatory (FRAND) terms for technology licensing, adding “fair” to the RAND assurance. Under the FRAND regime, a patent holder is required to license its essential technologies included in a standard on fair, reasonable, and nondiscriminatory terms. Korea adopted the CDMA technology as its mobile communication standard in 1993 and succeeded in commercializing the CDMA system for the first time in the world in 1996. The CDMA standard was adopted in Korea in order to create new market opportunities even though the GSM system had been already commercialized. In May 1997 when the Telecommunication Technology Association (hereinafter “TTA”) of Korea was in the course of developing standards for the 800MHz band, Qualcomm submitted its written commitment to the TTA that it would license its technology on RAND terms. Korea selected Qualcomm’s CDMA system as the nation’s mobile communication standard in 1993, and successfully commercialized the system for the first time in the world in 1996. Afterwards, Qualcomm maintained a dominant position in the CDMA modem chip market of Korea with more than 98% market share.… Samsung Electronics, VIA and EONEX began to manufacture and sell CDMA modem chips respectively in 1999, 2003 and 2004, Qualcomm hindered their entry to market with, for instance, discriminatory royalty and loyalty rebates. Such practices by Qualcomm resulted in most Korean mobile handset manufacturers using Qualcomm chips over its competitors’, excluding competitors’ modem chips from the market.… Licensing its CDMA technology to domestic mobile handset makers including Samsung Electronics, LG Electronics and Pantech & Curitel, Qualcomm charged companies that used non-Qualcomm chips discriminatively high royalties. From April 2004, Qualcomm set royalties in a discriminatory manner by subtracting prices of Qualcomm-made components from selling prices of mobile handsets for the domestic use, lowering the royalty ceiling for companies using Qualcomm chips, increasing the royalty difference from those using its competitors’ chips, and charging higher royalties on handsets embedded with non-Qualcomm chips for export than those with Qualcomm chips.… Entering into licensing agreements regarding CDMA technology with Korean mobile handset makers such as Samsung Electronics and LG Electronics, Qualcomm made sure that it would continue to get 50% of the patent royalties it garnered for its technology even after the concerned patent expired or became invalid. The company maintained such royalty provision in the WCDMA licensing agreement in 2004.… The act of charging discriminatory royalties depending on the use of Qualcomm chips constitutes discriminatory conduct by a vertically integrated monopolist, and is considered to cause potential anticompetitive effect and actually has lessened competition given that: the company’s act was in violation of the FRAND assurance; and the royalty discrimination continued for a long time and the degree of such discrimination was high.

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Qualcomm is a vertically integrated company that manufactures and sells modem chips. The company obtained dominant position in the technology market as its patented CDMA technology was incorporated into the mobile communications standard. As a dominant company in the vertically-integrated downstream and upstream markets of CDMA technology, Qualcomm excluded its rivals by refraining mobile handset manufactures from purchasing from its rivals with its discriminatory royalty practices based on handset makers’ use of Qualcomm chips. As for the mobile communications industry, leaving the matter of selecting mobile communications technologies to the market could make the whole system inefficient, because communications network requires a large amount of upfront investment in its establishment, and radio wave, which is a finite resource, could be used in an unfocused manner. Therefore, most countries select one or two mobile communications technologies as their national or regional standard(s) to pursue the economy of scale and promote competition in the downstream markets that use the standard technology. However, the selection of a standard is highly likely to lessen competition in relevant technology markets, because the moment certain technologies are chosen over other rival technologies as standards, those who own the technologies can automatically acquire dominant power. In order to address such competitive concerns, most of the world’s standard-setting organizations require patent holders to provide an assurance, if their patents are included in a standard, they would license their patents on fair, reasonable, and non-discriminatory (FRAND) terms. Qualcomm, too, provided the FRAND commitment during its participation in the standard-setting process. However, the company abused its dominant position in the mobile technology to create, maintain and strengthen its monopoly in the downstream markets of modem/RF chips in violation of such commitment. In order to prevent the abuse of such monopoly power, a standard-setting organization requires the patent owner to provide a commitment that they will license their patents on fair, reasonable, and non-discriminatory (FRAND) terms. In the Broadcom vs. Qualcomm [case], the U.S. Court of Appeals for the Third Circuit held that the breach of FRAND terms would constitute antitrust violation. The Federal Circuit conceded that Qualcomm committed to licensing its patents on FRAND terms before a private standard-setting organization and then reneged on those commitments after it successfully had its technology included in the standard, and concluded that these actions by Qualcomm gave rise to antitrust liability. As Qualcomm owned most of the CDMA patents, companies that manufactured CDMA2000 handsets and modem chips had to pay royalties to Qualcomm for the license to use its technologies. In this situation, charging discriminatory royalties based on the use of Qualcomm chips would weaken price competitiveness of other modem chip manufacturers, because other manufactures, who already had paid royalties for Qualcomm’s CDMA patents, would have to set their prices much lower than Qualcomm considering royalty rates applied to handset makers that use non-Qualcomm chips. Moreover, it was found that even a small price difference could become a

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decisive factor of price competitiveness in the mobile handset market due to low profit margin per unit, and that low-end modem chip market was particularly sensitive to price differences as the market was a channel for late comers’ entry to the market or expansion of business. When it comes to Qualcomm’s royalty practices applied to handsets for domestic use and export, the consequent average royalty discount was about $1 each per unit. However, a $1 difference in royalty was sufficient to influence handset makers in choosing a modem chip supplier in the market where price competitiveness was an important element. In fact, Qualcomm itself saw such discount level was enough to exercise an influence on handset makers’ choice. Such discriminatory royalty practice led to a plunge in market share of Qualcomm’s competitors who attempted to enter the modem chip market, Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297, 314 (DC. Cir 2007) having exclusionary effect and ultimately suppressing competition in the relevant markets. Before such discrimination by Qualcomm, domestic handset manufactures—such as Samsung and VIA—started to use non-Qualcomm chips. But after the company implemented discriminatory royalty policy, the use of non-Qualcomm chips by handset makers saw a considerable drop, and, since 2005 Qualcomm had maintained a near monopoly with its market share close to 100%. In conclusion, the discriminatory royalty practices by Qualcomm constituted abuse of dominant position in the upstream technology market to offer unfair price or other transaction terms, which consequently interfered with business activities of other companies in the downstream CDMA modem chip market in violation of Article 3-2 paragraph (1) Item 3 of the MRFTA, and unfair business practice of discriminating against a certain transacting partner in violation of Article 23 paragraph (1) Item 1 of the MRFTA.… As unlimited exclusive rights to patents could inhibit technological innovations, patent rights are granted for a limited period of time. Under this term, patent holders cannot exercise their exclusive rights after the patents expire. However, Qualcomm included a provision in a licensing contract that ensured the royalty payment even after the company’s patents expired. Such unfair trade terms were based on the company’s monopoly power obtained from its patented technologies included in a standard. Qualcomm alleged that the licensing provision should not be seen as unfair, since such provision had not been and was not likely to be implemented in the future as well. But the act of imposing an unfair condition itself was considered abuse of its dominant position. Based on such grounds, the KFTC decided that such conduct by Qualcomm was illegal in violation of Article 23 paragraph (1) Item 4 of the MRFTA, which prohibits the “act of engaging in a trade with its transacting partner by unfairly taking advantage of its position in the business area”.…

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Royalties on Unpatented Goods 40. Mercoid Corp. v. Mid-Continent Investment Co., 320 U.S. 661 (1944) SUPREME COURT OF THE UNITED STATES

Mr. Justice Douglas delivered the opinion of the Court. This suit was brought by respondent, Mid-Continent Investment Co., against petitioner, Mercoid Corporation, for contributory infringement of the Cross combination patent No. 1,758,146, issued May 13, 1930, for a domestic heating system. Mercoid in its answer denied contributory infringement and alleged that Mid-Continent should be barred from relief because it was seeking to extend the grant of the patent to unpatented devices. The alleged improper use of the patent was also the basis of a counterclaim filed by Mercoid in which it was averred that Mid-Continent and its exclusive licensee under the patent, respondent Minneapolis-Honeywell Regulator Co., who was brought in as a party plaintiff, had conspired to expand the monopoly of the patent in violation of the antitrust laws. Mercoid asked not only for declaratory relief but for an accounting and treble damages as well.… The controversy centers around the license agreement between Mid-Continent and Minneapolis-Honeywell. By that agreement Minneapolis-Honeywell received an exclusive license to make, use, sell, and to sub-license others to make, use, and sell the Cross combination patent No. 1,758,146. The royalty payments under the license, however, were to be based only upon sales of the combustion stoker switch that was an element of the combination patent embodied in the patented article but which was itself unpatented. The license agreement was construed by the Circuit Court of Appeals to mean that the royalty payments were to be made only on switches used for fire maintenance purposes under the Cross patent. And Minneapolis-Honeywell in advertising its stoker switches stated that the “right to use” the Cross system patent was “only granted to the user” when the stoker switches of Minneapolis-Honeywell were purchased from it and used in the system. Neither Mid-Continent nor MinneapolisHoneywell manufactures or installs heating systems under the Cross combination patent. There was ample evidence to sustain the findings of the District Court that respondents endeavored to use the license agreement so as to prevent the sale or use of combustion stoker switches in these heating systems unless they were the switches made by Minneapolis-Honeywell and purchased from it or its sub-licensees. The patent is a combination or system patent, covering a domestic heating system that comprises three main elements—a motor driven stoker for feeding fuel to the combustion chamber of a furnace, a room thermostat for controlling the feeding of fuel, and a combustion stoker switch to prevent extinguishment of the fire. The room thermostat functions to supply, or discontinue the supply of, heat by closing or then opening the circuit to the stoker motor at the required temperatures. The combustion stoker switch, or holdfire control, is responsive to a low temperature in the furnace causing the stoker to feed fuel so as to prevent the furnace fire from going out. The

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control of the combustion stoker switch is said to be effective in mild weather when the room thermostat may not call for heat for a considerable period. Mercoid, like Mid-Continent and Minneapolis-Honeywell, does not sell or install the Cross heating system. But the Circuit Court of Appeals found that Mercoid manufactured and sold combustion stoker switches for use in the Cross combination patent. And we may assume that Mercoid did not act innocently. Indeed the Circuit Court of Appeals said that it could find no use for the accused devices other than in the Cross combination patent. And it assumed, as was held in Smith v. Mid-Continent Investment Co., 106 F.2d 622, that the Cross patent was valid. But though we assume the validity of the patent and accept fully the findings of the Circuit Court of Appeals, we think the judgment below should be reversed. Ever since Henry v. A. B. Dick Co., 224 U.S. 1, was overruled by Motion Picture Co. v. Universal Film Co., 243 U.S. 502, this Court has consistently held that the owner of a patent may not employ it to secure a limited monopoly of an unpatented material used in applying the invention. Carbice Corp. v. American Patents Corp., supra; Leitch Mfg. Co. v. Barber Co., supra; Morton Salt Co. v. G. S. Suppiger Co., 314 U.S. 488; B. B. Chemical Co. v. Ellis, 314 U.S. 495. In those cases both direct and contributory infringement suits were disallowed on a showing that the owner of the patent was using it “as the effective means of restraining competition with its sale of an unpatented article.” Morton Salt Co. v. G. S. Suppiger Co., supra, p. 490. The Court has repeatedly held that to allow such suits would be to extend the aid of a court of equity in expanding the patent beyond the legitimate scope of its monopoly. It is true that those cases involved the use of the patent for a machine or process to secure a partial monopoly in supplies consumed in its operation or unpatented materials employed in it. But we can see no difference in principle where the unpatented material or device is itself an integral part of the structure embodying the patent. The grant of a patent is the grant of a special privilege “to promote the Progress of Science and useful Arts.” Const., Article I, §8. It carries, of course, a right to be free from competition in the practice of the invention. But the limits of the patent are narrowly and strictly confined to the precise terms of the grant.… It is the public interest that is dominant in the patent system.… It is the protection of the public in a system of free enterprise that alike nullifies a patent where any part of it is invalid … and denies to the patentee after issuance the power to use it in such a way as to acquire a monopoly that is not plainly within the terms of the grant. The necessities or convenience of the patentee do not justify any use of the monopoly of the patent to create another monopoly. The fact that the patentee has the power to refuse a license does not enable him to enlarge the monopoly of the patent by the expedient of attaching conditions to its use. United States v. Masonite Corp., supra, p. 277. The method by which the monopoly is sought to be extended is immaterial.… The patent is a privilege. But it is a privilege that is conditioned by a public purpose. It results from invention and is limited to the invention that it defines. When the patentee ties something else to his invention, he acts only by virtue of his right as the owner of property to make contracts concerning it and not otherwise. He then is subject to all the limitations upon that right that the general law imposes upon such contracts. The contract is not saved by anything in the patent laws because it relates to the invention.

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If it were, the mere act of the patentee could make the distinctive claim of the patent attach to something that does not possess the quality of invention. Then the patent would be diverted from its statutory purpose and become a ready instrument for economic control in domains where the anti-trust acts or other laws not the patent statutes define the public policy. The instant case is a graphic illustration of the evils of an expansion of the patent monopoly by private engagements. The patent in question embraces furnace assemblies that neither the patentee nor the licensee makes or vends. The struggle is not over a combination patent and the right to make or vend it. The contest is solely over unpatented wares that go into the patented product. Respondents point out that the royalties under the license are measured by the number of unpatented controls that are sold and that no royalty is paid unless a furnace covered by the patent has been installed. But the fact remains that the competition that is sought to be controlled is not competition in the sale of the patented assembly but merely competition in the sale of the unpatented thermostatic controls. The patent is employed to protect the market for a device on which no patent has been granted. But for the patent such restraint on trade would plainly run afoul of the anti-trust laws. If the restraint is lawful because of the patent, the patent will have been expanded by contract. That on which no patent could be obtained would be as effectively protected as if a patent had been issued. Private business would function as its own patent office and impose its own law upon its licensees. It would obtain by contract what letters patent alone may grant. Such a vast power “to multiply monopolies” at the will of the patentee (Chief Justice White dissenting in Henry v. A. B. Dick Co., supra, p. 53) would carve out exceptions to the antitrust laws that Congress has not sanctioned. Mr. Justice Brandeis, speaking for the Court, stated in the Carbice case that “Control over the supply of such unpatented material is beyond the scope of the patentee’s monopoly; and this limitation, inherent in the patent grant, is not dependent upon the peculiar function or character of the unpatented material or on the way in which it is used.” 283 U.S. p. 33. We now add that it makes no difference that the unpatented device is part of the patented whole.… If a limited monopoly over the combustion stoker switch were allowed, it would not be a monopoly accorded inventive genius by the patent laws but a monopoly born of a commercial desire to avoid the rigors of competition fostered by the anti-trust laws. If such an expansion of the patent monopoly could be effected by contract, the integrity of the patent system would be seriously compromised.… Respondents ask the equity court for an injunction against infringement by petitioner of the patent in question and for an accounting. Should such a decree be entered, the Court would be placing its imprimatur on a scheme that involves a misuse of the patent privilege and a violation of the anti-trust laws. It would aid in the consummation of a conspiracy to expand a patent beyond its legitimate scope. But patentees and licensees cannot secure aid from the court to bring such an event to pass, “unless it is in accordance with policy to grant that help.” Beasley v. Texas & Pacific Ry. Co., 191 U.S. 492, 497. And the determination of that policy is not “at the mercy” of the parties (id. at 498) nor dependent on the usual rules governing the settlement of private litigation. “Courts of equity may, and frequently do, go much farther both to give and withhold relief in furtherance of the public interest than they are accustomed to go

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when only private interests are involved.” Virginian Ry. Co. v. System Federation, 300 U.S. 515, 552. “Where an important public interest would be prejudiced,” the reasons for denying injunctive relief “may be compelling.” Harrisonville v. Dickey Clay Co., 289 U.S. 334, 338. And see United States v. Morgan, 307 U.S. 183, 194. That is the principle that has led this Court in the past to withhold aid from a patentee in suits for either direct or indirect infringement where the patent was being misused. Morton Salt Co. v. G. S. Suppiger Co., supra, at 492. That principle is controlling here. The parties cannot foreclose the courts from the exercise of that discretion by the failure to interpose the same defense in an earlier litigation. Compare Sola Electric Co. v. Jefferson Electric Co., 317 U.S. 173.…

41. Automatic Radio Manufacturing Co., Inc. v. Hazeltine Research, Inc., 339 U.S. 827 (1950) SUPREME COURT OF THE UNITED STATES Mr. Justice Minton delivered the opinion of the Court. This is a suit by respondent Hazeltine Research, Inc., as assignee of the licensor’s interest in a nonexclusive patent license agreement covering a group of 570 patents and 200 applications, against petitioner Automatic Radio Manufacturing Company, Inc., the licensee, to recover royalties. The patents and applications are related to the manufacture of radio broadcasting apparatus. Respondent and its corporate affiliate and predecessor have for some twenty years been engaged in research, development, engineering design and testing and consulting services in the radio field. Respondent derives income from the licensing of its patents, its policy being to license any and all responsible manufacturers of radio apparatus at a royalty rate that for many years has been approximately one percent. Petitioner manufactures radio apparatus, particularly radio broadcasting receivers. The license agreement in issue, which appears to be a standard Hazeltine license, was entered into by the parties in September 1942, for a term of ten years. By its terms petitioner acquired permission to use, in the manufacture of its “home” products, any or all of the patents that respondent held or to which it might acquire rights. Petitioner was not, however, obligated to use respondent’s patents in the manufacture of its products. For this license, petitioner agreed to pay respondent’s assignor royalties based upon a small percentage of petitioner’s selling price of complete radio broadcasting receivers, and in any event a minimum of $ 10,000 per year. It further agreed to keep a record of its sales and to make monthly reports thereof. This suit was brought to recover the minimum royalty due for the year ending August 31, 1946, for an accounting of other sums due, and for other relief. … The validity of the license agreement was upheld against various charges of misuse of the patents, and judgment was entered for the recovery of royalties and an accounting, and for a permanent injunction restraining petitioner from failing to pay royalties, to keep records, and to render reports during the life of the agreement. 77 F. Supp. 493. The

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Court of Appeals affirmed, one judge dissenting (176 F.2d 799), and we granted certiorari (338 U.S. 942) in order to consider important questions concerning patent misuse and estoppel to challenge the validity of licensed patents. The questions for determination are whether a misuse of patents has been shown … It is insisted that the license agreement cannot be enforced because it is a misuse of patents to require the licensee to pay royalties based on its sales, even though none of the patents are used. Petitioner directs our attention to the “Tie-in” cases. These cases have condemned schemes requiring the purchase of unpatented goods for use with patented apparatus or processes, prohibiting production or sale of competing goods, and conditioning the granting of a license under one patent upon the acceptance of another and different license. Petitioner apparently concedes that these cases do not, on their facts, control the instant situation. It is obvious that they do not. There is present here no requirement for the purchase of any goods. Hazeltine does not even manufacture or sell goods; it is engaged solely in research activities. Nor is there any prohibition as to the licensee’s manufacture or sale of any type of apparatus. The fact that the license agreement covers only “home” apparatus does not mean that the licensee is prohibited from manufacturing or selling other apparatus. And finally, there is no conditioning of the license grant upon the acceptance of another and different license.… But petitioner urges that this case “is identical in principle” with the “Tie-in” cases. It is contended that the licensing provision requiring royalty payments of a percentage of the sales of the licensee’s products constitutes a misuse of patents because it ties in a payment on unpatented goods. Particular reliance is placed on language from United States v. U.S. Gypsum Co., 333 U.S. 364, 389, 400. That case was a prosecution under the Sherman Act for an alleged conspiracy of Gypsum and its licensees to extend the monopoly of certain patents and to eliminate competition by fixing prices on patented and unpatented gypsum board. The license provisions based royalties on all sales of gypsum board, both patented and unpatented. It was held that the license provisions, together with evidence of an understanding that only patented board would be sold, showed a conspiracy to restrict the production of unpatented products that was an invalid extension of the area of the patent monopoly. 333 U.S. at 397. There is no indication here of conspiracy to restrict production of unpatented or any goods to effectuate a monopoly, and thus the Gypsum case does not aid petitioner. That which is condemned as against public policy by the “Tie-in” cases is the extension of the monopoly of the patent to create another monopoly or restraint of competition—a restraint not countenanced by the patent grant. See, e.g., Mercoid Corp. v. Mid-Continent Investment Co., 320 U.S. 661, 665-666; Morton Salt Co. v. Suppiger Co., 314 U.S. 488; Ethyl Gasoline Corp. v. United States, 309 U.S. 436, 456. The principle of those cases cannot be contorted to circumscribe the instant situation. This royalty provision does not create another monopoly; it creates no restraint of competition beyond the legitimate grant of the patent. The right to a patent includes the right to market the use of the patent at a reasonable return. See 46 Stat. 376, 35 U.S.C. § 40; Hartford-Empire Co. v. United States, 323 U.S. 386, 417, 324 U.S. 570, 574.

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The licensing agreement in issue was characterized by the District Court as essentially a grant by Hazeltine to petitioner of a privilege to use any patent or future development of Hazeltine in consideration of the payment of royalties. Payment for the privilege is required regardless of use of the patents. The royalty provision of the licensing agreement was sustained by the District Court and the Court of Appeals on the theory that it was a convenient mode of operation designed by the parties to avoid the necessity of determining whether each type of petitioner’s product embodies any of the numerous Hazeltine patents. 77 F. Supp. at 496. The Court of Appeals reasoned that since it would not be unlawful to agree to pay a fixed sum for the privilege to use patents, it was not unlawful to provide a variable consideration measured by a percentage of the licensee’s sales for the same privilege. 176 F.2d at 804. Numerous District Courts that have had occasion to pass on the question have reached the same result on similar grounds, and we are of like opinion. The mere accumulation of patents, no matter how many, is not in and of itself illegal. See Transparent-Wrap Machine Corp. v. Stokes & Smith Co., 329 U.S. 637. And this record simply does not support incendiary, yet vague, charges that respondent uses its accumulation of patents “for the exaction of tribute” and collects royalties “by means of the overpowering threat of disastrous litigation.” We cannot say that payment of royalties according to an agreed percentage of the licensee’s sales is unreasonable. Sound business judgment could indicate that such payment represents the most convenient method of fixing the business value of the privileges granted by the licensing agreement. We are not unmindful that convenience cannot justify an extension of the monopoly of the patent. See, e.g., Mercoid Corp. v. Mid-Continent Investment Co., 320 U.S. 661, 666; B. B. Chemical Co. v. Ellis, 314 U.S. 495, 498. But as we have already indicated, there is in this royalty provision no inherent extension of the monopoly of the patent. Petitioner cannot complain because it must pay royalties whether it uses Hazeltine patents or not. What it acquired by the agreement into which it entered was the privilege to use any or all of the patents and developments as it desired to use them. If it chooses to use none of them, it has nevertheless contracted to pay for the privilege of using existing patents plus any developments resulting from respondent’s continuous research. We hold that in licensing the use of patents to one engaged in a related enterprise, it is not per se a misuse of patents to measure the consideration by a percentage of the licensee’s sales.…

[4]

Post-expiry Royalties 27. As a matter of first impression, it seems that the Brulotte court (United States) and the Kai Ottung Court (European Union) have reached opposed solutions as regards the antitrust conformity of post-expiry royalties.9 However, this may be just an impression. Actually, the solutions may not be different. It is true that the Brulotte opinion concluded that charging post-expiry royalties conflicts with antitrust law (and principles), whereas the European court held that there was nothing

9. In the matter of post-expiry royalties, see also the Qualcomm decision by the Korean Fair Trade Commission (case no. 40).

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wrong with a licensing agreement containing that same clause. But the European court added a caveat that, in practice, leads to the same result as in Brulotte: a post-expiry royalty clause is acceptable only if it was established before the expiry of the patent term and provided that the licensee is entitled to terminate the license under reasonable conditions. This places the decision to accept the post-expiry royalties entirely in the hands of the licensee. In this way the post-expiry royalty is not imposed by the licensor and the licensee may stop paying royalties whenever he/she deems it convenient. The licensee may even avoid paying royalties altogether if it terminates the agreement prior to the expiry. 28. Actually, a post-expiry royalty clause may be acceptable beyond the strict requirements imposed by the Kai Ottung court, if the royalties concern the use of the licensed intellectual property asset before the expiry of its term of protection. In this manner, licensors and licensees can agree on lower rates to be paid for a longer period and in more installments.

42. Brulotte v. Thys Co., 379 U.S. 29 (1964) UNITED STATES SUPREME COURT Mr. Justice Douglas delivered the opinion of the Court. Respondent, owner of various patents for hop picking, sold a machine to each of the petitioners for a flat sum and issued a license for its use. Under that license, there is payable a minimum royalty of $500 for each hop-picking season or $3.33 1/3 per 200 pounds of dried hops harvested by the machine, whichever is greater. The licenses, by their terms, may not be assigned, nor may the machines be removed from Yakima County. The licenses issued to petitioners listed twelve patents relating to hop picking machines, but only seven were incorporated into the machines sold to and licensed for use by petitioners. Of those seven, all expired on or before 1957. But the licenses issued by respondent to them continued for terms beyond that date. Petitioners refused to make royalty payments accruing both before and after the expiration of the patents. This suit followed. One defense was misuse of the patents through extension of the license agreements beyond the expiration date of the patents. The trial court rendered judgment for respondent, and the Supreme Court of Washington affirmed. 62 Wash. 2d 284, 382 P.2d 271. The case is here on a writ of certiorari. 376 U.S. 905. We conclude that the judgment below must be reversed insofar as it allows royalties to be collected that accrued after the last of the patents incorporated into the machines had expired. The Constitution by Article I, §8 authorizes Congress to secure “for limited times” to inventors “the exclusive right” to their discoveries. Congress exercised that power by 35 U.S.C. §154, which provides in part as follows: Every patent shall contain a short title of the invention and a grant to the patentee, his heirs or assigns, for the term of seventeen years, of the right to exclude others

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from making, using, or selling the invention throughout the United States, referring to the specification for the particulars thereof.…

The right to make, the right to sell, and the right to use “may be granted or conferred separately by the patentee.” Adams v. Burke, 84 U.S. 456. But these rights become public property once the 17-year period expires. See Singer Mfg. Co. v. June Mfg. Co.,163 U.S. 169, 185; Kellogg Co. v. National Biscuit Co., 305 U.S. 111, 118. As stated by Chief Justice Stone, speaking for the Court in Scott Paper Co. v. Marcalus Mfg. Co., 326 U.S. 249, 256: … any attempted reservation or continuation in the patentee or those claiming under him of the patent monopoly, after the patent expires, whatever the legal device employed, runs counter to the policy and purpose of the patent laws.

The Supreme Court of Washington held that, in the present case, the period during which royalties were required was only “a reasonable amount of time over which to spread the payments for the use of the patent.” 62 Wash. 2d at 291, 382 P.2d at 275. But there is intrinsic evidence that the agreements were not designed with that limited view. As we have seen, the purchase price in each case was a flat sum, the annual payments not being part of the purchase price, but royalties for use of the machine during that year. The royalty payments due for the post-expiration period are, by their terms, for use during that period, and are not deferred payments for use during the pre-expiration period. Nor is the case like the hypothetical ones put to us where nonpatented articles are marketed at prices based on use. The machines in issue here were patented articles, and the royalties exacted were the same for the post-expiration period as they were for the period of the patent. That is peculiarly significant in this case in view of other provisions of the license agreements. The license agreements prevent assignment of the machines or their removal from Yakima County after, as well as before, the expiration of the patents. Those restrictions are apt and pertinent to protection of the patent monopoly, and their applicability to the post-expiration period is a telltale sign that the licensor was using the licenses to project its monopoly beyond the patent period. They forcefully negate the suggestion that we have here a bare arrangement for a sale or a lease at an undetermined price based on use. The sale or lease of unpatented machines on long-term payments based on a deferred purchase price or on use would present wholly different considerations. Those arrangements seldom rise to the level of a federal question. But patents are in the federal domain, and “whatever the legal device employed” (Scott Paper Co. v. Marcalus Mfg. Co., supra, at 326 U.S. 256), a projection of the patent monopoly after the patent expires is not enforceable. The present licenses draw no line between the term of the patent and the post-expiration period. The same provisions as respects both use and royalties are applicable to each. The contracts are, therefore, on their face a bald attempt to exact the same terms and conditions for the period after the patents have expired as they do for the monopoly period. We are, therefore, unable to conjecture what the bargaining position of the parties might have been and what resultant arrangement might have emerged had the provision for post-expiration royalties been divorced from the patent and nowise subject to its leverage.

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In light of those considerations, we conclude that a patentee’s use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se. If that device were available to patentees, the free market visualized for the postexpiration period would be subject to monopoly influences that have no proper place there. Automatic Radio Co. v. Hazeltine, 339 U.S. 827, is not in point. While some of the patents under that license apparently had expired, the royalties claimed were not for a period when all of them had expired. That license covered several hundred patents, and the royalty was based on the licensee’s sales, even when no patents were used. The Court held that the computation of royalty payments by that formula was a convenient and reasonable device. We decline the invitation to extend it so as to project the patent monopoly beyond the 17-year period. A patent empowers the owner to exact royalties as high as he can negotiate with the leverage of that monopoly. But to use that leverage to project those royalty payments beyond the life of the patent is analogous to an effort to enlarge the monopoly of the patent by tieing the sale or use of the patented article to the purchase or use of unpatented ones. See Ethyl Gasoline Corp. v. United States, 309 U.S. 436; Mercoid Corp. v. Mid-Continent Inv. Co., 320 U.S. 661, 664-665, and cases cited. The exaction of royalties for use of a machine after the patent has expired is an assertion of monopoly power in the post-expiration period, when, as we have seen, the patent has entered the public domain. We share the views of the Court of Appeals in Ar-Tik Systems, Inc. v. Dairy Queen, Inc., 302 F.2d 496, 510, that, after expiration of the last of the patents incorporated in the machines “the grant of patent monopoly was spent” and that an attempt to project it into another term by continuation of the licensing agreement is unenforceable.…

43. Kai Ottung v. Klee & Weilbach A/S and Thomas Schmidt A/S, Case 320/87 (1989) COURT OF JUSTICE OF THE EUROPEAN UNION (SIXTH CHAMBER) 1. By order of 23 September 1987, which was received at the Court Registry on 14 October 1987, the Sì—og Handelsret referred to the Court for a preliminary ruling under Article 177 of the EEC Treaty a number of questions on the interpretation of Article 85(1) of the EEC Treaty, with a view to determining the compatibility with that provision of certain clauses contained in a licensing agreement. 2. The questions were raised in proceedings concerning certain clauses in a licensing agreement under which Kai Ottung, a civil engineer, the plaintiff in the main proceedings, granted to A/S Anton Petersen & Henius Eftf (hereinafter referred to as “the licensee”) the exclusive right—which was subsequently assigned to the defendants in the main proceedings—to exploit two control devices that he had designed for use on

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brewery tanks. When the agreement was entered into, the licensee’s business was concerned mainly with the sale of brewery equipment. 3. Under clauses 1 and 2 of that agreement the licensee undertook, for an indeterminate period, to pay royalty for each device sold. Under clause 5 of the agreement, as amended by an addendum, the agreement may be terminated only by the licensee’s giving six months’ notice expiring on 1 October of any year. When such termination takes effect, the licensee is permitted to manufacture only a number of devices corresponding to the orders received as at the date of expiry of the agreement, less the number of devices, if any, in stock. 4. The agreement was entered into after a patent application had been filed in respect of one of the control devices, fitted with a non-return valve for the admission of air, but before the patent was granted in Denmark. During the years following the grant of the patent, the licensee paid the agreed royalty when selling the devices developed by Mr. Ottung, most of which incorporated the non-return valve for the admission of air. The Danish patent expired on 12 April 1977 and the last patent in respect of the same devices granted in a Member State expired on 15 March 1980. As from the end of 1980, the defendants in the main proceedings ceased paying the royalty, on the ground, inter alia, that all the patents had expired; however, they did not terminate the licensing agreement pursuant to clause 5, maintaining that the discontinuance of royalty payments was tantamount to termination . 5. In the course of the proceedings before the national court, Mr. Ottung claimed that the defendants should be ordered, as from January 1, 1981, to pay him the royalty provided for in the agreement or, in the alternative, royalty of a lower amount to be fixed by the court. In support of those claims, he argued in particular that the licensing agreement had been entered into for an indeterminate period and could not cease to apply until the defendants had terminated it in accordance with clause 5. 6. Considering that the dispute raised certain questions concerning the interpretation of Article 85(1) of the EEC Treaty, the Sì—og Handelsret submitted the following questions for a preliminary ruling: (1) Does a contractual obligation under which a licensee of a patented invention is to pay royalty for an indeterminate period, and thus even after the expiry of the patent, constitute a restriction of competition of the kind referred to in Article 85(1) of the Treaty of Rome where the agreement was entered into after the patent application was submitted and immediately before the grant of the patent? In that connection, is it of any significance that the grantor cannot terminate the agreement whereas the licensee can bring it to an end by giving a certain notice of termination and, according to the terms of the agreement, is thereafter not entitled to exploit the patent? (2) To be answered if Question 1 is answered in the affirmative: Does a contractual obligation under which a licensee of a nonpatented product is to pay royalty for an indeterminate period, and thus even after the patent for products also covered by the licensing agreement has expired, specifically in respect of that product constitute a restriction of competition of the kind referred

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to in Article 85(1) of the EEC Treaty where it is established that the nonpatented product complements the product for marketing purposes and that the agreement was entered into after the patent application was submitted and immediately before the grant of the patent? In that connection is it of any significance that the licensee only entered into the agreement to pay royalty in respect of the nonpatented product because otherwise he would not obtain a license for the patented invention? (3) To be answered if Question 1 is answered in the affirmative: Does a contractual obligation under which, for the use of a design protected by the law of copyright or under the Marketing Law, a licensee is to pay royalty for an indeterminate period, and thus even after the expiry of the patent on the product in question, constitute a restriction of competition of the kind referred to in Article 85(1) of the Treaty of Rome where it is established that the agreement was entered into after the patent application was submitted and immediately before the grant of the patent? In that connection is it of any significance that the licensee only entered into the agreement to pay royalty for exploitation of the copyright or for protection against passing off under the Marketing Law because he would obtain a license for the patented invention? (4) To be answered if Question 1 is answered in the negative: Does a provision in a licensing agreement according to which a licensee is not entitled to sell the product in question after the termination of the agreement constitute a restriction of competition of the kind referred to in Article 85(1) where the licensing agreement relates to a patented product and the patent has expired and where the agreement was entered into after the patent application was submitted and immediately before the grant of the patent?

7. Reference is made to the Report for the Hearing for a fuller account of the facts of the case and the observations submitted to the Court, which are mentioned or discussed hereinafter only in so far as is necessary for the reasoning of the Court. The first question 8. With respect to the first limb of the first question, it should first be observed that Article 85(1) prohibits as incompatible with the common market agreements between undertakings that may affect trade between Member States and that have as their object or effect the prevention, restriction or distortion of competition within the common market. 9. It must be assumed that the national court considers that trade between Member States is likely to be affected in the circumstances with which the main proceedings are concerned. 10. Restrictions that are imposed by the proprietor of a patent upon the reproduction, use or exploitation of a patented invention otherwise than under a license granted for that purpose and that derive from the application of national legislation intended to protect industrial property rights cannot in themselves be regarded as preventing, restricting or distorting competition within the common market within the meaning of Article 85(1). 11. The possibility cannot be ruled out that the reason for the inclusion in a licensing agreement of a clause imposing an obligation to pay royalty may be unconnected with

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a patent. Such a clause may instead reflect a commercial assessment of the value to be attributed to the possibilities of exploitation granted by the licensing agreement. That is even more true where, as in the main proceedings, the obligation to pay royalty in respect of two devices, one being patented after the agreement was entered into and the other being complementary to the first, was embodied in a licensing agreement entered into before the patent was granted. 12. Where the obligation to pay royalty was entered into for an indeterminate period and thus purports to bind the licensee even after the expiry of the patent concerned, the question arises whether, having regard to the economic and legal context of the licensing agreement, the obligation to continue to pay royalty might constitute a restriction of competition of the kind referred to in Article 85(1). 13. An obligation to continue to pay royalty after the expiry of a patent can result only from a licensing agreement that either does not grant the licensee the right to terminate the agreement by giving reasonable notice or seeks to restrict the licensee’s freedom of action after termination. If that were the case, the agreement might, having regard to its economic and legal context, restrict competition within the meaning of Article 85(1). Where, however, the licensee may freely terminate the agreement by giving reasonable notice, an obligation to pay royalty throughout the validity of the agreement cannot come within the scope of the prohibition contained in Article 85(1). 14. For the purpose of the national court’s assessment of the legality of the clause at issue, it is irrelevant that the licensor is bound by a clause preventing him from terminating the agreement. 15. It must therefore be stated in reply to the first limb of the first question submitted by the national court that a contractual obligation under which the grantee of a license for a patented invention is required to pay royalty for an indeterminate period, and thus after the expiry of the patent, does not in itself constitute a restriction of competition within the meaning of Article 85(1) of the Treaty where the agreement was entered into after the patent application was submitted and immediately before the grant of the patent. 16. In view of the answer given above, there is no need for a separate answer to be given to the second limb of the first question or to the second and third questions.…

[E]

Resale Price Maintenance

29. The Leegin court has admitted the legality of resale price maintenance to the extent it has submitted that sort of deals to a rule of reason approach. This understanding is not in conflict with the Line Material opinion (see case no. 47). Line Material was about vertical price fixing in the context of cross-licensing agreements. There was, in Line Material, collusion by patentees, who combined noninfringing patents and fixed prices on all products made under the patents.

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44. Leegin Creative Leather Prods. v. PSKS, Inc., 551 U.S. 877 (2007) SUPREME COURT OF THE UNITED STATES Justice Kennedy delivered the opinion of the Court. In Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), the Court established the rule that it is per se illegal under §1 of the Sherman Act, 15 U.S.C. §1, for a manufacturer to agree with its distributor to set the minimum price the distributor can charge for the manufacturer’s goods. The question presented by the instant case is whether the Court should overrule the per se rule and allow resale price maintenance agreements to be judged by the rule of reason, the usual standard applied to determine if there is a violation of §1. The Court has abandoned the rule of per se illegality for other vertical restraints a manufacturer imposes on its distributors. Respected economic analysts, furthermore, conclude that vertical price restraints can have procompetitive effects. We now hold that Dr. Miles should be overruled and that vertical price restraints are to be judged by the rule of reason. Petitioner, Leegin Creative Leather Products, Inc. (Leegin), designs, manufactures, and distributes leather goods and accessories. In 1991, Leegin began to sell belts under the brand name “Brighton.” The Brighton brand has now expanded into a variety of women’s fashion accessories. It is sold across the United States in over 5,000 retail establishments, for the most part independent, small boutiques and specialty stores. Leegin’s president, Jerry Kohl, also has an interest in about seventy stores that sell Brighton products. Leegin asserts that, at least for its products, small retailers treat customers better, provide customers more services, and make their shopping experience more satisfactory than do larger, often impersonal retailers.… Respondent, PSKS, Inc. (PSKS), operates Kay’s Kloset, a women’s apparel store in Lewisville, Texas. Kay’s Kloset buys from about seventy-five different manufacturers and at one time sold the Brighton brand. It first started purchasing Brighton goods from Leegin in 1995. Once it began selling the brand, the store promoted Brighton. For example, it ran Brighton advertisements and had Brighton days in the store. Kay’s Kloset became the destination retailer in the area to buy Brighton products. Brighton was the store’s most important brand and once accounted for 40 to 50 percent of its profits. In 1997, Leegin instituted the “Brighton Retail Pricing and Promotion Policy.” Id. at 939. Following the policy, Leegin refused to sell to retailers that discounted Brighton goods below suggested prices.… Leegin adopted the policy to give its retailers sufficient margins to provide customers the service central to its distribution strategy. It also expressed concern that discounting harmed Brighton’s brand image and reputation. A year after instituting the pricing policy Leegin introduced a marketing strategy known as the “Heart Store Program.” See id. at 962-972. It offered retailers incentives to become Heart Stores, and, in exchange, retailers pledged, among other things, to sell at Leegin’s suggested prices. Kay’s Kloset became a Heart Store soon after Leegin created the program. After a Leegin employee visited the store and found it

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unattractive, the parties appear to have agreed that Kay’s Kloset would not be a Heart Store beyond 1998. Despite losing this status, Kay’s Kloset continued to increase its Brighton sales. In December 2002, Leegin discovered Kay’s Kloset had been marking down Brighton’s entire line by 20 percent. Kay’s Kloset contended it placed Brighton products on sale to compete with nearby retailers who also were undercutting Leegin’s suggested prices. Leegin, nonetheless, requested that Kay’s Kloset cease discounting. Its request refused, Leegin stopped selling to the store. The loss of the Brighton brand had a considerable negative impact on the store’s revenue from sales. PSKS sued Leegin in the United States District Court for the Eastern District of Texas. It alleged, among other claims, that Leegin had violated the antitrust laws by “enter[ing] into agreements with retailers to charge only those prices fixed by Leegin.” Id. at 1236. Leegin planned to introduce expert testimony describing the procompetitive effects of its pricing policy. The District Court excluded the testimony, relying on the per se rule established by Dr. Miles. At trial PSKS argued that the Heart Store program, among other things, demonstrated Leegin and its retailers had agreed to fix prices. Leegin responded that it had established a unilateral pricing policy lawful under §1, which applies only to concerted action. See United States v. Colgate & Co., 250 U.S. 300, 307 460 (1919). The jury agreed with PSKS and awarded it $1.2 million. Pursuant to 15 U.S.C. § 15(a), the District Court trebled the damages and reimbursed PSKS for its attorney’s fees and costs. It entered judgment against Leegin in the amount of $3,975,000.80. The Court of Appeals for the Fifth Circuit affirmed.… On appeal Leegin did not dispute that it had entered into vertical price-fixing agreements with its retailers. Rather, it contended that the rule of reason should have applied to those agreements. The Court of Appeals rejected this argument. Id. at 466-467. It was correct to explain that it remained bound by Dr. Miles “[b]ecause [the Supreme] Court has consistently applied the per se rule to [vertical minimum price-fixing] agreements.” 171 Fed. Appx. at 466. On this premise the Court of Appeals held that the District Court did not abuse its discretion in excluding the testimony of Leegin’s economic expert, for the per se rule rendered irrelevant any procompetitive justifications for Leegin’s pricing policy. Id. at 467. We granted certiorari to determine whether vertical minimum resale price maintenance agreements should continue to be treated as per se unlawful. 549 U.S. 1092 (2006). Section 1 of the Sherman Act prohibits “[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States.” Ch. 647, 26 Stat. 209, as amended, 15 U.S.C. §1. While §1 could be interpreted to proscribe all contracts, see, e.g., Board of Trade of Chicago v. United States, 246 U.S. 231, 238 (1918), the Court has never “taken a literal approach to [its] language,” Texaco Inc. v. Dagher, 547 U.S. 1, 5 (2006). Rather, the Court has repeated time and again that §1 “outlaw[s] only unreasonable restraints.” State Oil Co. v. Khan, 522 U.S. 3, 10 (1997). The rule of reason is the accepted standard for testing whether a practice restrains trade in violation of §1. See Texaco, supra, at 5. “Under this rule, the factfinder weighs all of the circumstances of a case in deciding whether a restrictive practice should be

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prohibited as imposing an unreasonable restraint on competition.” Continental T. V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49 (1977). Appropriate factors to take into account include “specific information about the relevant business” and “the restraint’s history, nature, and effect.” Khan, supra, at 10. Whether the businesses involved have market power is a further, significant consideration. See, e.g., Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 768 (1984) (equating the rule of reason with “an inquiry into market power and market structure designed to assess [a restraint’s] actual effect”); see also Illinois Tool Works Inc. v. Independent Ink, Inc., 547 U.S. 28, 45-46 (2006). In its design and function the rule distinguishes between restraints with anticompetitive effect that are harmful to the consumer and restraints stimulating competition that are in the consumer’s best interest. The rule of reason does not govern all restraints. Some types “are deemed unlawful per se.” Khan, supra, at 10. The per se rule, treating categories of restraints as necessarily illegal, eliminates the need to study the reasonableness of an individual restraint in light of the real market forces at work, Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 717, 723 (1988); and, it must be acknowledged, the per se rule can give clear guidance for certain conduct. Restraints that are per se unlawful include horizontal agreements among competitors to fix prices, see Texaco, supra, at 5, or to divide markets, see Palmer v. BRG of Ga., Inc., 498 U.S. 46, 49-50 (1990) (per curiam). Resort to per se rules is confined to restraints, like those mentioned, “that would always or almost always tend to restrict competition and decrease output.” Business Electronics, supra, at 723 (internal quotation marks omitted). To justify a per se prohibition a restraint must have “manifestly anticompetitive” effects, GTE Sylvania, supra, at 50, and “lack … any redeeming virtue,” Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co., 472 U.S. 284, 289 (1985) (internal quotation marks omitted). As a consequence, the per se rule is appropriate only after courts have had considerable experience with the type of restraint at issue, see Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1, 9 (1979), and only if courts can predict with confidence that it would be invalidated in all or almost all instances under the rule of reason, see Arizona v. Maricopa County Medical Soc., 457 U.S. 332, 344 (1982). It should come as no surprise, then, that “we have expressed reluctance to adopt per se rules with regard to restraints imposed in the context of business relationships where the economic impact of certain practices is not immediately obvious.” Khan, supra, at 10 (internal quotation marks omitted); see also White Motor Co. v. United States, 372 U.S. 253, 263 (1963) (refusing to adopt a per se rule for a vertical nonprice restraint because of the uncertainty concerning whether this type of restraint satisfied the demanding standards necessary to apply a per se rule). And, as we have stated, a “departure from the rule-of-reason standard must be based upon demonstrable economic effect rather than … upon formalistic line drawing.” GTE Sylvania, supra, at 58-59. The Court has interpreted Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373, as establishing a per se rule against a vertical agreement between a manufacturer and its distributor to set minimum resale prices. See, e.g., Monsanto Co.

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v. Spray-Rite Service Corp., 465 U.S. 752, 761 (1984). In Dr. Miles the plaintiff, a manufacturer of medicines, sold its products only to distributors who agreed to resell them at set prices. The Court found the manufacturer’s control of resale prices to be unlawful. It relied on the common-law rule that “a general restraint upon alienation is ordinarily invalid.” 220 U.S. at 404-405. The Court then explained that the agreements would advantage the distributors, not the manufacturer, and were analogous to a combination among competing distributors, which the law treated as void. Id. at 407-408. The reasoning of the Court’s more recent jurisprudence has rejected the rationales on which Dr. Miles was based. By relying on the common-law rule against restraints on alienation, id. at 404-405, the Court justified its decision based on “formalistic” legal doctrine rather than “demonstrable economic effect,” GTE Sylvania, 433 U.S. at 58-59. The Court in Dr. Miles relied on a treatise published in 1628, but failed to discuss in detail the business reasons that would motivate a manufacturer situated in 1911 to make use of vertical price restraints. Yet the Sherman Act’s use of “restraint of trade” “invokes the common law itself, … not merely the static content that the common law had assigned to the term in 1890.” Business Electronics, supra, at 732. The general restraint on alienation, especially in the age when then-Justice Hughes used the term, tended to evoke policy concerns extraneous to the question that controls here. Usually associated with land, not chattels, the rule arose from restrictions removing real property from the stream of commerce for generations. The Court should be cautious about putting dispositive weight on doctrines from antiquity but of slight relevance. We reaffirm that “the state of the common law 400 or even 100 years ago is irrelevant to the issue before us: the effect of the antitrust laws upon vertical distributional restraints in the American economy today.” GTE Sylvania, supra, at 53, n. 21 (internal quotation marks omitted). Dr. Miles, furthermore, treated vertical agreements a manufacturer makes with its distributors as analogous to a horizontal combination among competing distributors. See 220 U.S. at 407-408. In later cases, however, the Court rejected the approach of reliance on rules governing horizontal restraints when defining rules applicable to vertical ones. See, e.g., Business Electronics, supra, at 734 (disclaiming the “notion of equivalence between the scope of horizontal per se illegality and that of vertical per se illegality”); Maricopa County, supra, at 348, n. 18 (noting that “horizontal restraints are generally less defensible than vertical restraints”). Our recent cases formulate antitrust principles in accordance with the appreciated differences in economic effect between vertical and horizontal agreements, differences the Dr. Miles Court failed to consider. The reasons upon which Dr. Miles relied do not justify a per se rule. As a consequence, it is necessary to examine, in the first instance, the economic effects of vertical agreements to fix minimum resale prices, and to determine whether the per se rule is nonetheless appropriate. See Business Electronics, 485 U.S. at 726. Though each side of the debate can find sources to support its position, it suffices to say here that economics literature is replete with procompetitive justifications for a manufacturer’s use of resale price maintenance.…

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The few recent studies documenting the competitive effects of resale price maintenance also cast doubt on the conclusion that the practice meets the criteria for a per se rule.… The justifications for vertical price restraints are similar to those for other vertical restraints. See GTE Sylvania, 433 U.S. at 54-57. Minimum resale price maintenance can stimulate interbrand competition—the competition among manufacturers selling different brands of the same type of product—by reducing intrabrand competition—the competition among retailers selling the same brand. See id. at 51-52. The promotion of interbrand competition is important because “the primary purpose of the antitrust laws is to protect [this type of] competition.” Khan, 522 U.S. at 15. A single manufacturer’s use of vertical price restraints tends to eliminate intrabrand price competition; this in turn encourages retailers to invest in tangible or intangible services or promotional efforts that aid the manufacturer’s position as against rival manufacturers. Resale price maintenance also has the potential to give consumers more options so that they can choose among low-price, low-service brands; high-price, high-service brands; and brands that fall in between. Absent vertical price restraints, the retail services that enhance interbrand competition might be underprovided. This is because discounting retailers can free ride on retailers who furnish services and then capture some of the increased demand those services generate. GTE Sylvania, supra, at 55. Consumers might learn, for example, about the benefits of a manufacturer’s product from a retailer that invests in fine showrooms, offers product demonstrations, or hires and trains knowledgeable employees. … Or consumers might decide to buy the product because they see it in a retail establishment that has a reputation for selling high-quality merchandise. … If the consumer can then buy the product from a retailer that discounts because it has not spent capital providing services or developing a quality reputation, the high-service retailer will lose sales to the discounter, forcing it to cut back its services to a level lower than consumers would otherwise prefer. Minimum resale price maintenance alleviates the problem because it prevents the discounter from undercutting the service provider. With price competition decreased, the manufacturer’s retailers compete among themselves over services. Resale price maintenance, in addition, can increase interbrand competition by facilitating market entry for new firms and brands. “[N]ew manufacturers and manufacturers entering new markets can use the restrictions in order to induce competent and aggressive retailers to make the kind of investment of capital and labor that is often required in the distribution of products unknown to the consumer.” GTE Sylvania, supra, at 55 … New products and new brands are essential to a dynamic economy, and if markets can be penetrated by using resale price maintenance there is a procompetitive effect. Resale price maintenance can also increase interbrand competition by encouraging retailer services that would not be provided even absent free riding. It may be difficult and inefficient for a manufacturer to make and enforce a contract with a retailer specifying the different services the retailer must perform. Offering the retailer a guaranteed margin and threatening termination if it does not live up to expectations may be the most efficient way to expand the manufacturer’s market share by inducing

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the retailer’s performance and allowing it to use its own initiative and experience in providing valuable services.… While vertical agreements setting minimum resale prices can have procompetitive justifications, they may have anticompetitive effects in other cases; and unlawful price fixing, designed solely to obtain monopoly profits, is an ever-present temptation. Resale price maintenance may, for example, facilitate a manufacturer cartel. See Business Electronics, 485 U.S. at 725. An unlawful cartel will seek to discover if some manufacturers are undercutting the cartel’s fixed prices. Resale price maintenance could assist the cartel in identifying price-cutting manufacturers who benefit from the lower prices they offer. Resale price maintenance, furthermore, could discourage a manufacturer from cutting prices to retailers with the concomitant benefit of cheaper prices to consumers.… Vertical price restraints also “might be used to organize cartels at the retailer level.” Business Electronics, supra, at 725-726. A group of retailers might collude to fix prices to consumers and then compel a manufacturer to aid the unlawful arrangement with resale price maintenance. In that instance the manufacturer does not establish the practice to stimulate services or to promote its brand but to give inefficient retailers higher profits. Retailers with better distribution systems and lower cost structures would be prevented from charging lower prices by the agreement.… A horizontal cartel among competing manufacturers or competing retailers that decreases output or reduces competition in order to increase price is, and ought to be, per se unlawful. See Texaco, 547 U.S. at 5; GTE Sylvania, 433 U.S. at 58, n. 28. To the extent a vertical agreement setting minimum resale prices is entered upon to facilitate either type of cartel, it, too, would need to be held unlawful under the rule of reason. This type of agreement may also be useful evidence for a plaintiff attempting to prove the existence of a horizontal cartel. Resale price maintenance, furthermore, can be abused by a powerful manufacturer or retailer. A dominant retailer, for example, might request resale price maintenance to forestall innovation in distribution that decreases costs. A manufacturer might consider it has little choice but to accommodate the retailer’s demands for vertical price restraints if the manufacturer believes it needs access to the retailer’s distribution network.… A manufacturer with market power, by comparison, might use resale price maintenance to give retailers an incentive not to sell the products of smaller rivals or new entrants. See, e.g., Marvel, 366-368. As should be evident, the potential anticompetitive consequences of vertical price restraints must not be ignored or underestimated. Notwithstanding the risks of unlawful conduct, it cannot be stated with any degree of confidence that resale price maintenance “always or almost always tend[s] to restrict competition and decrease output.” Business Electronics, supra, at 723 (internal quotation marks omitted). Vertical agreements establishing minimum resale prices can have either procompetitive or anticompetitive effects, depending upon the circumstances in which they are formed. And although the empirical evidence on the topic is limited, it does not suggest efficient uses of the agreements are infrequent or hypothetical.… As the rule would proscribe a significant amount of procompetitive conduct, these agreements appear ill suited for per se condemnation.

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Respondent contends, nonetheless, that vertical price restraints should be per se unlawful because of the administrative convenience of per se rules. See, e.g., GTE Sylvania, supra, at 50, n. 16 (noting “per se rules tend to provide guidance to the business community and to minimize the burdens on litigants and the judicial system”). That argument suggests per se illegality is the rule rather than the exception. This misinterprets our antitrust law. Per se rules may decrease administrative costs, but that is only part of the equation. Those rules can be counterproductive. They can increase the total cost of the antitrust system by prohibiting procompetitive conduct the antitrust laws should encourage.… They also may increase litigation costs by promoting frivolous suits against legitimate practices. The Court has thus explained that administrative “advantages are not sufficient in themselves to justify the creation of per se rules,” GTE Sylvania, 433 U.S. at 50, n. 16, and has relegated their use to restraints that are “manifestly anticompetitive,” id. at 49-50. Were the Court now to conclude that vertical price restraints should be per se illegal based on administrative costs, we would undermine, if not overrule, the traditional “demanding standards” for adopting per se rules. Id. at 50. Any possible reduction in administrative costs cannot alone justify the Dr. Miles rule. Respondent also argues the per se rule is justified because a vertical price restraint can lead to higher prices for the manufacturer’s goods.… Respondent is mistaken in relying on pricing effects absent a further showing of anticompetitive conduct.… For, as has been indicated already, the antitrust laws are designed primarily to protect interbrand competition, from which lower prices can later result. See Khan, 522 U.S. at 15. The Court, moreover, has evaluated other vertical restraints under the rule of reason even though prices can be increased in the course of promoting procompetitive effects. See, e.g., Business Electronics, 485 U.S. at 728. And resale price maintenance may reduce prices if manufacturers have resorted to costlier alternatives of controlling resale prices that are not per se unlawful.… Respondent’s argument, furthermore, overlooks that, in general, the interests of manufacturers and consumers are aligned with respect to retailer profit margins. The difference between the price a manufacturer charges retailers and the price retailers charge consumers represents part of the manufacturer’s cost of distribution, which, like any other cost, the manufacturer usually desires to minimize. See GTE Sylvania, 433 U.S. at 56, n. 24; see also id. at 56 (“Economists … have argued that manufacturers have an economic interest in maintaining as much intrabrand competition as is consistent with the efficient distribution of their products”). A manufacturer has no incentive to overcompensate retailers with unjustified margins. The retailers, not the manufacturer, gain from higher retail prices. The manufacturer often loses; interbrand competition reduces its competitiveness and market share because consumers will “substitute a different brand of the same product.” Id. at 52, n. 19; see Business Electronics, supra, at 725. As a general matter, therefore, a single manufacturer will desire to set minimum resale prices only if the “increase in demand resulting from enhanced service … will more than offset a negative impact on demand of a higher retail price.” … The implications of respondent’s position are far reaching. Many decisions a manufacturer makes and carries out through concerted action can lead to higher prices.

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A manufacturer might, for example, contract with different suppliers to obtain better inputs that improve product quality. Or it might hire an advertising agency to promote awareness of its goods. Yet no one would think these actions violate the Sherman Act because they lead to higher prices. The antitrust laws do not require manufacturers to produce generic goods that consumers do not know about or want. The manufacturer strives to improve its product quality or to promote its brand because it believes this conduct will lead to increased demand despite higher prices. The same can hold true for resale price maintenance. Resale price maintenance, it is true, does have economic dangers. If the rule of reason were to apply to vertical price restraints, courts would have to be diligent in eliminating their anticompetitive uses from the market. This is a realistic objective, and certain factors are relevant to the inquiry. For example, the number of manufacturers that make use of the practice in a given industry can provide important instruction. When only a few manufacturers lacking market power adopt the practice, there is little likelihood it is facilitating a manufacturer cartel, for a cartel then can be undercut by rival manufacturers.… Likewise, a retailer cartel is unlikely when only a single manufacturer in a competitive market uses resale price maintenance. Interbrand competition would divert consumers to lower priced substitutes and eliminate any gains to retailers from their price-fixing agreement over a single brand. … Resale price maintenance should be subject to more careful scrutiny, by contrast, if many competing manufacturers adopt the practice. … The source of the restraint may also be an important consideration. If there is evidence retailers were the impetus for a vertical price restraint, there is a greater likelihood that the restraint facilitates a retailer cartel or supports a dominant, inefficient retailer.… If, by contrast, a manufacturer adopted the policy independent of retailer pressure, the restraint is less likely to promote anticompetitive conduct.… A manufacturer also has an incentive to protest inefficient retailer-induced price restraints because they can harm its competitive position. As a final matter, that a dominant manufacturer or retailer can abuse resale price maintenance for anticompetitive purposes may not be a serious concern unless the relevant entity has market power. If a retailer lacks market power, manufacturers likely can sell their goods through rival retailers. See also Business Electronics, supra, at 727, n. 2 (noting “[r]etail market power is rare, because of the usual presence of interbrand competition and other dealers”). And if a manufacturer lacks market power, there is less likelihood it can use the practice to keep competitors away from distribution outlets. The rule of reason is designed and used to eliminate anticompetitive transactions from the market. This standard principle applies to vertical price restraints. A party alleging injury from a vertical agreement setting minimum resale prices will have, as a general matter, the information and resources available to show the existence of the agreement and its scope of operation. As courts gain experience considering the effects of these restraints by applying the rule of reason over the course of decisions, they can establish the litigation structure to ensure the rule operates to eliminate anticompetitive restraints from the market and to provide more guidance to businesses. Courts can, for example, devise rules over time for offering proof, or even presumptions where

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justified, to make the rule of reason a fair and efficient way to prohibit anticompetitive restraints and to promote procompetitive ones. For all of the foregoing reasons, we think that were the Court considering the issue as an original matter, the rule of reason, not a per se rule of unlawfulness, would be the appropriate standard to judge vertical price restraints.… The Dr. Miles rule is also inconsistent with a principled framework, for it makes little economic sense when analyzed with our other cases on vertical restraints. If we were to decide the procompetitive effects of resale price maintenance were insufficient to overrule Dr. Miles, then cases such as Colgate and GTE Sylvania themselves would be called into question. These later decisions, while they may result in less intrabrand competition, can be justified because they permit manufacturers to secure the procompetitive benefits associated with vertical price restraints through other methods. The other methods, however, could be less efficient for a particular manufacturer to establish and sustain. The end result hinders competition and consumer welfare because manufacturers are forced to engage in second-best alternatives and because consumers are required to shoulder the increased expense of the inferior practices. The manufacturer has a number of legitimate options to achieve benefits similar to those provided by vertical price restraints. A manufacturer can exercise its Colgate right to refuse to deal with retailers that do not follow its suggested prices. See 250 U.S. at 307. The economic effects of unilateral and concerted price setting are in general the same. See, e.g., Monsanto, 465 U.S. at 762-764. The problem for the manufacturer is that a jury might conclude its unilateral policy was really a vertical agreement, subjecting it to treble damages and potential criminal liability. Ibid.; Business Electronics, supra, at 728. Even with the stringent standards in Monsanto and Business Electronics, this danger can lead, and has led, rational manufacturers to take wasteful measures.… A manufacturer might refuse to discuss its pricing policy with its distributors except through counsel knowledgeable of the subtle intricacies of the law. Or it might terminate longstanding distributors for minor violations without seeking an explanation.… Furthermore, depending on the type of product it sells, a manufacturer might be able to achieve the procompetitive benefits of resale price maintenance by integrating downstream and selling its products directly to consumers. Dr. Miles tilts the relative costs of vertical integration and vertical agreement by making the former more attractive based on the per se rule, not on real market conditions. See Business Electronics, supra, at 725.… This distortion might lead to inefficient integration that would not otherwise take place, so that consumers must again suffer the consequences of the suboptimal distribution strategy. And integration, unlike vertical price restraints, eliminates all intrabrand competition. See, e.g., GTE Sylvania, supra, at 57, n. 26. There is yet another consideration. A manufacturer can impose territorial restrictions on distributors and allow only one distributor to sell its goods in a given region. Our cases have recognized, and the economics literature confirms, that these vertical nonprice restraints have impacts similar to those of vertical price restraints; both reduce intrabrand competition and can stimulate retailer services. See, e.g., Business Electronics, supra, at 728; Monsanto, supra, at 762-763.… The same legal standard (per se unlawfulness) applies to horizontal market division and horizontal price fixing

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because both have similar economic effect. There is likewise little economic justification for the current differential treatment of vertical price and nonprice restraints. Furthermore, vertical nonprice restraints may prove less efficient for inducing desired services, and they reduce intrabrand competition more than vertical price restraints by eliminating both price and service competition. … In sum, it is a flawed antitrust doctrine that serves the interests of lawyers—by creating legal distinctions that operate as traps for the unwary—more than the interests of consumers—by requiring manufacturers to choose second-best options to achieve sound business objectives.… For these reasons the Court’s decision in Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373, is now overruled. Vertical price restraints are to be judged according to the rule of reason.…

[F]

Grant-Back Clauses

45. Transparent-Wrap Machine Corp. v. Stokes & Smith Co., 329 U.S. 637 (1947) SUPREME COURT OF THE UNITED STATES Opinion by Mr. Justice Douglas. This is a suit for a declaratory judgment (Judicial Code § 274d, 28 U.S.C. § 400) and an injunction, instituted by respondent for the determination of the legality and enforceability of a provision of a patent license agreement. The District Court, whose jurisdiction was based on diversity of citizenship (Judicial Code § 24(1), 28 U.S.C. §41(1)), entered judgment for petitioner, holding the provision valid. The Circuit Court of Appeals reversed by a divided vote, 156 F.2d 198, being of the opinion that the provision in question was illegal under the line of decisions represented by Mercoid Corporation v. Mid-Continent Co., 320 U.S. 661. The case is here on a petition for a writ of certiorari that we granted because of the public importance of the question presented and of the apparent conflict between the decision below and Allbright-Nell Co. v. Stanley Hiller Co., 72 F.2d 392, decided by the Seventh Circuit Court of Appeals. Petitioner, organized in 1934, has patents on a machine that bears the trademark “Transwrap.” This machine makes transparent packages, simultaneously fills them with such articles as candy, and seals them. In 1937, petitioner sold and respondent acquired the Transwrap business in the United States, Canada, and Mexico, the right to use the trademark “Transwrap,” and an exclusive license to manufacture and sell the Transwrap machine under the patents petitioner then owned or might acquire. The agreement contained a formula by which royalties were to be computed and paid. The term of the agreement was ten years with an option in respondent to renew it thereafter for five-year periods during the life of the patents covered by the agreement. The agreement could be terminated by petitioner on notice for specified defaults on

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respondent’s part. The provision of the agreement around which the present controversy turns is a covenant by respondent to assign to petitioner improvement patents applicable to the machine and suitable for use in connection with it. The parties had operated under the agreement for several years when petitioner ascertained that respondent had taken out certain patents on improvements in the machine. Petitioner notified respondent that its failure to disclose and assign these improvements constituted a breach of the agreement and called on respondent to remedy the default. When that did not occur, petitioner notified respondent that the agreement would be terminated on a day certain. Thereupon respondent instituted this action asking that the provisions respecting the improvement patents be declared illegal and unenforceable and that petitioner be enjoined from terminating the agreement. In a long and consistent line of cases the Court has held that [HN1] an owner of a patent may not condition a license so as to tie to the use of the patent the use of other materials, processes or devices that lie outside of the monopoly of the patent.… As stated in Morton Salt Co. v. Suppiger Co., supra, at 492, “… the public policy which includes inventions within the granted monopoly excludes from it all that is not embraced in the invention. It equally forbids the use of the patent to secure an exclusive right or limited monopoly not granted by the Patent Office and which it is contrary to public policy to grant.” If such practices were tolerated, ownership of a patent would give the patentee control over unpatented articles that but for the patent he would not possess. “If the restraint is lawful because of the patent, the patent will have been expanded by contract. That on which no patent could be obtained would be as effectively protected as if a patent had been issued. Private business would function as its own patent office and impose its own law upon its licensees.” Mercoid Corp. v. Mid-Continent Co., supra, at 667. The requirement that a licensee under a patent use an unpatented material or device with the patent might violate the anti-trust laws but for the attempted protection of the patent. Id. The condemnation of the practice, however, does not depend on such a showing. Though control of the unpatented article or device falls short of a prohibited restraint of trade or monopoly, it will not be sanctioned. Morton Salt Co. v. Suppiger Co., supra. For it is the tendency in that direction that condemns the practice and that, if approved by a court either through enjoining infringement or enforcing the covenant, would receive a powerful impetus. Id. The Circuit Court of Appeals was of the view that the principle of those cases was applicable here and rendered illegal and unenforceable the covenant to assign the improvement patents to petitioner. It stated, “The owner of all property, by withholding it upon any other terms, may, if he can, force others to buy from him; land is the best example and every parcel of land is a monopoly. But it is precisely in this that a patent is not like other property; the patentee may not use it to force others to buy of him things outside its four corners. If the defendant gets the plaintiff’s patents, it will have put itself in that position, in part at any rate, by virtue of the compulsion of its own patents.” 156 F.2d at 202. It went on to note that since all improvement patents would not expire until after expiration of petitioner’s patents on the machine, the arrangement put respondent at a competitive disadvantage. For respondent would lose the negative command over the

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art that ownership of the improvement patents would have given it. Moreover, respondent, though able to renew the license on conditions stated in the agreement, would be irretrievably tied to it so as to be “forced, either to cease all efforts to patent improvements, or to keep renewing the contract in order to escape the consequences of its own ingenuity.” Id. at 203. The first difficulty we have with the position of the Circuit Court of Appeals is that Congress has made all patents assignable and has granted the assignee the same exclusive rights as the patentee. “Every application for patent or patent or any interest therein shall be assignable in law by an instrument in writing, and the applicant or patentee or his assigns or legal representatives may in like manner grant and convey an exclusive right under his application for patent or patent to the whole or any specified part of the United States.” R. S. § 4898, 35 U.S.C. Supp. V § 47. The statute does not limit the consideration that may be paid for the assignment to any species or kind of property. At least so far as the terms of the statute are concerned, we see no difference whether the consideration is services (cf. Standard Parts Co. v. Peck, 264 U.S. 52) or cash, or the right to use another patent. An improvement patent may, like a patent on a step in a process, have great strategic value. For it may, on expiration of the basic patent, be the key to a whole technology. One who holds it may therefore have a considerable competitive advantage. And one who assigns it and thereby loses negative command of the art may by reason of his assignment have suffered a real competitive handicap. For thereafter he will have to pay toll to the assignee, if he practices the invention. But the competitive handicap or disadvantage that he suffers is no greater and no less whether the consideration for the assignment be the right to use the basic patent or something else of value. That is to say, the freedom of one who assigns a patent is restricted to the same degree whether the assignment is made pursuant to a license agreement or otherwise. If Congress, by whose authority patent rights are created, had allowed patents to be assigned only for a specified consideration, it would be our duty to permit no exceptions. But here Congress has made no such limitation. A patent is a species of property. It gives the patentee or his assignee the “exclusive right to make, use, and vend the invention or discovery” for a limited period. R. S. § 4884, 35 U.S.C. § 40. That is to say, it carries for the statutory period “a right to be free from competition in the practice of the invention.” Mercoid Corporation v. Mid-Continent Co., supra, at 665. That exclusive right, being the essence of the patent privilege, is, for purposes of the assignment statute, of the same dignity as any other property that may be used to purchase patents. What we have said is not, of course, a complete answer to the position of the Circuit Court of Appeals. For the question remains whether here, as in Mercoid Corporation v. Mid-Continent Co., supra, and its predecessors, the condition in the license agreement violates some other principle of law or public policy. The fact that a patentee has the power to refuse a license does not mean that he has the power to grant a license on such conditions as he may choose. United States v. Masonite Corp., 316 U.S. 265, 277.

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As we have noted, such a power, if conceded, would enable the patentee not only to exploit the invention but to use it to acquire a monopoly not embraced in the patent. Thus, if he could require all licensees to use his unpatented materials with the patent, he would have, or stand in a strategic position to acquire, a monopoly in the unpatented materials themselves. Beyond the “limited monopoly” granted by the patent, the methods by which a patent is exploited are “subject to the general law.” United States v. Masonite Corp., supra, at 277. Protection from competition in the sale of unpatented materials is not granted by either the patent law or the general law. He who uses his patent to obtain protection from competition in the sale of unpatented materials extends by contract his patent monopoly to articles as respects that the law sanctions neither monopolies nor restraints of trade. It is at precisely this point that our second difficulty with the view of the Circuit Court of Appeals is found. An improvement patent, like the basic patent to which it relates, is a legalized monopoly for a limited period. The law permits both to be bought and sold. One who uses one patent to acquire another is not extending his patent monopoly to articles governed by the general law and as respects that neither monopolies nor restraints of trade are sanctioned. He is indeed using one legalized monopoly to acquire another legalized monopoly. Mercoid Corporation v. Mid-Continent Co., supra, and its predecessors, by limiting a patentee to the monopoly found within the four corners of the grant, outlawed business practices that the patent law unaided by restrictive agreements did not protect. Take the case of the owner of an unpatented machine who leases it or otherwise licenses its use on condition that all improvements that the lessee or licensee patents should be assigned. He is using his property to acquire a monopoly. But the monopoly, being a patent, is a lawful one. The general law would no more make that acquisition of a patent unlawful than it would the assignment of a patent for cash. Yet, a patent is a species of property; and if the owner of an unpatented machine could exact that condition, why may not the owner of a patented machine? It is true that for some purposes the owner of a patent is under disabilities with which owners of other property are not burdened. Thus where the use of unpatented materials is tied to the use of a patent, a court will not lend its aid to enforce the agreement though control of the unpatented article falls short of a prohibited restraint of trade or monopoly. Morton Salt Co. v. Suppiger Co., supra. There is a suggestion that the same course should be followed in this case since the tendency of the practice we have here would be in the direction of concentration of economic power that might run counter to the policy of the anti-trust laws. The difficulty is that Congress has not made illegal the acquisition of improvement patents by the owner of a basic patent. The assignment of patents is indeed sanctioned. And as we have said, there is no difference in the policy of the assignment statute whatever consideration may be used to purchase the improvement patents. And apart from violations of the anti-trust laws to which we will shortly advert, the end result is the same whether the owner of a basic patent uses a license to obtain improvement patents or uses the wealth that he accumulates by exploiting his basic patent for that purpose. In sum, a patent license may not be used coercively to exact a condition contrary to public policy. But what falls within the terms of the assignment statute is plainly not per se against the public interest.

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It is, of course, true that the monopoly that the licensor obtains when he acquires the improvement patents extends beyond the term of his basic patent. But as we have said, that is not creating by agreement a monopoly that the law otherwise would not sanction. The grant of the improvement patent itself creates the monopoly. On the facts of the present case the effect on the public interest would seem to be the same whether the licensee or the licensor owns the improvement patents. There is a suggestion that the enforcement of the condition gives the licensee less incentive to make inventions when he is bound to turn over to the licensor the products of his inventive genius. Since the primary aim of the patent laws is to promote the progress of science and the useful arts (United States v. Masonite Corp., supra, at 278 and cases cited), an arrangement that diminishes the incentive is said to be against the public interest. Whatever force that argument might have in other situations, it is not persuasive here. Respondent pays no additional royalty on any improvement patents that are used. By reason of the agreement any improvement patent can be put to immediate use and exploited for the account of the licensee. And that benefit continues so long as the agreement is renewed. The agreement thus serves a function of supplying a market for the improvement patents. Whether that opportunity to exploit the improvement patents would be increased but for the agreement depends on vicissitudes of business too conjectural on this record to appraise. We are quite aware of the possibilities of abuse in the practice of licensing a patent on condition that the licensee assign all improvement patents to the licensor. Conceivably the device could be employed with the purpose or effect of violating the anti-trust laws. He who acquires two patents acquires a double monopoly. As patents are added to patents a whole industry may be regimented. The owner of a basic patent might thus perpetuate his control over an industry long after the basic patent expired. Competitors might be eliminated and an industrial monopoly perfected and maintained. Through the use of patent pools or multiple licensing agreements the fruits of invention of an entire industry might be systematically funneled into the hands of the original patentee. See United Shoe Machinery Co. v. La Chapelle, 212 Mass. 467, 99 N.E. 289. A patent may be so used as to violate the anti-trust laws. Standard Sanitary Mfg. Co. v. United States, 226 U.S. 20; United Shoe Machinery Corp. v. United States, 258 U.S. 451; Ethyl Gasoline Corp. v. United States, 309 U.S. 436; United States v. Masonite Corp., supra. Such violations may arise through conditions in the license whereby the licensor seeks to control the conduct of the licensee by the fixing of prices (Ethyl Gasoline Corp. v. United States, supra; United States v. Masonite Corp., supra) or by other restrictive practices. United Shoe Machinery Corp. v. United States, supra. Moreover, in the Clayton Act, 38 Stat. 730, 731, 15 U.S.C. § 14, Congress made it unlawful to condition the sale or lease of one article on an agreement not to use or buy a competitor’s article (whether either or both are patented), where the effect is “to substantially lessen competition or tend to create a monopoly.” See International Business Machines Corp. v. United States, 298 U.S. 131. Congress, however, has made no specific prohibition against conditioning a patent license on the assignment by the licensee of improvement patents. But that does not mean that the practice we have here has immunity under the anti-trust laws. Indeed, the recent case of Hartford-Empire Co. v. United States, 323 U.S.

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386, 324 U.S. 570, dramatically illustrates how the use of a condition or covenant in a patent license that the licensee will assign improvement patents may give rise to violations of the anti-trust laws.… We only hold that the inclusion in the license of the condition requiring the licensee to assign improvement patents is not per se illegal and unenforceable.…

[G]

Cross-licensing, Exclusive Licensing, Assigning, and Pooling 30. The Blount opinion is of enormous importance to the extent it gives a precise idea of the boundaries of the rights conveyed by a patent. Reading Blount one learns the U.S. Supreme Court’s view on where patent law ends and antitrust law starts. In spite of its respectable age (it is more than a century old), Blount is still enlightening. The only point in respect of which it may be dated—but which does not affect the opinion’s overall relevance—concerns the patentee’s right to suppress his/her invention and the lack of influence of that suppression in the ordering of an injunction. This doctrine, based on the Supreme Court’s Paper Bag opinion, may have been superseded. On this topic, see infra section §2.03[B] (cases 57 and 58).

46. Blount Mfg. Co. v. Yale & Towne Mfg. Co., 166 F. 555 (D.C. Mas. 1909) UNITED STATES CIRCUIT COURT, DISTRICT OF MASSACHUSETTS Opinion by Brown, District Judge. This is a demurrer to a bill for an accounting in accordance with the terms of a contract concerning the profits arising from the manufacture and sale of liquid door checks.… Such [contractual] relations [between plaintiff and defendant] are established between the complainant, the defendant, the Corbin Company, and the Russell & Erwin Company that the contracts before us must be regarded as related parts of a general plan to regulate and control the business of dealing in liquid door checks. The plan comprehends the maintaining of prices, the pooling of profits, the elimination of competition, and the restraint of improvements. If relating to ordinary articles of trade or commerce, it seems reasonably clear that these contracts would be in violation of Act Cong. July 2, 1890, c. 647, 26 Stat. 209 (U.S. Comp. St. 1901, p. 3200), known as the “Sherman Anti-Trust Act, and therefore unenforceable.” The complainant contends that the demurrer should be overruled, because such contracts are legal and valid when the subject-matter of the contract comprises solely articles the manufacture and sale of which are protected by patents. The amended bill alleges in effect that all liquid door checks manufactured or sold at the time of the execution of the contracts embodied patented devices or improvements. While the language of the contracts is broad enough to cover unpatented as well as patented articles, yet in view of the allegations of the amended bill I should hesitate to sustain the demurrer merely on the ground that the contract covers articles that do

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not embody patents. The principal question is whether the fact that the articles to which the agreements relate embody patented inventions is sufficient to make the Sherman act inapplicable. This question was not passed upon by the Supreme Court in Bement v. National Harrow Co., 186 U.S. 70. That decision related to restraints and conditions imposed in connection with the grant of patent rights.… It seems self-evident that a contract that is only coextensive with the monopoly conferred by letters patent, and that creates no additional restraint of trade or monopoly, does not conflict with the Sherman act. The monopoly granted by letters patent is of a particular invention. Devices thus protected by patents are as a matter of fact in commercial competition with both patented and unpatented devices. A contract whereby the manufactures of two independent patented inventions agree not to compete in the same commercial field deprives the public of the benefits of competition, and creates a restraint of trade that results, not from granting of letters patent, but from agreement. While the monopoly of the patented articles is not increased, the monopoly of the commercial field is increased by the “unified tactics” as to prices. This question was directly considered by the Circuit Court of Appeals of the Third Circuit in National Harrow Company v. Hench, 83 F. 36-38. The opinion says: The fact that the property involved is covered by letters patent is urged as a justification; but we do not see how any importance can be attributed to this fact. Patents confer a monopoly as respects the property covered by them, but they confer no right upon the owners of several distinct patents to combine for the purpose of restraining competition and trade. Patented property does not differ in this respect from any other. The fact that one patentee may possess himself of several patents, and thus increase his monopoly, affords no support for an argument in favor of a combination by several distinct owners of such property to restrain manufacture, control sales, and enhance prices.

See also National Harrow Company v. Hench (C.C.) 76 Fed. 667; National Harrow Company v. Quick (C.C.) 67 Fed. 130. The bill does not aver that the articles made by each company embody features covered by the patents of the other. While the contracts provide that the parties are licensed to use patented inventions of the other, this does not alter the fact that by the terms of the contracts each party is restrained in the exercise of its rights under its own patents, and in the sale of articles made solely under its own patents. The right of the owner of letters patent to assign rights to manufacture, use, and vend, upon condition that the assignee shall maintain certain prices, and to agree not to compete with his assignee or to license others to compete, is recognized in Bement v. National Harrow Company, 186 U.S. 93. Whether a patentee may not lawfully make such a license agreement in consideration of the making of a like license agreement by another patentee is a somewhat interesting question. If, as a result of mutual licenses, there is put upon the market an article embodying the inventions of both patentees, so that as the effect of exchange of licenses a new article of commerce is developed, it is doubtful if the public is thereby unlawfully deprived of any of its rights or expectations of free competition. Where, however, each patentee continues to make his own goods under his own patents, and seeks to enhance his profits by an agreement with competitors, who make either

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patented or unpatented articles, then it seems to follow that the agreement of each to restrain his own trade cannot be regarded merely as an incident to the assignment of patent rights. The patentee then restrains his own trade, not for the purpose of enhancing the value of the license that he grants, but for the purpose of enhancing the value of his trade by removing competition. A sale or license, with a covenant not to compete, made as an ordinary incident to enhance the value of the thing conveyed, is not within the Sherman act. Cincinnati Packet Company v. Bay, 200 U.S. 179-185; U.S. v. Freight Association, 166 U.S. 329. By the terms of the present contracts each party limits its trade in goods made under its own patents. In Rubber Tire Company v. Milwaukee Company, 154 Fed. 362, on which complainant relies, it was said in the opinion of the majority of the court: The Sherman law contains no reference to the patent law. Each was passed under a separate and distinct constitutional grant of power. Each was passed professedly to advantage the public. The necessary implication is not that one iota was taken away from the patent law. The necessary implication is that patented articles, unless or until they are released by the owner of the patent from the dominion of his monopoly, are not articles of trade or commerce among the several states.

Judge Grosscup was unable to concur in this proposition. The question whether agreements concerning patented articles are within the provisions of the Sherman anti-trust act must be determined by a consideration of the nature of the rights conferred by the grant of a patent. While it is the ordinary privilege of the owner of patent rights to use or not to use them without question of motive, the grant of letters patent confers upon the patentee no right not to use his invention, or to make an agreement in restraint of trade in that article, save in connection with an assignment of the rights conferred by letters patent. The proposition that an agreement not to manufacture, or to restrain trade, is within some rights of nonuse conferred upon a patentee, seems unsound, if we consider the nature of the grant of letters patent. The right of the patentee or of his assignee to withhold the invention is quite apart from any grant contained in the letters patent. The privilege of restraining others is granted to the owner of letters patent. He is given no right or privilege to restrain himself. By the terms of the patent he has the exclusive right to make, use, and vend. The right to make, use, and vend he has without the grant of letters patent. When we say that a patent grants an “exclusive right,” we do not mean that the right to make, use, and vend is granted, but only that the patentee’s existing right is made exclusive by the grant. In the Paper Bag Patent Case, 210 U.S. 424, 425, it was said with reference to previous decisions relating to the nature of the patent grant: Those cases declare that he receives nothing from the law that he did not have before, and that the only effect of the patent is to restrain others from manufacturing and using that which he has invented. United States v. Bell Telephone Company, 167 U.S. 224-249.

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Bloomer v. McQuewan, 14 How. 539-549, is cited: The franchise which the patent grants consists altogether in the right to exclude everyone from making, using, or vending the thing patented without the permission of the patentee. This is all that he obtains by the patent.

The right of a patentee to suppress his own rests upon ordinary considerations of property right. The public has no right to compel the use of patented devices or of unpatented devices, when that is inconsistent with fundamental rules of property. When a patentee agrees, however, to restrain his own trade in the article of his own invention, not as an incident to a granting of rights, but for the purpose of enhancing his price by the removal of competitors, he is then quite outside the sphere of any right granted him by the government. He may engage in interstate trade or not as he pleases; but, being engaged in that trade, he is subject to all restrictions upon interstate traders. That patented articles are an important factor in interstate commerce must be especially apparent to those who have been engaged in the administration of patent law. If they are within the ordinary signification of the broad terms of the Sherman act, patented articles can be excluded only by showing some conflict or inconsistency between the patent law and the Sherman act. In Bement v. National Harrow Company, 186 U.S. 92, the court was of the opinion that the statute does not refer to a restraint that may arise from reasonable and legal conditions imposed upon the assignee or licensee, restricting the terms upon which the article may be used and the prices to be demanded. The restraint that arise from joint agreements between independent patentees as to the course of conduct each will take results solely from voluntary contract, and in no sense from the exercise of rights granted by letters patent. The patentee may grant to others rights otherwise denied them, and may limit those rights as he pleases. He may, by assignment of his exclusive rights, exclude himself; for the rights of exclusion granted by the patent are transferable. Has he, in spite of the Sherman act, a full right to agree that neither he nor his assignees will compete with other persons, or that trade in his invention will be wholly or partly suppressed or restrained in order to enhance the profits of the trade of others in other competing articles, patented or unpatented? It must be recognized that an inventor stands in a special relation to the product of his own faculties. When he has secured his patent, he may derive profit from an agreement not to use it. In the Paper Bag Case, 210 U.S. 429, there was involved the question whether a patentee who held his patent in nonuse had a standing in equity to restrain infringement. Upon facts presented in argument the court observed: It is disputable that the nonuse was unreasonable or that the rights of the public were involved. There are sound reasons for holding that the mere fact of nonuse is insufficient for denying relief by injunction against infringement. While the Sherman act cannot be so applied as to deprive the patentee to the profits arising from the use of his invention by himself or others, or to deprive him of the right to make the usual restrictions necessary to preserve the value of the monopoly conferred by letters patent, yet a logical application of the proposition that all that letters patent convey is a right to exclude others, and to assign such a right of exclusion, leads to the conclusion that an

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agreement whereby the owner of the patent agrees to restrain his own trade may be as much within the prohibition of the Sherman act as any other agreement of the same character. It is a fact, familiar in commercial history, that patent rights have a commercial value for purposes of extinction; that many patents are purchased in order to prevent the competition of new inventions and of new machines with old machines already installed. The equitable status of an owner of a patent who has purchased and held it in nonuse for this purpose is still an open question, and was not determined by the Paper Bag Patent Case. An attempt to make profit out of letters patent by suppressing the invention covered thereby is outside the patent grant, and is so far removed from the spirit and intent of the patent law that the mere fact that an inventor may make a profit by suppressing his invention is not a sufficient reason for holding the Sherman act inapplicable to agreements affecting patented articles. If there is secured to the patentee all profits legitimately arising from the manufacture, use, and sale of his invention, this is all that is within the terms of the grant. To prohibit contracts for the suppression or restraint of his own trade by the application of the Sherman anti-trust act is not inconsistent with his right to manufacture, use, and vend. That the Sherman act interferes with some supposed right, granted by the patent, to suppress an invention, is an unsound proposition, for the reason that letters patent grant no such rights, either in terms or by reasonable implication. When no question of the value of the right of excluding others is involved, I am unable to find in the patent law any reason for upholding an agreement for the suppression or restraint of trade in a patented article against the provisions of the Sherman act. Granting that nonuse of an invention is fully within the right of the owner of a patent, it does not follow that he may by agreement bind himself to nonuse, save in connection with an assignment of his letters patent. Ownership of a patent involves no obligation to use, nor does ownership of other property. Nonuse ordinarily violates no law; but contracting with another, putting it in the power of another to compel one not to use, is a contract in restraint of trade, designed for the purpose of suppressing competition. Section 4884 of the Revised Statutes (U.S. Comp. St. 1901, p. 3381) defines the nature of a right conferred upon the patentee. It is an assignable and heritable exclusive right to make, use, and vend. The profit that arises from suppressing an invention, from nonuse, flows from commercial tactics, and not from the use of the invention. The public interest that forbids contracts in restraint of trade arises from no right in the public to create trade by compulsion, but only from the expectation of the ordinary course of conduct, and the harmful results of interference with it by monopolistic schemes. The inventor who has not patented his invention cannot make an agreement in restraint of interstate trade without violating the Sherman act, even though he is in fact an inventor. The rules of public policy, expressed in the Sherman act, apply to him, and I do not think are affected by his taking out a patent, save in the single particular of an assignment or license.

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The object of the constitutional provision upon the subject of patents, etc., was: To promote the progress of science and useful arts by securing for limited terms, to authors and inventors the exclusive right to their respective writings and discoveries.

The suppression of intellectual products for the preservation of the old market does not promote the progress of science and the arts. A patentee who agrees to suppress his invention is not promoting it. He is not deriving his profit from its promotion, but from manipulation of the market. It is no part of the constitutional scheme, or of the scheme of the patent laws, to secure to inventors a profit from the suppression of their creations. The true rule seems to me to be well expressed by Judge Seaman in Indiana Manufacturing Company v. J.I. Case Threshing Machine Company (C.C.), 148 Fed. 21-25: I am of the opinion that such combination must be limited to the express policy and object of the patent grant—monopoly in beneficial use of a specific invention—and when extended beyond that purpose by concert of action may thus be brought within the inhibition of the general law.

To limit the application of the Sherman act merely because profits may be made by a patentee in the course of business strategy seems to me to be unsound, for the reason that it misinterprets the language of the patent law, and perverts its spirit, and excludes from the Sherman anti-trust act a very considerable class of agreements that are quite as objectionable as agreements covering nonpatented articles. Is it possible that the manufacturers of automobiles, of typewriters, of shoe machinery, or spinning machinery, are without the scope of the Sherman act for the reason that their machines generally “embody one or more patented improvements”? Regard must be had to the actual conditions of interstate trade and to the general course of combination. The reasons for enacting the Sherman law seem quite as applicable to articles of this character as to articles having no connection with patents. The Sherman act is not inconsistent with any rights acquired by the patentee when it prevents agreements in restraint of trade that are not designed to make valuable the right to use. There is no inconsistency between the grant of an exclusive and assignable right to make, use, and vend, and the prohibition of an agreement restraining or suppressing the sale of the article in interstate commerce, because any profit from such an agreement does not arise from the value of making, using, and vending. There is no inconsistency between the proposition that an inventor may withhold his invention from use as he sees fit, and the proposition that he may not make an agreement whereby, for the advantage of a competitor, trade in his patented article is restrained or suppressed. Though an invention may be suppressed by the patentee or his assignee, yet the fact that there are now two ways of suppressing a patent is no reason for disregarding a statute designed to prevent a third way. In the consideration of this case I have dwelt principally upon the broad contention that the Sherman anti-trust act has no application to patented articles. It seems quite clear that an agreement in restraint of trade, though it relates to patented

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articles, may tend to create a monopoly that is different from that conferred by grants of letters patent. Combinations between owners of independent patents, whereby, as part of a plan to monopolize the commercial field, competition is eliminated, are within the Sherman act, for the reason that the restraint of trade or monopoly arises from combination, and not from the exercise of rights granted by letters patent. As by the terms of the contracts under consideration the owners of distinct patents each agreed to restrain its own interstate trade, I am of the opinion that the contracts are in these particulars obnoxious to the Sherman anti-trust act.…

47. United States v. Line Material Co., 333 U.S. 287 (1948) SUPREME COURT OF THE UNITED STATES Mr. Justice Reed delivered the opinion of the Court. The United States sought an injunction under §§1 and 4 of the Sherman Act in the District Court against continuance of violations of that Act by an allegedly unlawful combination or conspiracy between appellees, through contracts, to restrain interstate trade in certain patented electrical devices. The restraint alleged arose from a crosslicense arrangement between the patent owners, Line Material Company and Southern States Equipment Corporation, to fix the sale price of the devices, to which arrangement the other appellees, licensees to make and vend, adhered by supplemental contracts. The District Court, 64 F. Supp. 970, dismissed the complaint as to all defendants upon its conclusion that the rule of United States v. General Electric Co., 272 U.S. 476, was controlling. That case approved as lawful a patentee’s license to make and vend which required the licensee in its sales of the patented devices to conform to the licensor’s sale price schedule.… The challenged arrangements center around three product patents, which are useful in protecting an electric circuit from the dangers incident to a short circuit or other overload. Two of them are dropout fuse cutouts and the third is a housing suitable for use with any cutout. Dropout fuse cutouts may be used without any housing. The District Court found that 40.77% of all cutouts manufactured and sold by these defendants were produced under these patents. This was substantially all the dropout fuse cutouts made in the United States. There are competitive devices that perform the same functions manufactured by appellees and others under different patents than those here involved. The dominant patent, No. 2,150,102, in the field of dropout fuse cutouts with double jointed hinge construction was issued March 7, 1939, to the Southern States Equipment Corporation, assignee, on an application of George N. Lemmon. This patent reads upon a patent No. 2,176,227, reissued December 21, 1943, Re. 22,412, issued October 17, 1939 to Line Material Company, assignee, on an application by Schultz and Steinmayer. The housing patent No. 1,781,876, reissued March 31, 1931, as Re. 18,020,

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and again February 5, 1935, as Re. 19,449, was issued November 18, 1930 to Line, assignee, on an application by W. D. Kyle. The Kyle patent covers a wet-process porcelain box with great dielectric strength, which may be economically constructed and has been commercially successful. We give no weight to the presence of the Kyle patent in the licenses. The applications for the Lemmon and Schultz patents were pending simultaneously. They were declared in interference and a contest resulted. The decision of the Patent Office awarding dominant claims to Southern and subservient claims to Line on the Lemmon and the Schultz applications made it impossible for any manufacturer to use both patents when later issued without some cross-licensing arrangement. Compare Temco Electric Motor Co. v. Apco Mfg. Co., 275 U.S. 319, 328. Only when both patents could be lawfully used by a single maker could the public or the patentees obtain the full benefit of the efficiency and economy of the inventions. Negotiations were started by Line that eventuated in the challenged arrangements. The first definitive document was a bilateral, royalty-free, cross-license agreement of May 23, 1938, between Southern and Line after the Patent Office award but before the patents issued. This, so far as here pertinent, was a license to Southern by Line to make and vend the prospective Schultz patented apparatus with the exclusive right to grant licenses or sublicenses to others. Line also granted Southern the right to make and vend but not to sublicense the Kyle patent. Southern licensed Line to make and vend but not to sublicense the prospective Lemmon patent for defined equipment that included the Schultz apparatus. Sublicense royalties and expenses were to be divided between Line and Southern. Although a memorandum of agreement of January 12, 1938, between the parties had no such requirement, Line agreed to sell equipment covered by the Southern patent at prices not less than those fixed by Southern. Southern made the same agreement for equipment covered solely by the Line patent. No requirement for price limitation upon sales by other manufacturers under license was included. Six of the other manufacturers here involved were advised by Line by letter, dated June 13, 1938, that Southern had authority to grant licenses under the Schultz prospective patent. On October 3, 1938, Kearney took from Southern a license to practice the Lemmon and Schultz patents. The license had a price, term and condition of sale clause, governed by Southern’s prices, which bound Kearney to maintain the prices on its sales of devices covered by the patents. On October 7, 1938, the five other manufacturers mentioned above were offered by Southern the same contract as the standard licensor’s agreement. The Kearney contract was discussed at Chicago in October, 1938, by all of the above manufacturers except Railway. Pacific also participated. It never was enforced. The first patent involved in this case did not issue until March, 1939. Those manufacturers who were making double jointed open and enclosed dropout cutouts wanted to and did explore cooperatively (F. F. 15) the validity of the patents. They failed to find a satisfactory basis for attack. They were faced with infringement suits. Other reasons developed for the refusal of the six manufacturers to accept the Kearney form contracts (F. F. 16 & 17) unnecessary to detail here. One reason was that the prospective sublicensees preferred Line to Southern as licensor because of the fact that Line, as owner and manufacturer, would

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license the Kyle patent. New arrangements were proposed for the licensees. After mutual discussion between the licensees and patentees, these new agreements were submitted. A finding to which no objection is made states: On October 24, 1939, General Electric, Westinghouse, Kearney, Matthews, Schweitzer and Conrad, and Railway met with Line in Chicago and jointly discussed drafts of the proposed license agreements under the Lemmon, Schultz, and Kyle patents. Thereafter, identical sets of revised licenses were sent by Line to General Electric, Westinghouse, Matthews, Schweitzer and Conrad, and the attorneys for Railway and Kearney.

A form for a proposed licensing agreement that contained the essential elements of the price provision ultimately included in the licenses had been circulated among prospective licensees by Line by letters under date of October 6, 1939. To meet the various objections of the future licensees, the agreement of May 23, 1938, between Southern and Line was revised as of January 12, 1940. Except for the substitution of Line for Southern as licensor of other manufacturers, it follows generally the form of the earlier agreement. There were royalty-free cross-licenses of the Schultz and Lemmon patents substantially as before. Line was given the exclusive right to grant sublicenses to others for Lemmon. Southern retained the privilege, royalty free, of making and vending the Kyle patent, also. Southern bound itself to maintain prices, so long as Line required other licensees to do so. Even if it be assumed that the proper interpretation of the Line-Southern agreement permitted Southern to manufacture under its own Lemmon patent without price control, the practical result is that Southern does have its price for its products fixed because the only commercially successful fabrication is under a combination of the Lemmon and Schultz patents.… The price maintenance feature was reflected in all the licenses to make and vend granted by Line, under the Line-Southern contract, to the other appellees. There were variations in the price provisions that are not significant for the issues of this case. A fair example appears below. The execution of these sublicenses by the other appellees, except Johnson and Royal, followed within a year. Licenses were executed by the two on June 15, 1943, and March 24, 1944, respectively. After August 1, 1940, since a number of the appellees had executed the license contracts, two consultations of the licensees and the patentees were held to classify the products of the various licensees in comparison with the licensor’s devices. The trial judge found that prices were not discussed. These were fixed by Line without discussion with or advice from any other appellee. There can be no doubt, however, that each licensee knew of the proposed price provisions in the licenses of other licensees from the circulation of proposed form of license on October 6, 1939, subsequent consultations among the licensees and an escrow agreement, fulfilled July 11, 1940. That agreement was entered into after General Electric took its license and required for fulfillment the acceptance of identical licenses by Matthews, Kearney and Railway. The licenses that were the subject of the escrow contained the price provisions of General Electric’s license. This awareness by each signer of the price provisions in prior contracts is conceded by appellees’ brief. A price schedule became effective January 18, 1941. Thereafter, all the appellees tried to

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maintain prices. Where there was accidental variation, Line wrote the licensee calling attention to the failure. The licenses were the result of arm’s length bargaining in each instance. Price limitation was actively opposed in toto or restriction of its scope sought by several of the licensees, including General Electric, the largest producer of the patented appliances. A number tried energetically to find substitutes for the devices. All the licensees, however, were forced to accept the terms or cease manufacture. By accepting they secured release from claims for past infringement through a provision to that effect in the license. The patentees through the licenses sought system in their royalty collections and pecuniary reward for their patent monopoly. Undoubtedly one purpose of the arrangements was to make possible the use by each manufacturer of the Lemmon and Schultz patents. These patents in separate hands produced a deadlock. Lemmon by his basic patent “blocked” Schultz’s improvement. Cross-licenses furnished appellees a solution. On consideration of the agreements and the circumstances surrounding their negotiation and execution, the District Court found that the arrangements, as a whole, were made in good faith, to make possible the manufacture by all appellees of the patented devices, to gain a legitimate return to the patentees on the inventions; and that, apart from the written agreements, there was no undertaking between the appellees or any of them to fix prices. Being convinced, as we indicated at the first of this opinion, that the General Electric case controlled and permitted such price arrangements as are disclosed in the contracts, the District Court dismissed the complaint. The Government attacks the rationale of the General Electric case and urges that it be overruled, limited and explained or differentiated.

[a]

The General Electric Case

That case was decided in 1926 by a unanimous Court, Chief Justice Taft writing. It involved a bill in equity to enjoin further violations of the Sherman Act. While violations of the Act by agreements fixing the resale price of patented articles (incandescent light bulbs) sold to dealers also were alleged in the bill, so far as here material the pertinent alleged violation was an agreement between General Electric and Westinghouse Company through which Westinghouse was licensed to manufacture lamps under a number of General Electric’s patents, including a patent on the use of tungsten filament in the bulb, on condition that it should sell them at prices fixed by the licensor. On considering an objection to the fixing of prices on bulbs with a tungsten filament, the price agreement was upheld as a valid exercise of patent rights by the licensor. Speaking of the arrangement, this Court said: “If the patentee … licenses the selling of the articles [by a licensee to make], may he limit the selling by limiting the method of sale and the price? We think he may do so, provided the conditions of sale are normally and reasonably adapted to secure pecuniary reward for the patentee’s monopoly.” P. 490. This proviso must be read as directed at agreements between a patentee and a licensee to make and vend. The original context of the words just quoted

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makes clear that they carry no implication of approval of all a patentee’s contracts that tend to increase earnings on patents. The opinion recognizes the fixed rule that a sale of the patented article puts control of the purchaser’s resale price beyond the power of the patentee. P. 489. Compare United States v. Univis Lens Co., 316 U.S. 241. Nor can anything be found in the General Electric case that will serve as a basis to argue otherwise than that the precise terms of the grant define the limits of a patentee’s monopoly and the area in which the patentee is freed from competition of price, service, quality, or otherwise. Compare Mercoid Corporation v. Mid-Continent Inv. Co., 320 U.S. 661, 665, 666; United States v. Masonite Corp., 316 U.S. 265, 277-78, 280; Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502, 510.…

[b]

The Determination of the Issue

Under the above-mentioned assumption as to General Electric, the ultimate question for our decision on this appeal may be stated, succinctly and abstractly, to be as to whether in the light of the prohibition of §1 of the Sherman Act, … two or more patentees in the same patent field may legally combine their valid patent monopolies to secure mutual benefits for themselves through contractual agreements, between themselves and other licensees, for control of the sale price of the patented devices.… If the patent rights do not empower the patentees to fix sale prices for others, the agreements do violate the Act. The previous summary in this opinion of the agreements that compose these arrangements demonstrates that the agreements were intended to and did fix prices on the patented devices. Compare Interstate Circuit v. United States, 306 U.S. 208, 226. While Line’s sublicenses to others than General Electric, … gave to Line the power that it exercised to fix prices only for devices embodying its own Schultz patent, the sublicense agreements licensed the use of the dominant Lemmon patent. As the Schultz patent could not be practiced without the Lemmon, the result of the agreement between Southern and Line for Line’s sublicensing of the Lemmon patent was to combine in Line’s hands the authority to fix the prices of the commercially successful devices embodying both the Schultz and Lemmon patents. Thus, though the sublicenses in terms followed the pattern of General Electric in fixing prices only on Line’s own patents, the additional right given to Line by the license agreement of January 12, 1940, between Southern and Line, to be the exclusive licensor of the dominant Lemmon patent, made its price fixing of its own Schultz devices effective over devices embodying also the necessary Lemmon patent. See note 9. By the patentees’ agreement the dominant Lemmon and the subservient Schultz patents were combined to fix prices. In the absence of patent or other statutory authorization, a contract to fix or maintain prices in interstate commerce has long been recognized as illegal per se under the Sherman Act. This is true whether the fixed price is reasonable or unreasonable. It is also true whether it is a price agreement between producers for sale or between producer and distributor for resale. It is equally well settled that the possession of a valid patent or patents does not give the patentee any exemption from the provisions of the Sherman Act beyond the limits of the patent monopoly. By aggregating patents in one control, the holder of the

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patents cannot escape the prohibitions of the Sherman Act. See Standard Sanitary Mfg. Co. v. United States, 226 U.S. 20; United States v. United States Gypsum Co., post, at 364. During its term, a valid patent excludes all except its owner from the use of the protected process or product. United States v. United Shoe Machinery Co., 247 U.S. 32, 58; Special Equipment Co. v. Coe, 324 U.S. 370, 378. This monopoly may be enjoyed exclusively by the patentee or he may assign the patent “or any interest therein” to others. Rev. Stat. § 4898, as amended 55 Stat. 634. As we have pointed out, a patentee may license others to make and vend his invention and collect a royalty therefor. Thus we have a statutory monopoly by the patent and by the Sherman Act a prohibition, not only of monopoly or attempt to monopolize, but of every agreement in restraint of trade. Public policy has condemned monopolies for centuries. The Case of Monopolies, Darcy v. Allein, 11 Co. Rep. 84-b. See United States v. Aluminum Co. of America, 148 F.2d 416, 428-49. See Employment Act of 1946, § 2, 60 Stat. 23. Our Constitution allows patents. Article I, §8, cl. 8. The progress of our economy has often been said to owe much to the stimulus to invention given by the rewards allowed by patent legislation. The Sherman Act was enacted to prevent restraints of commerce but has been interpreted as recognizing that patent grants were an exception. Bement v. National Harrow Co., supra, 92, 21 Cong. Rec. 2457. Public service organizations, governmental and private, aside, our economy is built largely upon competition in quality and prices. Associated Press v. United States, 326 U.S. 1, 12-14. Validation by Congress of agreements to exclude competition is unusual. Monopoly is a protean threat to fair prices. It is a tantalizing objective to any business compelled to meet the efforts of competitors to supply the market. Perhaps no single fact manifests the power and will to monopolize more than price control of the article monopolized. There can be no clearer evidence of restraint of trade. Whatever may be the evil social effect of cutthroat competition on producers and consumers through the lowering of labor standards and the quality of the produce and the obliteration of the marginal to the benefit of the surviving and low-cost producers, the advantages of competition in opening rewards to management, in encouraging initiative, in giving labor in each industry an opportunity to choose employment conditions and consumers a selection of product and price, have been considered to overbalance the disadvantages. The strength of size alone, the disappearance of small business are ever-present dangers in competition. Despite possible advantages to a stable economy from efficient cartels with firm or fixed prices for products, it is crystal clear from the legislative history and accepted judicial interpretations of the Sherman Act that competition on prices is the rule of congressional purpose and that, where exceptions are made, Congress should make them. The monopoly granted by the patent laws is a statutory exception to this freedom for competition and consistently has been construed as limited to the patent grant. Ethyl Gasoline Corp. v. United States, 309 U.S. 436, 452, 455; United States v. Univis Lens Co., 316 U.S. 241; Hartford-Empire Co. v. United States, 323 U.S. 386. It is not the monopoly of the patent that is invalid. It is the improper use of that monopoly. The development of patents by separate corporations or by cooperating units of an industry through an organized research group is a well-known phenomenon. However far advanced over the lone inventor’s experimentation this method of seeking improvement in the practices of the arts and sciences may be, there can be no

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objection, on the score of illegality, either to the mere size of such a group or the thoroughness of its research. It may be true, as Carlyle said, that “Genius is an infinite capacity for taking pains.” Certainly the doctrine that control of prices, outside the limits of a patent monopoly, violates the Sherman Act is as well understood by Congress as by all other interested parties. We are thus called upon to make an adjustment between the lawful restraint on trade of the patent monopoly and the illegal restraint prohibited broadly by the Sherman Act. That adjustment has already reached the point, as the precedents now stand, that a patentee may validly license a competitor to make and vend with a price limitation under the General Electric case and that the grant of patent rights is the limit of freedom from competition…. With the postulates in mind that price limitations on patented devices beyond the limits of a patent monopoly violate the Sherman Act and that patent grants are to be construed strictly, the question of the legal effect of the price limitations in these agreements may be readily answered. Nothing in the patent statute specifically gives a right to fix the price at which a licensee may vend the patented article. 35 U.S.C. §§40, 47. While the General Electric case holds that a patentee may, under certain conditions, lawfully control the price the licensee of his several patents may charge for the patented device, no case of this Court has construed the patent and antimonopoly statutes to permit separate owners of separate patents by cross-licenses or other arrangements to fix the prices to be charged by them and their licensees for their respective products. Where two or more patentees with competitive, noninfringing patents combine them and fix prices on all devices produced under any of the patents, competition is impeded to a greater degree than where a single patentee fixes prices for his licensees. The struggle for profit is less acute. Even when, as here, the devices are not commercially competitive because the subservient patent cannot be practiced without consent of the dominant, the statement holds good. The stimulus to seek competitive inventions is reduced by the mutually advantageous price-fixing arrangement. Compare, as to acts by a single entity and those done in combination with others, Swift & Co. v. United States, 196 U.S. 375, 396; United States v. Reading Co., 226 U.S. 324, 357; Eastern States Lumber Dealers’ Assn. v. United States, 234 U.S. 600; Binderup v. Pathe Exchange, 263 U.S. 291. The merging of the benefits of price fixing under the patents restrains trade in violation of the Sherman Act in the same way as would the fixing of prices between producers of nonpatentable goods. If the objection is made that a price agreement between a patentee and a licensee equally restrains trade, the answer is not that there is no restraint in such an arrangement but, when the validity of the General Electric case is assumed, that reasonable restraint accords with the patent monopoly granted by the patent law. Where a patentee undertakes to exploit his patent by price fixing through agreements with anyone, he must give consideration to the limitations of the Sherman Act on such action. The patent statutes give an exclusive right to the patentee to make, use and vend and to assign any interest in this monopoly to others. The General Electric case construes that as giving a right to a patentee to license another to make and vend at a fixed price. There is no suggestion in the patent statutes of authority to combine with other patent owners to fix prices on articles covered by the respective patents. As the

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Sherman Act prohibits agreements to fix prices, any arrangement between patentees runs afoul of that prohibition and is outside the patent monopoly. We turn now to the situation here presented of an agreement where one of the patentees is authorized to fix prices under the patents. The argument of respondents is that if a patentee may contract with his licensee to fix prices, it is logical to permit any number of patentees to combine their patents and authorize one patentee to fix prices for any number of licensees. In this present agreement Southern and Line have entered into an arrangement by which Line is authorized to and has fixed prices for devices produced under the Lemmon and Schultz patents. It seems to us, however, that such argument fails to take into account the cumulative effect of such multiple agreements in establishing an intention to restrain. The obvious purpose and effect of the agreement was to enable Line to fix prices for the patented devices. Even where the agreements to fix prices are limited to a small number of patentees, we are of the opinion that it crosses the barrier erected by the Sherman Act against restraint of trade though the restraint is by patentees and their licensees. As early as 1912, in Standard Sanitary Mfg. Co. v. United States, 226 U.S. 20, this Court unanimously condemned price limitation under pooled patent licenses. As the arrangement was coupled with an agreement for limitation on jobbers’ resale prices, the case may be said to be indecisive on patent license agreements for price control of a product without the jobber’s resale provision. No such distinction appears in the opinion. This Court has not departed from that condemnation of price fixing. Even in Standard Oil Co. v. United States, 283 U.S. 163, where an arrangement by which the patentees pooled their oil cracking patents and divided among themselves royalties from licensees fixed by the pooling contracts was upheld, the theory was reiterated that a price limitation for the product was unlawful per se. Id. at 170, 173, 175. Of course, if a purpose or plan to monopolize or restrain trade is found, the arrangement is unlawful. Id. at 174. The Government’s contention in that case that the limitation on royalties in itself violated the Sherman Act by fixing an element in the price was dismissed because the Court was of the view that controlled royalties were effective as price regulators only when the patentees dominated the industry. Id. at 174. This domination was thought by this Court not to have been proven. When a plan for the patentee to fix the sale prices of patented synthetic hardboard on sales made through formerly competing manufacturers and distributors, designated as del credere agents, came before this Court on allegations that the plan was in violation of the Sherman Act, we invalidated the scheme. We said that the patentee could not use its competitor’s sales organization as its own agents so as to control prices. The patent monopoly, under such circumstances, we said, was exhausted on disposition of the product to the distributor. We reasoned that such an arrangement was a restriction on our free economy, “a powerful inducement to abandon competition,” and that it derogated “from the general law [against price limitation] beyond the necessary requirements of the patent statute.” United States v. Masonite Corp., 316 U.S. 265, 281, 280. We think that this general rule against price limitation clearly applies in the circumstances of this case. Even if a patentee has a right in the absence of a purpose to restrain or monopolize trade, to fix prices on a licensee’s sale of the patented product

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in order to exploit properly his invention or inventions, when patentees join in an agreement as here to maintain prices on their several products, that agreement, however advantageous it may be to stimulate the broader use of patents, is unlawful per se under the Sherman Act. It is more than an exploitation of patents. There is the vice that patentees have combined to fix prices on patented products. It is not the cross-licensing to promote efficient production that is unlawful. There is nothing unlawful in the requirement that a licensee should pay a royalty to compensate the patentee for the invention and the use of the patent. The unlawful element is the use of the control that such cross-licensing gives to fix prices. The mere fact that a patentee uses his patent as whole or part consideration in a contract by which he and another or other patentees in the same patent field arrange for the practice of any patent involved in such a way that royalties or other earnings or benefits from the patent or patents are shared among the patentees, parties to the agreement, subjects that contract to the prohibitions of the Sherman Act whenever the selling price, for things produced under a patent involved, is fixed by the contract or a license authorized by the contract. Licensees under the contract who as here enter into license arrangements, with price-fixing provisions, with knowledge of the contract, are equally subject to the prohibitions.…

48. Tetra Pak v. Commission, Case T-51/89 (1990) COURT OF FIRST INSTANCE (EUROPEAN UNION) 1. By decision of 26 July 1988 (Official Journal 1988 L 272, p. 27) (‘the Decision’) the Commission found that, by acquiring, through its purchase of the Liquipak Group, the exclusivity of the patent licence granted on 27 August 1981 by the National Research and Development Council to Novus Corp., a company in the Liquipak group, Tetra Pak Rausing SA was in breach of Article 86 of the EEC Treaty from the date of that acquisition until the exclusivity came to an end. 2. The Decision involves the sector concerned with the packaging of liquid foods, especially milk, in cartons. There are two distinct types of such packaging. Ultrahightemperature(UHT)-treated milk is filled by special machines into cartons which are sterilized, then sealed immediately after filling, by the machines under strictly aseptic conditions. The packaging of fresh pasteurized milk does not require the same degree of sterility and so calls for less sophisticated equipment. 3. The company to which the Decision is addressed, Tetra Pak Rausing SA (‘Tetra Pak’), whose registered office is in Switzerland, coordinates the policy of a group of companies world-wide specializing mainly in equipment for the packaging of milk in cartons. Tetra Pak’s activities cover the sector concerned with the packaging of fresh and UHT-treated milk. They consist essentially of manufacturing canons and cartonfilling machines using the group’s own technology. In the field of aseptic packaging, Tetra Pak supplies the ‘Tetrabrik’ system. In the field of fresh products, it also

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distributes machines made by a number of other manufacturers. In 1985 the group, which has manufacturing and distribution subsidiaries in all EEC Member States except Luxembourg and Greece, had nearly half its total turnover—amounting to approximately ECU 2 000 million—in the European Economic Community. In the same year the group’s share of the Community market was approximately 90% in the field of aseptic packaging and 50% in fresh milk packaging. 4. Before it was taken over by Tetra Pak, the Liquipak group was owned or controlled by the Allpak group of Canada and a private individual. It specializes in the development and manufacture of filling equipment for liquid food products. 5. The Elopak group is Norwegian in origin and is mainly engaged in Europe. In 1987, it had a turnover of around ECU 300 million. Although its activities are essentially in the fresh milk sector, particularly in the supply of ‘gable-top’ cartons where its main competitor is Tetra Pak, Elopak was also Liquipak’s exclusive distributor for its machines for pasteurized milk and also for any machine to be developed for UHTtreated milk. Elopak helped Liquipak in its efforts to develop a new packaging machine incorporating the process protected by the exclusive licence at issue in this case. That exclusive licence relates to a new UHT milk-packaging process involving the use of ultra-violet light which makes it possible to use a weak solution of hydrogen peroxide in combination with heat, as opposed to the processes hitherto applied in the Community which use a combination of concentrated hydrogen peroxide and heat. Unlike the processes used in the aseptic packaging machines currently on the market, this technique for use in carton-filling machines can be adapted for both ‘brick’ and ‘gable-top’ cartons. The current machines are not suitable for use with gable-top cartons on which, as the Decision says, Elopak has concentrated its development efforts and for which it has the most know-how. 6. The exclusive licence at issue was granted, with effect from 27 August 1981, to Novus Corp. by the National Research and Development Council, whose activities have been taken over by the British Technology Group (‘BTG’). The licence relates to the patents covering BTG’s new sterilization technique and the relevant know-how. Within the Community, patents have been granted in Ireland, Spain and Belgium. A patent application is pending in Italy and an application has been filed under the European Patent Convention for inter alia the United Kingdom, France, the Federal Republic of Germany and the Netherlands. The exclusive licence qualified for block exemption under Commission Regulation (EEC) No 2349/84 of 23 July 1984 on the application of Article 85(3) of the Treaty to certain categories of patent licensing agreements (Official Journal 1984 L 219, p. 15), subject always to Article 9 of that regulation, which provides that the Commission may withdraw exemption where the conditions laid down in Article 85(3) of the Treaty are not fulfilled. In 1986 Tetra Pak acquired the United States company Liquipak International Inc. As part of the same transaction, it also acquired the companies in the Liquipak group to which Novus Corp. had in 1983 assigned the BTG licence. At the time of Liquipak’s takeover by Tetra Pak, the new version of the machine incorporating the BTG process, developed by Liquipak with the assistance of Elopak, had not yet been tested in practice. Following the

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announcement of Tetra Pak’s takeover of Liquipak, Elopak brought its collaboration to an end. Elopak considered that the machine was very nearly operational. Tetra Pak considered that further major and costly research was required before the BTG technique could be exploited. 7. As regards the companies’ position on the market, it appears from the Decision that at the material time only two undertakings—Tetra Pak and PKL, a subsidiary of the German group Rheinmetall AG—were to any significant extent in a position to market aseptic milk-packaging machines in the Community. For the technical reasons mentioned above and also because, in practice, the manufacturers of aseptic machines also manufacture the cartons for their own machines, possession of an aseptic-filling technique is the key to market entry both for packaging equipment and for cartons. 8. On 26 June 1986, the Elopak group made a complaint to the Commission pursuant to Article 3 of Regulation No 17 of the Council of 6 February 1962, the first regulation implementing Articles 85 and 86 of the Treaty (Official Journal, English Special Edition 1959-62, p. 87), with a view to establishing that Tetra Pak had infringed Articles 85 and 86 of the EEC Treaty. After service of a statement of objections by the Commission on 3 March 1987 and a hearing on 25 July 1987, Tetra Pak informed the Commission by letter of 26 November 1987 that it was abandoning all claims to exclusivity in the BTG licence. Although the infringement to which objection had been taken was brought to an end in the course of the administrative procedure, the Commission considered that a finding of infringement should be made by formal decision with a view, inter alia, to clarifying its position on the relevant point of law. But since the point raised was unprecedented, no fine was imposed on Tetra Pak. In its Decision, the Commission considers in turn the application of Article 86 and of Article 85. With regard to Article 85, the Commission sets out the reasons which would have entitled it to withdraw the benefit of exemption from the exclusive licence for so long as there was an infringement of Article 86. At the end of its discussion of Article 86, the Commission concludes that ‘Tetra abused its dominant position by the acquisition of [the BTG] exclusive licence which had the effect of strengthening its already dominant position, further weakening existing competition and rendering even more difficult the entry of any new competition’. . . . 9. These are the circumstances in which, by application lodged at the Registry of the Court of Justice on 11 November 1988, Tetra Pak has sought annulment of the Decision. . . . 14. Tetra Pak challenges the Decision on the ground that it is contrary to Article 85(3) and Article 86 that the Commission should treat an agreement enjoying block exemption under Article 85(3) as prohibited under Article 86. The challenge is developed under three heads. The applicant relies, first, on a schematic analysis of the relevant rules of the Treaty and secondary sources; second, on the principle of legal certainty; and third, on the principle of the uniform application of Community law. 15. The applicant maintains that the Commission cannot apply Article 86 to behavior exempt under Article 85(3) because Articles 85 and 86 both pursue the same objective.

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The applicant relies on the judgment of the Court of Justice in Continental Can where it was stated that ‘Articles 85 and 86 cannot be interpreted in such a way that they contradict each other, because they serve to achieve the same aim’ (Case 6/72 Europemballage and Continental Can v Commission [1973] ECR 215, paragraph 25). Conduct cannot both be expressly authorized under Article 85(3) and prohibited under Article 86 since exemption involves ‘positive action’, as the Court put it in Case 14/68 Walt Wilhelm v Bundeskartellamt [1969] ECR 1, paragraph 5, though that case was concerned with the relationship between Article 85(3) and national rules on competition. 16. In support of that argument, the applicant claims that the finding against it in the Decision relates essentially to the exclusivity granted by the licensing agreement. The applicant goes on to argue that the Commission based the application of Article 86 on a distinction, for which there is no justification in competition law, between an exclusive licence enjoying block exemption on the one hand and, on the other, acquisition of the exclusivity afforded by the licence through takeover of a competing company (in this case Liquipak), such acquisition having been held in the Decision to constitute infringement of Article 86. Both, according to the applicant, have the same restrictive effects on competition. 17. The applicant further argued at the hearing that since, on this view, Article 86 cannot be applied to an agreement enjoying exemption under Article 85(3), the fact that an undertaking in a dominant position becomes party to an agreement enjoying such exemption cannot constitute an abuse within the meaning of Article 86 unless a supplementary element, extrinsic to the agreement and attributable to the undertaking, is present. The applicant relied in this connection on Ahmed Saeed where the Court of Justice said that there may be abuse of a dominant position where, in particular, an undertaking in a dominant position succeeds in imposing unfair contractual conditions on competitors or customers (Case 66/86 Ahmed Saeed Flugreisen and Another v Zentrale zur Bekämpfung unlauteren Wettbewerbs [1989] ECR 803, in particular paragraphs 37, 42 and 46). 18. The applicant points out that the inapplicability of Article 86 to an exempt agreement does not jeopardize achievement of the objectives of Article 86 since it is always within the discretion of the Commission to withdraw the exemption. In support of its view that the application of Article 86 is conditional on the prior withdrawal of exemption, Tetra Pak cites Article 7(2) of Council Regulation (EEC) No 3976/87 of 14 December 1987 on the application of Article 85(3) of the Treaty to certain categories of agreements and concerted practices in the air transport sector (Official Journal 1987 L 374, p. 9) and Article 8(2) of Council Regulation (EEC) No 4056/86 of 22 December 1986 laying down detailed rules for the application of Articles 85 and 86 of the Treaty to maritime transport (Official Journal 1986 L 378, p. 4). Under these regulations, where an agreement enjoying block exemption nevertheless has effects prohibited by Article 86, the Commission may withdraw the benefit of the exemption and take all appropriate steps to bring the infringement of Article 86 to an end.

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19. The applicant ‘accepts that there is no express exemption for the prohibition under Article 86’ (reply, Section III). But, in support of its view that Article 86 is inapplicable to conduct exempt under Article 85(3), it puts forward an interpretation of the conditions for applying Article 86 based on the general scheme of Article 85. This interpretation leads in reality to accepting that there can be an implied exemption in respect of abuse of a dominant position. In determining whether conduct constitutes an abuse, one must, the applicant argues, ‘impliedly undertake the two-stage process which is made explicit in Article 85, namely . . . ask does the conduct have the object or effect of preventing, restricting or distorting competition within the common market, and, if so, does the conduct nevertheless have overall a pro-competitive effect because it contributes to promoting technical or economic progress’. 20. In reply to this schematic analysis developed by Tetra Pak, the Commission deploys an argument based on a different interpretation of Articles 85 and 86. In particular, referring to the Advocate General’s Opinion in Ahmed Saeed, the Commission argues that since no abuse can be authorized in a Community governed by the rule of law, there can be no derogation from the prohibition of abuse of a dominant position (first Opinion, delivered on 28 April 1988 [1989] ECR 818, paragraph 41). The Commission points out that in the judgment in that case the Court of Justice expressly stated that no exemption may be granted in respect of an abuse of a dominant position (judgment in Case 66/86 Ahmed Saeed, cited above, paragraph 32). It concludes that the applicant’s argument, that Article 86 is inapplicable to an agreement exempt under Article 85(3) so long as the Commission has not withdrawn the exemption, cannot be accepted since that would be tantamount to recognizing the existence of exemption for abuse of a dominant position, withdrawal of exemption being effective only ex nunc. 21. This Court notes at the outset that the problem of reconciling application of Article 86 with enjoyment of block exemption, which is the crux of the present case and arises because of the need for logical coherence in the implementation of Articles 85 and 86, has not yet been expressly determined by the Community Court. However, it must be borne in mind that the relationship between Articles 85 and 86 has, to an extent, been clarified by the Court of Justice, in that the Court has expressly said that the applicability to an agreement of Article 85 does not preclude application of Article 86. The Court held that in such a case the Commission may apply either of the two provisions to the act in question : ‘the fact that agreements … might fall within Article 85 and in particular within paragraph 3 thereof does not preclude the application of Article 86 … so that in such cases the Commission is entitled, taking into account the nature of the reciprocal undertakings entered into and the competitive position of the various contracting parties on the market or markets on which they operate, to proceed on the basis of Article 85 or Article 86’ (Case 85/76 Hoffmann-La Roche v Commission [1979] ECR 461, paragraph 116). The Court of Justice confirmed that position in Ahmed Saeed where it said that, in certain circumstances, ‘the possibility that Articles 85 and 86 may both be applicable cannot be ruled out’ (judgment in Case 66/86, cited above, paragraph 37). But the problem raised in Ahmed Saeed, as far as the relationship between Articles 85 and 86 is concerned, was the question of principle as to whether implementation of an agreement capable of falling under Article 85(1) can also

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constitute abuse of a dominant position (paragraph 34). The relationship between exemption under Article 85(3) and the applicability of Article 86 was not at issue. 22. Resolution of the problem of reconciling application of Article 86 with exemption under Article 85(3) must therefore start from the Treaty system for the protection of competition, in particular as laid down by those two articles of the Treaty and their implementing regulations. Articles 85 and 86 are complementary inasmuch as they pursue a common general objective, set out in Article 3(f) of the Treaty, which provides that the activities of the Community are to include ‘the institution of a system ensuring that competition in the common market is not distorted’. But they none the less constitute, in the scheme of the Treaty, two independent legal instruments addressing different situations. This was emphasized by the Court of Justice in Continental Can where, having said that ‘Article 85 concerns agreements between undertakings, decisions of associations of undertakings and concerted practices, while Article 86 concerns unilateral activity of one or more undertakings’, the Court held that ‘Articles 85 and 86 seek to achieve the same aim on different levels, namely, the maintenance of effective competition within the common market’ (judgment in Case 6/72, cited above, paragraph 25). 23. Turning to the specific nature of the conduct whose compatibility with Article 86 is considered in the Decision, this Court holds that the mere fact that an undertaking in a dominant position acquires an exclusive licence does not per se constitute abuse within the meaning of Article 86. For the purpose of applying Article 86, the circumstances surrounding the acquisition, and in particular its effects on the structure of competition in the relevant market, must be taken into account. This interpretation is borne out by the case-law of the Court of Justice, in which the concept of abuse is defined as ‘an objective concept relating to the behaviour of an undertaking in a dominant position which is such as to influence the structure of a market where, as a result of the very presence of the undertaking in question, the degree of competition is weakened and which, through recourse to methods different from those which condition normal competition in products or services on the basis of the transactions of commercial operators, has the effect of hindering the maintenance of the degree of competition still existing in the market or the growth of that competition’ (judgment in Case 85/76 Hoffmann-La Roche, cited above, paragraph 91). So, here, the Commission was right not to put in issue the exclusive licence as such, but rather to object specifically under Article 86 to the anti-competitive effect of its being acquired by the applicant. It is plain from the reasoning and conclusions of the Decision that the infringement of Article 86 found by the Commission stemmed precisely from Tetra Pak’s acquisition of the exclusive licence ‘in the specific circumstances of this case’. The specific context to which the Commission refers is expressly characterized as being the fact that acquisition of the exclusivity of the licence not only ‘strengthened Tetra’s very considerable dominance but also had the effect of preventing, or at the very least considerably delaying, the entry of a new competitor into a market where very little if any competition is found’ (point 45 of the Decision; see also point 60). The decisive factor in the finding that acquisition of the exclusive licence constituted an abuse therefore lay quite specifically in the applicant’s position in the relevant market and in

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particular, as appears from the Decision (point 27), in the fact that at the material time the right to use the process protected by the BTG licence was alone capable of giving an undertaking the means of competing effectively with the applicant in the field of the aseptic packaging of milk. The takeover of Liquipak was no more than the means—to which the Commission has attached no particular significance in applying Article 86—by which the applicant acquired the exclusivity of the BTG licence, the effect of which was to deprive other undertakings of the means of competing with the applicant. 24. Similarly, the applicant’s argument that there must be a supplementary element, external to the agreement, cannot be accepted. In this connection, it is relevant to note that in Ahmed Saeed, to which the applicant refers, the Court of Justice held that ‘the application of tariffs for scheduled flights on the basis of bilateral or multilateral agreements may, in certain circumstances, constitute an abuse of a dominant position on the market in question, in particular where an undertaking in a dominant position has succeeded in imposing on other carriers the application of excessively high or excessively low tariffs or the exclusive application of only one tariff on a given route’ (judgment in Case 66/86, cited above, paragraph 46). It is true that the Court of Justice justified the concurrent application of Articles 85 and 86 to the tariff agreements there at issue by referring to the existence of a supplementary element, which in that case took the form of pressure brought to bear by the undertaking on its competitors. But the Decision in the present case does refer to the additional element that constituted an abuse within the meaning of Article 86 and justified its application. The additional element lies in the very context of the case—in the fact that Tetra Pak’s acquisition of the exclusive licence had the practical effect of precluding all competition in the relevant market. This was emphasized in the Decision and was not put in issue by the applicant. 25. In these circumstances, this Court holds that in the scheme for the protection of competition established by the Treaty the grant of exemption, whether individual or block exemption, under Article 85(3) cannot be such as to render inapplicable the prohibition set out in Article 86. This principle follows both from the wording of Article 85(3) which permits derogation, through a declaration of inapplicability, only from the prohibition of agreements, decisions and concerted practices set out in Article 85(1), and also from the general scheme of Articles 85 and 86 which, as noted above, are independent and complementary provisions designed, in general, to regulate distinct situations by different rules. Application of Article 85 involves two stages: a finding that Article 85(1) has been infringed followed, where appropriate, by exemption from that prohibition if the agreement, decision or concerted practice in question satisfies the conditions laid down in Article 85(3). Article 86, on the other hand, by reason of its very subject-matter (abuse), precludes any possible exception to the prohibition it lays down (see the judgment in Case 66/86 Ahmed Saeed, cited above, paragraph 32). If the Commission were required in every case to take a decision withdrawing exemption before applying Article 86, this would be tantamount, in view of the non-retroactive nature of the withdrawal of exemption, to accepting that an exemption under Article 85(3) operates in reality as a concurrent exemption from the prohibition of abuse of a dominant position. For the reasons just given, that would not be consistent with the very nature of the infringement prohibited by Article 86. Moreover, in view of the

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principles governing the hierarchical relationship of legal rules, grant of exemption under secondary legislation could not, in the absence of any enabling provision in the Treaty, derogate from a provision of the Treaty, in this case Article 86. 26. Having established that, in principle, the grant of exemption cannot preclude application of Article 86, the question remains whether, in practice, findings made with a view to the grant of exemption under Article 85(3) preclude application of Article 86. 27. Under Article 85(3), the prohibition laid down in Article 85(1) may be declared inapplicable to agreements, decisions or concerted practices, or to categories thereof, which fulfil the conditions set out in Article 85(3). Article 85(3) provides inter alia that the agreement must not afford the undertakings the possibility of eliminating competition in respect of a substantial part of the products in question. 28. The way in which the question of exemption arises may in practice be different depending on whether an individual or block exemption is involved. The grant of individual exemption presupposes that the Commission has found that the agreement in question complies with the conditions set out in Article 85(3). So, where an individual exemption decision has been taken, characteristics of the agreement which would also be relevant in applying Article 86 may be taken to have been established. Consequently, in applying Article 86, the Commission must take account, unless the factual and legal circumstances have altered, of the earlier findings made when exemption was granted under Article 85(3). 29. Now it is true that regulations granting block exemption, like individual exemption decisions, apply only to agreements which, in principle, satisfy the conditions set out in Article 85(3). But unlike individual exemptions, block exemptions are, by definition, not dependent on a case-by-case examination to establish that the conditions for exemption laid down in the Treaty are in fact satisfied. In order to qualify for a block exemption, an agreement has only to satisfy the criteria laid down in the relevant block-exemption regulation. The agreement itself is not subject to any positive assessment with regard to the conditions set out in Article 85(3). So a block exemption cannot, generally speaking, be construed as having effects similar to negative clearance in relation to Article 86. The result is that, where agreements to which undertakings in a dominant position are parties fall within the scope of a block-exemption regulation (that is, where the regulation is unlimited in scope), the effects of block exemption on the applicability of Article 86 must be assessed solely in the context of the scheme of Article 86. 30. Lastly, the possibility of applying Article 86 to an agreement covered by a block exemption is confirmed by analysis of the scheme of the block-exemption regulations. First, those regulations do not, in principle, exclude undertakings in a dominant position from qualifying for exemption and therefore do not take account of the position on the relevant markets of the parties to any given agreement. That is particularly so in the case of Regulation No 2349/84 on exemptions in respect of patent licensing agreements (cited above) which is relevant in this case. Second, the possibility of applying Article 85(3) and Article 86 concurrently is expressly confirmed by

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certain of the block-exemption regulations where it is provided that enjoyment of block exemption does not preclude application of Article 86—in particular, the three blockexemption regulations in the field of air transport adopted by the Commission on 26 July 1988, each of which states expressly in the preamble that group exemption does not preclude the application of Article 86. . . . 31. It follows from all the foregoing considerations that the first head of argument in support of the sole ground of action, based on a schematic analysis of Article 85(3) and Article 86, is unfounded. . . .

49. Eli Lilly and Co. v. Apotex Inc., 2005 FCA 361, [2006] 2 F.C.R. 478 Canada, Federal Court of Appeals The following are the reasons for judgment rendered in English by Evans J.A.: 1. This is an appeal by Apotex Inc. from a decision of the Federal Court granting motions brought by the respondents, Eli Lilly and Company, Eli Lilly Canada Inc. (Lilly) and Shionogi & Co. Ltd. The Judge granted motions for summary judgment by Lilly and Shionogi and struck paragraphs from Apotex’ defence and counterclaim to an action by Lilly for patent infringement. . . . 2. The appeal raises an important question of law arising at the intersection of patent law and competition law. It is this. As a matter of law, can an assignment of a patent constitute an agreement or arrangement to lessen competition unduly, contrary to section 45 . . . of the Competition Act . . . , if it results in an increase to the assignee’s market power greater than that inherent in the patents assigned? 3. Lilly and Shionogi say that it cannot. They rely on section 50 . . . of the Patent Act . . . , which authorizes a patentee to assign a patent. They argue that, by their nature, patents create monopolies. Since the right to assign is one of the rights conferred on patentees by Parliament, any lessening of competition following the exercise of the right to assign cannot be undue. Lilly and Shionogi say that there is binding authority to this effect: Molnlycke AB v. Kimberly-Clark of Canada Ltd. et al. (1991), 36 C.P.R. (3d) 493 (F.C.A.). However, they concede that it is different if, in addition to the assignment, the assignor and assignee enter into some other competition-restricting arrangement. 4. Apotex, on the other hand, submits that section 50 of the Patent Act and section 45 of the Competition Act can be read harmoniously: section 50 enables patents to be assigned to comply with other laws, including section 45 of the Competition Act. Hence, it is argued, when the effect of an assignment is to increase the assignee’s market power by more than that inherent in the rights assigned, section 50 does not preclude the possibility, as a matter of law, that the assignment unduly lessened competition.

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5. Apotex says that Molnlycke is distinguishable on the ground that the Court in that case was not considering a situation in which the assignment created in the assignee market power greater than that inherent in the patents assigned. In contrast, such power was conferred in the present case because of the assignee’s existing ownership of related patents. 6. The Commissioner of Competition was given leave to intervene to assist the Court on whether section 50 of the Patent Act precludes the application of section 45 of the Competition Act from the assignment of patents, and whether the Judge erred in concluding that his view on this issue was consistent with the Intellectual Property Enforcement Guidelines (Industry Canada, 2000) issued by the Commissioner. 7. The essential background to this appeal has already been described by Rothstein J.A. in the previous round of the present litigation, reported as Eli Lilly and Co. v. Apotex Inc. (2004), 240 D.L.R. (4th) 679 (F.C.A.), at paragraphs 2-5: On June 18, 1997, Eli Lilly and Company and Eli Lilly Canada Inc. (“Lilly”) commenced an action against Apotex Inc. (“Apotex”) for infringement of seven patents which relate to processes that can be used in the making of the antibiotic cefaclor, to intermediates that can be formed using those processes, and to a compound used in the processes. On January 11, 2001, Lilly amended its statement of claim to add an eighth patent which it claimed had been infringed. By amendments to its Statement of Defence and by Counterclaim made in 2001, Apotex alleged that certain conduct of Lilly violated s. 45 of the Competition Act, R.S.C. 1985, c. C-34, thereby entitling Apotex to damages under s. 36 of that Act. In 2002, Apotex further amended its Statement of Defence and Counterclaim to add Shionogi & Co. Ltd. (“Shionogi”) as a defendant by counterclaim in the proceedings as part of its claim for damages under the Competition Act. Of the eight patents Lilly claimed were infringed by Apotex, four had been assigned to Lilly by Shionogi in 1995. Apotex says that these assignments constituted an agreement that resulted in an undue lessening of competition contrary to s. 45 of the Competition Act. Subsection 45(1) of the Competition Act makes it unlawful for parties to enter into agreements which lessen competition unduly.

8. I would only add that the patent for cefaclor expired in 1994 and the last Shionogi process patent expired in 2000, shortly before the last of Lilly’s process patents. Finally, contemporaneously with the assign-ment, Lilly granted a non-exclusive licence to Shionogi with respect to the patents, which Shionogi assigned to Lilly. 9. In the first round of these proceedings, the Judge granted three motions. In the first, Lilly was awarded summary judgment striking the paragraphs of Apotex’ defence and counterclaim that rested on section 45 and dismissing the counterclaim. In the second, Shionogi was awarded summary judgment on the counterclaim and, in the third, the Judge allowed Shionogi’s appeal from a decision of a Prothonotary refusing to strike Apotex’ counterclaim against it. 10. The Judge held that, since any lessening of competition arose from Shionogi’s assignment of the patents to Lilly, it could not be undue because it was authorized by section 50 of the Patent Act. He regarded Molnlycke as binding authority to this effect.

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The Judge’s decision is reported as Eli Lilly and Co. v. Apotex Inc. (2003), 28 C.P.R. (4th) 37 (F.C.). 11. Apotex appealed to this Court, which allowed the appeal and remitted the matter to the Judge, on the ground that Molnlycke only applied when the lessening of competition resulted from the assignment alone. If there was “evidence of something more than the mere exercise of patent rights” [underlining added] (at paragraph 15), the Competition Act was not necessarily excluded. Accordingly, the Court referred the matter back to the Judge, requesting him (at paragraph 22) to address the following questions “at a minimum”: . . . (1) whether subsection 45(1) can ever apply to an agreement involving the exercise of patent rights; and (2) if it can, whether the facts of this case are sufficient to prove that Lilly and/or Shionogi engaged in conduct that was contrary to section 45. Finally, even if Apotex can establish that section 45 applies and that Lilly and/or Shionogi’s conduct was contrary to section 45, the motions judge will still have to determine if any of the other arguments raised by Lilly and Shionogi, which he did not originally consider, prevent Apotex from recovering damages under section 36 of the Competition Act.

The citation for the Federal Court of Appeal’s decision was set out at paragraph 7 of these reasons. 12. When the matter went back to the Judge, he asked himself whether there was some agreement or term, in addition to the assignment of the patents, which could constitute the “something more” to which the Federal Court of Appeal had alluded. Finding that there was not, he again granted the motions. He said (at paragraph 9): . . . where an agreement deals only with patent rights and is itself specifically authorized by the Patent Act, any lessening of competition resulting therefrom, being authorized by Parliament, is not “undue” and is not an offence under section 45.

In the Judge’s view, therefore, since any lessening of competition resulted from the assignments alone, Molnlycke applied. 13. Accordingly, the Judge (at paragraph 26) answered yes to the first question, but no to the second, because [at paragraph 15]: The agreement which constitutes the conspiracy alleged by Apotex, however, is solely and exclusively the assignment of the Shionogi patents and there is no other agreement alleged or shown by the evidence which could be the basis of a section 45 offence.

As for the third question, the Judge said that [at paragraph 26], while it did not arise, “it too would receive a negative answer.” 14. For the reasons that follow, I have concluded that the assignment of a patent may, as a matter of law, unduly lessen competition. I would allow Apotex’ appeal from the Judge’s decision, dismiss the motions, restore the paragraphs struck from the defence

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and counterclaim, and allow the matter to proceed to trial on all other issues, except whether there was a lessening of competition as a result of the assignment. . . . Issue 1: As a matter of law, may an assignment of a patent unduly lessen competition by virtue of the assignee’s ownership of related patents? 15. Lilly and Shionogi rely heavily on the decision in Molnlycke. They argue that, in the first round of this litigation (see paragraph 7 of these reasons), this Court held that Molnlycke is good law and should be followed. Consequently, they submit, as far as the present parties are concerned, the soundness of Molnlycke is res judicata. For present purposes, I accept this. However, the more important question is to define the scope of the proposition for which this Court affirmed Molnlycke. 16. In my view, this Court’s opinion of the scope of Molnlycke is clear from the reasons it gave when allowing the appeal from the first decision of the Judge. If, as Lilly and Shionogi argue, Apotex is bound by the Court’s conclusion that Molnlycke should be followed, Lilly and Shionogi, in my opinion, are equally bound by the Court’s view of the ratio of Molnlycke. This is what Rothstein J.A. said about Molnlycke [at paragraphs 14-15]: In the case of Molnlycke, there was a single supplier lawfully entitled to sell the subject of the patent prior to the patent being assigned. The assignment merely transferred the patent to another company. The only effect of the assignment was that a different company could sue the defendant for infringement. There was no change in the number of patent-holders before and after the assignment. The defendant appears to have claimed that an agreement to assign a patent and thereby allow the assignee to enforce the patent monopoly, with nothing more, could itself be an agreement that unduly lessened competition under subsection 45(1). Molnlycke held that, in order to provide scope for the statutory monopolies granted by the Patent Act to operate, Parliament must have intended that “undue impairment of competition cannot be inferred from evidence of the exercise of [patent] rights alone”. Where, however, there is evidence of something more than the mere exercise of patent rights that may affect competition in the relevant market, Molnlycke does not purport to completely preclude application of the Competition Act. [Emphasis added.]

17. Distinguishing Molnlycke, the Court said [at paragraph 17]: In the present case, Apotex does not allege that it is the mere assignment of patent rights or the enforcement of those patent rights by Lilly that gave it a cause of action. Rather, Apotex says that the assignment in this case resulted in one company, Lilly, acquiring patent rights that allow it to control all of the commercially viable processes for making cefaclor where, before the agreement, those processes were controlled by two companies, Shionogi and Lilly. Apotex argues that this consolidation was something more than the mere exercise of patent rights. Therefore, it says, the assignment agreement gave rise to an undue lessening of competition which engaged subsection 45(1) of the Competition Act.

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18. Since the Court did not refer to any other basis on which Apotex sought to distinguish Molnlycke, the Court’s reference to “something more” must mean, in this case, the anti-competitive effects of the assignment, namely, the increased power of Lilly in the market for bulk cefaclor, as a result of its existing ownership of the patents for the other known, commercially viable processes for manufacturing the medicine. 19. Hence, Molnlycke must be distinguished on the basis that it was dealing with a situation where the only market power created by the assignment was that inherent in the patent assigned. To the extent that there is broader language in Molnlycke, it must be understood to have been read down. 20. In my respectful opinion, therefore, the Judge erred in confining his consideration to whether the parties entered into some agreement or other arrangement, in addition to the assignment itself. 21. My conclusion that, in the previous round of this litigation, this Court held that Molnlyke was not determinative of this case would be sufficient to allow the appeal. Nonetheless, because the merits were fully argued, and in case the matter should go further, I shall explain why I agree with the interpretation of the relevant legislation implicit in the conclusion of this Court in the previous round of this litigation: namely, section 50 of the Patent Act does not immunize an agreement to assign a patent from section 45 of the Competition Act when the assignment increases the assignees’s market power in excess of that inherent in the patent rights assigned. 22. First, this interpretation of section 50 of the Patent Act enables it and section 45 of the Competition Act to operate harmoniously in accordance with the ordinary meaning of the statutory language of the provisions. It avoids the need to imply limiting words into section 45 exempting the assignment of patents from its scope. Nor does it render section 50 otiose because the provision clarified what otherwise would have been, at best, uncertain: namely, that a patentee’s rights include the right to assign the statutory rights conferred under the Patent Act on the grantee of a patent. 23. Since section 50 neither compels nor expressly authorizes what section 45 forbids, there is no true conflict between these two provisions of statutes which have different purposes . . . 24. Further, it is possible that an assignment pursuant to section 50 of the Patent Act which unduly lessens competition, and thereby potentially gives rise to criminal proceedings under section 45 and a claim for damages under section 36, may still be valid as between the assignor and assignee, even though section 45 may prevent the assignee from enforcing the rights assigned against certain third parties. However, this is not an issue that falls for decision here. 25. To subject the right to assign patents to section 45 in the circumstances under consideration in this case is also consistent with the scheme of the Competition Act. 26. For example, subsections 45(3), (7) and (7.1) provide specific exceptions and defences to the offences created by subsection 45(1). None deals with intellectual

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property rights. Moreover, it is clear that Parliament considered the interface of the Competition Act and intellectual property rights. For example, while subsection 79(1) prohibits the abuse of market dominance, subsection 79(5) provides that, for the purpose of section 79, “an act engaged in pursuant only to the exercise of any right . . . derived under the . . . Patent Act . . . is not an anti-competitive act.” Section 45 contains no analogous exemption for the exercise of rights under the Patent Act, including assignments pursuant to section 50. 27. In light of the above, the presumption of statutory interpretation, expressio unius est exclusio alterius, supports an interpretation of section 45 that does not impliedly exclude an assignment of patents which lessens competition by increasing the market power of the assignee beyond that inherent in the rights assigned. 28. Further, section 32 provides that the Federal Court may make certain orders where use is made of the exclusive rights conferred by a patent so as to unduly restrain trade or lessen competition in an article. It is clear from this that Parliament did not intend to exclude the exercise of patent rights from the reach of the Competition Act altogether. In order to achieve consistency with section 32, section 45 should be interpreted as applicable to an assignment of a patent which unduly lessens competition. 29. Lilly and Shionogi argue that, if a person had applied for and been granted patents for all the known processes for making a product, the person would have a monopoly over the manufacture of that product. This would not be contrary to the Competition Act, unless the patentee abused its market power in breach of section 79. Why should it make a difference if the patentee acquired some or all of the patents as a result of an assignment? 30. In my view, the answer is that the right to exclude others is an essential part of the bargain: the monopoly granted to the patentee is the recompense for ingenuity and the public disclosure of the invention. Moreover, as a unilateral act, the issue of a patent cannot be a conspiracy or agreement for the purpose of section 45. 31. The right to assign a patent is also valuable, and Parliament has authorized patent holders to assign their patents. No doubt, a patent holder may expect to obtain a higher price from a purchaser who already owns patents that would give the assignee a monopoly in a relevant market. However, to deter a patentee from obtaining the full potential value of the patent in these circumstances in order to maintain competition in a market is not incompatible with the essential bargain between the patentee and the state. 32. Second, an interpretation of section 50 of the Patent Act that does not immunize the assignment of patents from section 45 when it lessens competition is consistent with the purpose of the Competition Act, which is stated in section 1.1 . . . to be “to maintain and encourage competition in Canada in order to promote the efficiency and adaptability of the Canadian economy.” The importance of the Act and, within it, of section 45, was emphasized in R. v. Nova Scotia Pharmaceutical Society, [1992] 2 S.C.R. 606, at page 648, where Gonthier J. described the Act as being “central to Canadian

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public policy in the economic sector” and said that “s. 32 [now section 45] is itself one of the pillars of the Act.” It would be inconsistent with this view of the Competition Act, and of the place of section 45 within it, to reduce the scope of section 45 by reading in words that exclude an assignment of patents that lessens competition in the relevant market. 33. Third, this interpretation is consistent with the Competition Bureau’s Intellectual Property Enforcement Guidelines. Like other administrative interpretations, the Guidelines are not, and do not purport to be, legally binding nor determinative of the meaning of the Competition Act: Canada (Commissioner of Competition) v. Superior Propane Inc., [2001] 3 F.C. 185 (C.A.), at paragraph 124. Nonetheless, they may be considered by the Court as an aid to the Act’s interpretation (Nowegijick v. The Queen, [1983] 1 S.C.R. 29, at page 37 (Revenue Canada Interpretation Bulletin)), especially since the Guidelines are promulgated after an extensive consultative process. . . . 36. To conclude, in my respectful opinion, the Judge erred in law by holding that the assignment of patents is exempt from section 45 when, by reason of the assignee’s existing ownership of other patents, the assignment transfers more market power than that inherent in the patents assigned. He also erred in regarding Molnlycke as authority for the proposition that, in these circumstances, any lessening of competition could not be undue for the purpose of section 45. 37. The alternative argument of Lilly and Shionogi is that the evidence does not establish that the assignment of Shionogi’s patents to Lilly in 1995 lessened competition. Lilly says that this is because, as a result of the 1995 assignment and Lilly’s grant of a non-exclusive licence back to Shionogi of the assigned patents, there were two sources, namely, Shionogi and Lilly, from which a competitor could purchase, or seek a licence to manufacture, cefaclor. Previously, only Lilly could utilize the Shionogi cefaclor patents in Canada because, in 1975, Shionogi had granted Lilly an exclusive licence with respect to these patents. 38. Whether there was a lessening of competition after the 1995 assignment is a question of fact, on which the Judge made an express finding. After quoting a passage from the Federal Court of Appeal’s decision in the previous round of this litigation, the Judge said [at paragraphs 13-14]: To avoid any possible doubt, what was stated by the Court of Appeal in the quoted passage to be an allegation of Apotex is a fact amply demonstrated by the evidence and not seriously contested by either Lilly or Shionogi. So, there is and never has been any doubt that the result of the assignment of Shionogi’s patents to Lilly was to increase the latter’s monopoly power. Where formerly it had held four process patents useful in the production of cefaclor, it now held eight and no one else held any. In a word, it had a monopoly of the known production processes. It may well have been in a position of market dominance. [Emphasis added.]

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To put his view beyond any doubt, he added (at paragrah 22) that the agreement between Lilly and Shionogi “had the effect of lessening competition”. 39. In the absence of a palpable and overriding error, this Court cannot disturb the Judge’s conclusion that the effect of the assignment was a lessening of competition because of Lilly’s existing ownership of other patents. The question for trial is whether the lessening of competition resulting from the assignment is sufficiently significant as to be undue: see R. v. Nova Scotia Pharmaceutical Society, at page 646 and following. 40. Lilly argues that, since Shionogi was not in the Canadian market for cefaclor and, in 1975, had granted an exclusive licence to Lilly, Lilly held a monopoly in Canada prior to the assignment. After 1995, as a result of both the assignment, and Lilly’s grant to Shionogi of a non-exclusive licence with respect to cefaclor, there were two potential sources from which Apotex could have sought either to purchase or to obtain a licence to manufacture bulk cefaclor. Thus, it was argued, the assignment merely enabled Lilly, rather than Shionogi, to sue for infringement of the assigned patents and actually increased competition. 41. Moreover, Lilly and Shionogi say, since Apotex had not sought a licence from Lilly or Shionogi, before or after the assignment, it was in no position to say that the effect of the assignment was to shut it out of the cefaclor market. Indeed, Apotex had obtained bulk cefaclor from another source which, Apotex alleged, was manufactured by a process that did not infringe the Shionogi or Lilly patents. 42. Although the Judge made his finding of fact on the lessening of competition without referring to the grant of the licence back to Shionogi in 1995, he based his decision on the same arguments and record as were before us, including those relating to the grant of the licence back to Shionogi. The fact that Lilly granted a non-exclusive licence to Shionogi at the time of the 1995 assignment does not mean that it thereby lost control of the patents. For example, the licence prevented Shionogi from granting a sub-licence “without the written prior approval of, and at the sole discretion of, Lilly.” 43. Affidavits filed by Apotex from experts in various fields, including competition policy, provided significant evidence of a lessening of competition in the market for bulk cefaclor. In contrast, Lilly served only one relatively short affidavit, by an employee, in support of its position. Shionogi filed none. 44. As for the assertion that Shionogi had licensed its cefaclor process patents to Lilly in 1975, the evidence before the Judge about the pre-1995 relationship between Shionogi and Lilly with respect to those patents does not establish that the Judge’s finding that the 1995 assignment lessened competition was vitiated by palpable and overriding error. 45. Nor do I regard the Judge’s reference in paragraph 14 of his reasons to the possibility that the assignment may have put Lilly in a position of “market dominance”

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as an indication that, in making a finding respecting a lessening of competition, he had in mind section 79, not section 45. 46. On the basis of the evidence in the record, I would not disturb the Judge’s finding that the assignment lessened competition. . . .

[H]

Unfair Competition 31. This Section contains two U.S. leading cases only. The reason is that the expansion of unfair competition law to cover practices that used to be exclusively within the realm of antitrust started in the United States, with the enacting of the Federal Trade Commission Act of 1914 (15 U.S.C. §41). The two fields of law, however, have remained distinct, and their enforcement based on different requisites. Nevertheless, unfair competition has become a tool of repression of anticompetitive practices and the prior foundation of dishonesty or fraud has been greatly diminished. An expanded notion of unfair competition is based on the existence of a gain of competitive advantage in the absence of superior efficiency (or of luck or of governmental protection). Consequently, the boarders between unfair competition practices and antitrust violations have been blurred to a great extent. Later in the twentieth century the same trend started appearing in other countries, although not with the same breadth of scope as in the United States. Statutes recently introduced in a number of countries, indeed, have qualified as unfair competition any competitive gains acquired in result of breaches of statutes. In some countries, reference is made to specific statutes, such as labor laws. In other countries, breaches of any sort of statutes, providing they are coercively imposed, have the same consequence. 32. As a matter of course, this is not about antitrust law, but about unfair competition law being used as a complementary tool to promote free (rather than fair) competition. What distinguishes the two branches of law, therefore, is no longer their goals—which become the same—but the requisites for their enforcement.

50. Federal Trade Commission v. Raladam Co., 283 U.S. 643 (1931) SUPREME COURT OF THE UNITED STATES Mr. Justice Sutherland delivered the opinion of the Court. Under §5 of the Federal Trade Commission Act, c. 311, 38 Stat. 717, 719 (U. S. C., Title 15, § 45), . . . the Commission issued its complaint charging the respondent with using unfair methods of competition in interstate commerce. Respondent manufactures a preparation for internal use, denominated an “obesity cure.” The complaint charges that this preparation is sold by respondent in and throughout the several States, generally to wholesalers who resell to retailer dealers, and these, in turn, to consumers; that it is offered for sale and sold in competition with other persons who are engaged “in offering for sale, and selling, printed professional

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advice, books of information and instruction, and other methods and means and certain remedies and appliances for dissolving or otherwise removing excess flesh of the human body”; that respondent advertises in newspapers, etc., circulated generally in the United States, and in printed labels, etc., that the preparation is the result of scientific research, knowledge and accuracy, that it is safe and effective and may be used without discomfort, inconvenience or danger of harmful results to health. Among the ingredients is “desiccated thyroid,” which, it is alleged, cannot be prescribed to act with reasonable uniformity on the bodies of all users, or without impairing the health of a substantial portion of them, etc., or with safety, without previous consultation with, and continuing observation and advice of, a competent medical adviser. The complaint further avers that many persons are seeking obesity remedies, and respondent’s advertisements are calculated to mislead and deceive the purchasing public into the belief that the preparation is safe, effective, dependable, and without danger of harmful results. By way of conclusion, it is said that “the acts and practices of the respondent are all to the prejudice of the public and of competitors of respondent, . . . and constitute unfair methods of competition.” Respondent answered and hearings were had before an examiner. The Commission found against respondent and issued a cease and desist order. The findings in general follow the language of the complaint. There was no finding of prejudice or injury to any competitor, but the conclusion was drawn from the findings of fact that the practice of respondent was to the prejudice of the public and respondent’s competitors, and constituted an unfair method of competition. The court of appeals reviewed the action of the Commission upon respondent’s petition, and reversed the order. 42 F.2d 430. We brought the case here by certiorari, limiting the briefs and argument to the question of the jurisdiction of the Commission. In substance the Commission ordered the respondent to cease and desist from representing that its preparation is a scientific method for treating obesity, is the result of scientific research, or that the formula is a scientific formula; and from representing its preparation as a remedy for obesity, unless accompanied by the statement that it cannot be taken safely except under medical advice and direction. Findings, supported by evidence, warrant the conclusion that the preparation is one which cannot be used generally with safety to physical health except under medical direction and advice. If the necessity of protecting the public against dangerously misleading advertisements of a remedy sold in interstate commerce were all that is necessary to give the Commission jurisdiction, the order could not successfully be assailed. But this is not all. By the plain words of the act, the power of the Commission to take steps looking to the issue of an order to desist depends upon the existence of three distinct prerequisites: (1) that the methods complained of are unfair; (2) that they are methods of competition in commerce; and (3) that a proceeding by the Commission to prevent the use of the methods appears to be in the interest of the public. We assume the existence of the first and third of these requisites; and pass at once to the consideration of the second. Section 5 of the Trade Commission Act is supplementary to the Sherman Anti-Trust Act and the Clayton Act. Federal Trade Comm. v. Beech-Nut Co., 257 U.S.

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441, 453. The latter was discussed and passed at the same session of Congress. The Sherman Act deals with contracts, agreements and combinations which tend to the prejudice of the public by the undue restriction of competition or the undue obstruction of the due course of trade, United States v. American Tobacco Co., 221 U.S. 106, 179; and which tend to “restrict the common liberty to engage therein.” United States v. Patten, 226 U.S. 525, 541. The Clayton Act, so far as it deals with the subject, was intended to reach in their incipiency agreements embraced within the sphere of the Sherman Act. Standard Fashion Co. v. Magrane-Houston Co., 258 U.S. 346, 355-357. The object of the Trade Commission Act was to stop in their incipiency those methods of competition which fall within the meaning of the word “unfair.” “The great purpose of both statutes was to advance the public interest by securing fair opportunity for the play of the contending forces ordinarily engendered by an honest desire for gain.” Federal Trade Comm. v. Sinclair Co., 261 U.S. 463, 476. All three statutes seek to protect the public from abuses arising in the course of competitive interstate and foreign trade. In a case arising under the Trade Commission Act, the fundamental questions are, whether the methods complained of are “unfair,” and whether, as in cases under the Sherman Act, they tend to the substantial injury of the public by restricting competition in interstate trade and “the common liberty to engage therein.” The paramount aim of the act is the protection of the public from the evils likely to result from the destruction of competition or the restriction of it in a substantial degree, and this presupposes the existence of some substantial competition to be affected, since the public is not concerned in the maintenance of competition which itself is without real substance. Compare International Shoe Co. v. Federal Trade Comm., 280 U.S. 291, 297-299. The bill which was the foundation of the Act, as it first passed the Senate, declared “unfair competition” to be unlawful. Debate apparently convinced the sponsors of the legislation that these words, which had a well settled meaning at common law, were too narrow. When the bill came from conference between the two Houses, these words had been eliminated and the words “unfair methods of competition” substituted. Undoubtedly the substituted phrase has a broader meaning but how much broader has not been determined. It belongs to that class of phrases which do not admit of precise definition, but the meaning and application of which must be arrived at by what this court elsewhere has called “the gradual process of judicial inclusion and exclusion.” Davidson v. New Orleans, 96 U.S. 97, 104. The question is one for the final determination of the courts and not of the Commission. Federal Trade Comm. v. Gratz, 253 U.S. 421, 427; Federal Trade Comm. v. Beech-Nut Co., supra, p. 453. The authority of the Commission to proceed, if that body believes that there has been or is being used any unfair method of competition in commerce, was then qualified in conference by the further requirement, not in the original bill,—“and if it shall appear to the commission that a proceeding by it in respect thereof would be to the interest of the public.” By these additional words, protection to the public interest is made of paramount importance, but, nevertheless, they are not substantive words of jurisdiction, but complementary words of limitation upon the jurisdiction conferred by

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the language immediately preceding. Thus, the Commission is called upon first to determine, as a necessary prerequisite to the issue of a complaint, whether there is reason to believe that a given person, partnership or corporation has been or is using any unfair method of competition in commerce; and that being determined in the affirmative, the Commission still may not proceed unless it further appear that a proceeding would be to the interest of the public, and that such interest is specific and substantial. Federal Trade Comm. v. Klesner, 280 U.S. 19, 28. Unfair trade methods are not per se unfair methods of competition. It is obvious that the word “competition” imports the existence of present or potential competitors, and the unfair methods must be such as injuriously affect or tend thus to affect the business of these competitors—that is to say, the trader whose methods are assailed as unfair must have present or potential rivals in trade whose business will be, or is likely to be, lessened or otherwise injured. It is that condition of affairs which the Commission is given power to correct, and it is against that condition of affairs, and not some other, that the Commission is authorized to protect the public. Official powers cannot be extended beyond the terms and necessary implications of the grant. If broader powers be desirable they must be conferred by Congress. They cannot be merely assumed by administrative officers; nor can they be created by the courts in the proper exercise of their judicial functions. The foregoing view of the powers of the Commission under the Act finds confirmation, if that be needed, in the committee reports and the statements of those in charge of the legislation, as well as in the debate which took place in the Senate, extending over weeks of time and covering hundreds of pages in the Congressional Record. In that debate the necessity of curbing those whose unfair methods threatened to drive their competitors out of business was constantly emphasized. It was urged that the best way to stop monopoly at the threshold was to prevent unfair competition; that the unfair competition sought to be reached was that which must ultimately result in the extinction of rivals and the establishment of monopoly; that by the words “unfair methods” was meant those resorted to for the purpose of destroying competition or of eliminating a competitor or of introducing monopoly—such as tend unfairly to destroy or injure the business of a competitor; that the law was necessary to protect small business against giant competitors; that it was an effort to make competition stronger in its fight against monopoly; that unfair competition was that practice which destroys competition and establishes monopoly. These and similar statements run through the debate from beginning to end. Although protection to the public interest was recognized as the ultimate aim, comparatively little was said about it. It is true, at least generally, that statements made in debate cannot be used as aids to the construction of a statute. But the fact that throughout the consideration of this legislation there was common agreement in the debate as to the great purpose of the act, may properly be considered in determining what that purpose was and what were the evils sought to be remedied. . . . While it is impossible from the terms of the act itself, and in the light of the foregoing circumstances leading up to its passage, reasonably to conclude that

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Congress intended to vest the Commission with the general power to prevent all sorts of unfair trade practices in commerce apart from their actual or potential effect upon the trade of competitors, it is not necessary that the facts point to any particular trader or traders. It is enough that there be present or potential substantial competition, which is shown by proof, or appears by necessary inference, to have been injured, or to be clearly threatened with injury, to a substantial extent, by the use of the unfair methods complained of. In Federal Trade Comm. v. Winsted Co., 258 U.S. 483, it appeared that a manufacturer engaged in selling underwear and other knit goods made partly of wool, labeled them as “natural merino,” “natural wool,” “Australian wool,” etc. It was shown that a substantial part of the consuming public and some buyers and retailers understood the words used in the labels to mean that the underwear was all wool. Part of the public was thereby misled into selling or into buying, as all wool, underwear which was in large part cotton. The labels were false and calculated to deceive, and did in fact deceive, a substantial portion of the purchasing public. This court, after saying that the facts show that a proceeding to stop the practice was in the interest of the public, added (page 493): And they show also that the practice constitutes an unfair method of competition as against manufacturers of all wool knit underwear and as against those manufacturers of mixed wool and cotton underwear who brand their product truthfully. For when misbranded goods attract customers by means of the fraud which they perpetrate, trade is diverted from the producer of truthfully marked goods. That these honest manufacturers might protect their trade by also resorting to deceptive labels is no defense to this proceeding brought against the Winsted Company in the public interest.

And again, at page 494, after reaffirming the existence of the public interest, the court said: . . . since the business of its trade rivals who marked their goods truthfully was necessarily affected by that practice, the Commission was justified in its conclusion that the practice constituted an unfair method of competition; . . .

The court below thought that the trade to be protected “was that legitimate trade which was entitled to hold its own in the trade field without embarrassment from unfair competition.” There is much force in this conception of the act, and the language just quoted from the Winsted case seems inferentially to lend it support. Certainly, it is hard to see why Congress would set itself to the task of devising means and creating administrative machinery for the purpose of preserving the business of one knave from the unfair competition of another. In the present case, however, we do not find it necessary further to consider the merits of this view or to determine whether the facts are such as to bring the case within it. Findings of the Commission justify the conclusion that the advertisements naturally would tend to increase the business of respondent; but there is neither finding nor evidence from which the conclusion legitimately can be drawn that these advertisements substantially injured or tended thus to injure the business of any competitor

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or of competitors generally, whether legitimate or not. None of the supposed competitors appeared or was called upon to show what, if any, effect the misleading advertisements had, or were likely to have, upon his business. The only evidence as to the existence of competitors comes from medical sources not engaged in making or selling “obesity cures,” and consists in the main of a list of supposed producers and sellers of “anti-fat remedies” compiled from the files and records of the Bureau of Investigation of the American Medical Association, a list which appears to have been gathered mainly from newspapers and advertisements. The only specific evidence was that of a witness who said that he had purchased in drug stores in Chicago five different anti-fat treatments and could have purchased a sixth. How long they had been in stock, what was their nature, whether they were intended to be used internally, or in what way they competed or could compete with respondent’s preparation, does not appear. Of course, medical practitioners, by some of whom the danger of using the remedy without competent advice was exposed, are not in competition with respondent. They follow a profession and not a trade, and are not engaged in the business of making or vending remedies but in prescribing them. It is impossible to say whether, as a result of respondent’s advertisements, any business was diverted, or was likely to be diverted, from others engaged in like trade, or whether competitors, identified or unidentified, were injured in their business, or were likely to be injured, or, indeed, whether any other anti-obesity remedies were sold or offered for sale in competition, or were of such a character as naturally to come into any real competition, with respondent’s preparation in the interstate market. All this was left without proof and remains, at best, a matter of conjecture. Something more substantial than that is required as a basis for the exercise of the authority of the Commission. Whether the respondent, in what it was doing, was subjecting itself to administrative or other proceeding under the statute relating to the misbranding of foods and drugs we need not now inquire for the administration of that statute is not committed to the Federal Trade Commission. A proceeding under §5 is not one instituted before the Commission by one party against another. It is instituted by the Commission itself, and is authorized whenever the Commission has reason to believe that unfair methods of competition in commerce are being used, and that a proceeding by it in respect thereof would be to the interest of the public. Acting upon its belief, the Commission issues charges and enters upon an inquiry which, of course, it has jurisdiction to make. But one of the facts necessary to support jurisdiction to make the final order to cease and desist, is the existence of competition; and the Commission cannot, by assuming the existence of competition, if in fact there be none, give itself jurisdiction to make such an order. If, as a result of the inquiry, it turn out that the preliminary assumption of competition is without foundation, jurisdiction to make that order necessarily fails, and the proceeding must be dismissed by the Commission. Compare Federal Trade Comm. v. Klesner, supra, pp. 29-30. That course should have been followed here. . . .

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51. Federal Trade Commission v. Sperry & Hutchinson Co., 405 U.S. 233 (1972) SUPREME COURT OF THE UNITED STATES Mr. Justice White delivered the opinion of the Court. In June 1968 the Federal Trade Commission held that the largest and oldest company in the trading stamp industry, Sperry & Hutchinson (S&H), was violating §5 of the Federal Trade Commission Act, 38 Stat. 719, as amended, 15 U. S. C. §45 (a)(1), in three respects. The Commission found that S&H improperly regulated the maximum rate at which trading stamps were dispensed by its retail licensees; that it combined with others to regulate the rate of stamp dispensation throughout the industry; and that it attempted (almost invariably successfully) to suppress the operation of trading stamp exchanges and other “free and open” redemption of stamps. The Commission entered cease-and-desist orders accordingly. S&H appealed only the third of these orders. Before the Court of Appeals for the Fifth Circuit it conceded that it acted as the Commission found, but argued that its conduct is beyond the reach of §5 of the Act. That section provides, in pertinent part, that: The Commission is empowered and directed to prevent persons, partnerships, or corporations . . . from using unfair methods of competition in commerce and unfair or deceptive acts or practices in commerce.” 15 U. S. C. §45 (a)(6).

As S&H sees it, §5 empowers the Commission to restrain only such practices as are either in violation of the antitrust laws, deceptive, or repugnant to public morals. In S&H’s view, its practice of successfully prosecuting stamp exchanges in state and federal courts cannot be restrained under any of these theories. . . . S&H has been issuing trading stamps—small pieces of gummed paper about the size of postage stamps—since 1896. In 1964, the year from which data in this litigation are derived, the company had about 40% of the business in an industry that annually issued 400 billion stamps to more than 200,000 retail establishments for distribution in connection with retail sales of some 40 billion dollars. In 1964, more than 60% of all American consumers saved S&H Green Stamps. In the normal course, the trading stamp business operates as follows. S&H sells its stamps to retailers, primarily to supermarkets and gas stations, at a cost of about $2.65 per 1200 stamps; retailers give the stamps to consumers (typically at a rate of one for each 10 cent worth of purchases) as a bonus for their patronage; consumers paste the stamps in books of 1,200 and exchange the books for “gifts” at any of 850 S&H Redemption Centers maintained around the country. Each book typically buys between $2.86 and $3.31 worth of merchandise depending on the location of the redemption center and type of goods purchased. Since its development of this cycle 75 years ago, S&H has sold over one trillion stamps and redeemed approximately 86% of them. A cluster of factors relevant to this litigation tends to disrupt this cycle and, in S&H’s view, to threaten its business. An incomplete book has no redemption value.

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Even a complete book is of limited value because most “gifts” may be obtained only on submission of more than one book. For these reasons a collector of another type of stamps who has acquired a small number of green stamps may benefit by exchanging with a green stamp collector who has opposite holdings and preferences. Similarly, because of the seasonal usefulness or immediate utility of an object sought, a collector may want to buy stamps outright and thus put himself in a position to secure redemption merchandise immediately though it is “priced” beyond his current stamp holdings. Or a collector may seek to sell his stamps in order to use the resulting cash to make more basic purchases (food, shoes, etc.) than redemption centers normally provide. Periodically over the past 70 years professional exchanges have arisen to service this demand. Motivated by the prospect of profit realizable as a result of serving as middlemen in swaps, the exchanges will sell books of S&H stamps previously acquired from consumers, or, for a fee, will give a consumer another company’s stamps for S&H’s or vice versa. Further, some regular merchants have offered discounts on their own goods in return for S&H stamps. Retailers do this as a means of competing with merchants in the area who issue stamps. By offering a price break in return for stamps, the redeeming merchant replaces the incentive to return to the issuing merchant (to secure more stamps so as to be able to obtain a gift at a redemption center) with the attraction of securing immediate benefit from the stamps by exchanging them for a discount at his store. S&H fears these activities because they are believed to reduce consumer proclivity to return to green-stamp-issuing stores and thus lower a store’s incentive to buy and distribute stamps. The company attempts to pre-empt “trafficking” in its stamps by contractual provisions reflected in a notice on the inside cover of every S&H stamp book. . . . S&H makes no effort to enforce this condition when consumers casually exchange stamps with each other, though reportedly some 20% of all the company’s stamps change hands in this manner. But S&H vigorously moves against unauthorized commercial exchanges and redeemers. Between 1957 and 1965, by its own account the company filed for 43 injunctions against merchants who redeemed or exchanged its stamps without authorization, and it sent letters threatening legal action to 140 stamp exchanges and 175 businesses that redeemed S&H stamps. In almost all instances the threat or the reality of suit forced the businessmen to abandon their unauthorized practices. The Commission presented two questions in its petition for certiorari, the first being “whether Section 5 of the Federal Trade Commission Act, which directs the Commission to prevent ‘unfair methods of competition . . . and unfair or deceptive acts or practices,’ is limited to conduct which violates the letter or spirit of the antitrust laws.” . . . In reality, the question is a double one: First, does § 5 empower the Commission to define and proscribe an unfair competitive practice, even though the practice does not infringe either the letter or the spirit of the antitrust laws? Second, does §5 empower the Commission to proscribe practices as unfair or deceptive in their effect upon consumers regardless of their nature or quality as competitive practices or their effect

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on competition? We think the statute, its legislative history, and prior cases compel an affirmative answer to both questions. When Congress created the Federal Trade Commission in 1914 and charted its power and responsibility under §5, it explicitly considered, and rejected, the notion that it reduce the ambiguity of the phrase “unfair methods of competition” by tying the concept of unfairness to a common-law or statutory standard or by enumerating the particular practices to which it was intended to apply. Senate Report No. 597, 63d Cong., 2d Sess., 13 (1914), presents the reasoning that led the Senate Committee to avoid the temptations of precision when framing the Trade Commission Act: The committee gave careful consideration to the question as to whether it would attempt to define the many and variable unfair practices which prevail in commerce and to forbid their continuance or whether it would, by a general declaration condemning unfair practices, leave it to the commission to determine what practices were unfair. It concluded that the latter course would be the better, for the reason, as stated by one of the representatives of the Illinois Manufacturers’ Association, that there were too many unfair practices to define, and after writing 20 of them into the law it would be quite possible to invent others.

The House Conference Report was no less explicit. “It is impossible to frame definitions which embrace all unfair practices. There is no limit to human inventiveness in this field. Even if all known unfair practices were specifically defined and prohibited, it would be at once necessary to begin over again. If Congress were to adopt the method of definition, it would undertake an endless task.” H. R. Conf. Rep. No. 1142, 63d Cong., 2d Sess., 19 (1914). . . . Since the sweep and flexibility of this approach were thus made crystal clear, there have twice been judicial attempts to fence in the grounds upon which the FTC might rest a finding of unfairness. In FTC v. Gratz, 253 U.S. 421 (1920), the Court over the strong dissent of Mr. Justice Brandeis (who had been involved in drafting the Trade Commission Act), wrote that while the “exact meaning” of the phrase “unfair method of competition . . . is in dispute,” the only practices that were subject to this characterization were those that were “heretofore regarded as opposed to good morals because characterized by deception, bad faith, fraud or oppression, or as against public policy because of their dangerous tendency unduly to hinder competition or create monopoly.” Id., at 427. This view was reiterated in other opinions over the next decade. See, e. g., FTC v. Curtis Publishing Co., 260 U.S. 568 (1923), and FTC v. Sinclair Refining Co., 261 U.S. 463, 475-476 (1923). The opinion of the Court of Appeals’ majority, citing Sinclair in support of its narrow view of the FTC’s leeway, is in the tradition of these authorities. In FTC v. Raladam Co., 283 U.S. 643 (1931), a unanimous Court held that: “The paramount aim of the act is the protection of the public from the evils likely to result from the destruction of competition or the restriction of it in a substantial degree. . . . Unfair trade methods are not per se unfair methods of competition.” (Italics in original.) “It is obvious,” the Court continued: that the word ‘competition’ imports the existence of present or potential competitors, and the unfair methods must be such as injuriously affect or tend thus to

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affect the business of these competitors—that is to say, the trader whose methods are assailed as unfair must have present or potential rivals in trade whose business will be, or is likely to be, lessened or otherwise injured. It is that condition of affairs which the Commission is given power to correct, and it is against that condition of affairs, and not some other, that the Commission is authorized to protect the public. . . . If broader powers be desirable they must be conferred by Congress. Id., at 647-649.

Neither of these limiting interpretations survives to buttress the Court of Appeals’ view of the instant case. Even if the first line of cases, Gratz and its progeny, stood unimpaired, their deference to action taken to constrain “deception, bad faith, fraud or oppression” would grant the FTC greater power to set right what it perceives as wrong than the panel of the Court of Appeals acknowledges. But frequent opportunity for reconsideration has consistently and emphatically led this Court to the view that the perspective of Gratz is too confined. As we recently unanimously observed: “Later cases of this Court . . . have rejected the Gratz view and it is now recognized in line with the dissent of Mr. Justice Brandeis in Gratz that the Commission has broad powers to declare trade practices unfair.” FTC v. Brown Shoe Co., 384 U.S. 316, 320-321 (1966). The leading case that recognized a role for the FTC beyond that mapped out in Gratz, FTC v. R. F. Keppel & Bro., Inc., 291 U.S. 304 (1934), also brought Raladam into question; on both counts it sets the standard by which the range of FTC jurisdiction is to be measured today. Keppel & Brothers sold penny candies in “break and take” packs, a form of merchandising that induced children to buy lesser amounts of concededly inferior candy in the hope of by luck hitting on bonus packs containing extra candy and prizes. The FTC issued a cease-and-desist order under §5 on the theory that the popular marketing scheme contravened public policy insofar as it tempted children to gamble and compelled those who would successfully compete with Keppel to abandon their scruples by similarly tempting children. The Court had no difficulty in sustaining the FTC’s conclusion that the practice was “unfair,” though any competitor could maintain his position simply by adopting the challenged practice. “Here,” the Court said, “the competitive method is shown to exploit consumers, children, who are unable to protect themselves. . . . It is clear that the practice is of the sort which the common law and criminal statutes have long deemed contrary to public policy.” Id., at 313. En route to this result the Court met Keppel’s arguments that, absent an antitrust violation or at least incipient injury to competitors, Gratz and Raladam so straitjacketed the FTC that the Commission could not issue a cease-and-desist order proscribing even an immoral practice. It held: Neither the language nor the history of the Act suggests that Congress intended to confine the forbidden methods to fixed and unyielding categories. The common law afforded a definition of unfair competition and, before the enactment of the Federal Trade Commission Act, the Sherman Act had laid its inhibition upon combinations to restrain or monopolize interstate commerce which the courts had construed to include restraints upon competition in interstate commerce. It would not have been a difficult feat of draftsmanship to have restricted the operation of the Trade Commission Act to those methods of competition in interstate commerce

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which are forbidden at common law or which are likely to grow into violations of the Sherman Act, if that had been the purpose of the legislation. Id., at 310.

Thenceforth, unfair competitive practices were not limited to those likely to have anticompetitive consequences after the manner of the antitrust laws; nor were unfair practices in commerce confined to purely competitive behavior. The perspective of Keppel, displacing that of Raladam, was legislatively confirmed when Congress adopted the 1938 Wheeler-Lea amendment, 52 Stat. 111, to §5. The amendment added the phrase “unfair or deceptive acts or practices” to the section’s original ban on “unfair methods of competition” and thus made it clear that Congress, through §5, charged the FTC with protecting consumers as well as competitors. The House Report on the amendment summarized congressional thinking: “This amendment makes the consumer, who may be injured by an unfair trade practice, of equal concern, before the law, with the merchant or manufacturer injured by the unfair methods of a dishonest competitor.” H. R. Rep. No. 1613, 75th Cong., 1st Sess., 3 (1937). See also S. Rep. No. 1705, 74th Cong., 2d Sess., 2-3 (1936). Thus, legislative and judicial authorities alike convince us that the Federal Trade Commission does not arrogate excessive power to itself if, in measuring a practice against the elusive, but congressionally mandated standard of fairness, it, like a court of equity, considers public values beyond simply those enshrined in the letter or encompassed in the spirit of the antitrust laws. The general conclusion just enunciated requires us to hold that the Court of Appeals erred in its construction of §5 of the Federal Trade Commission Act. Ordinarily we would simply reverse the judgment of the Court of Appeals insofar as it limited the unfair practices proscribed by §5 to those contrary to the letter and spirit of the antitrust laws and we would remand the case for consideration of whether the challenged practices, though posing no threat to competition within the precepts of the antitrust laws, are nevertheless either (1) unfair methods of competition or (2) unfair or deceptive acts or practices. . . . The Commission urges reversal of the Court of Appeals and approval of its own order because, in its words, “the Act gives the Commission comprehensive power to prevent trade practices which are deceptive or unfair to consumers, regardless of whether they also are anticompetitive.” . . . It says the Court of Appeals was “wrong in two ways: you can have an anticompetitive impact that is not a violation of the antitrust laws and violate Section 5. You can also have an impact upon consumers without regard to competition and you can uphold a Section 5 violation on that ground.” . . . Though completely accurate, these statements cannot be squared with the Commission’s holding that “it is essential in this matter, we believe, and as we have heretofore indicated, to determine whether or not there has been or may be an impairment of competition,” . . .; its conclusion that “respondent . . . prevents . . . competitive reaction[s] and thereby it has restrained trade. We believe this is an unfair method of competition and an unfair act and practice in violation of Section 5 of the Federal Trade Commission Act and so hold,” . . ; its observation that: Respondent’s individual acts and its acts with others taken to suppress trading stamp exchanges and other stamp redemption activity are all part of a clearly

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defined restrictive policy pursued by the respondent. In the circumstances surrounding this particular practice it is difficult to wholly separate the individual acts from the collective acts for the purpose of making an analysis of the consequences under the antitrust laws. . . . and like statements throughout the opinion, . . .

There is no indication in the Commission’s opinion that it found S&H’s conduct to be unfair in its effect on competitors because of considerations other than those at the root of the antitrust laws. For its part, the theory that the FTC’s decision is derived from its concern for consumers finds support in only one line of the Commission’s opinion. The Commission’s observation that S&H’s conduct limited “stamp collecting consumers’ . . . freedom of choice in the disposition of trading stamps,” . . . will not alone support a conclusion that the FTC has found S&H guilty of unfair practices because of damage to consumers. Arguably, the Commission’s findings, in contrast to its opinion, go beyond concern with competition and address themselves to noncompetitive and consumer injury as well. It may also be that such findings would have evidentiary support in the record. But even if the findings were considered to be adequate foundation for an opinion and order resting on unfair consequences to consumer interests, they still fail to sustain the Commission action; for the Commission has not rendered an opinion which, by the route suggested, links its findings and its conclusions. The opinion is barren of any attempt to rest the order on its assessment of particular competitive practices or considerations of consumer interests independent of possible or actual effects on competition. Nor were any standards for doing so referred to or developed. ...

[I]

Obstruction of Markets 33. This topic is closely associated with refusals to license. Where an intellectual property owner is entitled to refuse competitors the right to use his/her intangible assets, either to produce goods that compete with their own, or to produce noncompeting goods, he/she naturally raises a barrier against competitors. In principle, as the IMS Health court held (see case no. 26), that is simply the consequence of the exercise of intellectual property exclusive rights. However, in another case (Magill) the same court held that intellectual property rights cannot be exercised against the production of non-competing goods for which potential consumer demand exists. Therefore, the fact that the goods are non-competing eliminates the possibility of a reasonable commercial justification for the refusal. In Magill, the exercise of intellectual property exclusivity was deemed abusive because of the obstruction of markets it caused. In other jurisdictions, courts (administrative courts in the examples that follow) have taken a different view. In India, industrial design rights have been submitted to compulsory licenses (case no. 52). In Brazil, enforcement of those rights against manufacturers of spare parts has been deemed an abuse of dominant position.10

10. See infra n. 12.

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34. In various jurisdictions, such as Australia, India and the United Kingdom, statutes impose compulsory licenses in patent rights if their exercise prejudices the establishment or the development of domestic commercial or industrial activities.11

52. Shri Shamsher Kataria Informant v. Honda Siel Cars India Ltd. et alii, Case No. 03/2011 (2014) COMPETITION COMMISSION OF INDIA . . . The present information has been filed by Shri Shamsher Kataria (hereinafter, referred to as the “Informant”) under Section 19 (1)(a) of the Competition Act, 2002 (hereinafter, referred to as the “Act”) against Honda Siel Cars India Ltd (hereinafter, referred to as “Honda” or OP-1), the Volkswagen India Pvt Ltd (hereinafter, referred to as “Volkswagen” or OP-2) and Fiat India Auomobiles Ltd (hereinafter, referred to as “Fiat” or OP-3), alleging anti-competitive practices on part of the OPs whereby the genuine spare parts of automobiles manufactured by OP-1, OP-2 and OP-3, respectively, are not made freely available in the open market. . . . The Informant has also alleged, that even the technological information, diagnostic tools and software programs required to maintain, service and repair the technologically advanced automobiles manufactured by each of the aforesaid OPs were not freely available to the independent repair workshops. The repair, maintenance and servicing of such automobiles could only be carried out at the workshops or service stations of the authorized dealers of OP. . . . It has been further alleged that the OPs 1-3, by restricting the sale and supply of the genuine spare parts, diagnostic tools/equipment, technical information required to maintain, service and repair the automobiles manufactured by the respective OPs, have effectively created a monopoly over the supply of such genuine spare parts and repair/maintenance services and, consequently, have indirectly determined the prices of the spare parts and the repair and maintenance services. Additionally, the Informant has alleged, that such restrictive practice carried out by the OPs in conjunction with their respective authorized dealers, amounts to denial of market access to independent repair workshops. The Informant has stated that the cost of getting a car repaired in an independent workshop is cheaper by 35-50% as compared to the authorized service centers of the OPs. The Informant has alleged that the OPs charge arbitrary and high prices to the consumers who are forced to avail the services of the authorized dealers of the OPs for repairing and maintaining their automobiles since the genuine spare parts, diagnostic tools and the technological information required to service their cars are not made available by the OPs to independent repair workshops. It has been also stated that the

11. See WIPO, Refusals to License IP Rights supra n. 6.

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prices charged for the genuine spare parts and for repair and maintenance services by the authorized dealers of the OPs are even higher than what they charge in other markets in Europe. The Informant has alleged that such practices which allow the OPs to charge arbitrary and high prices result in significant increase in the maintenance cost to car owners. It has been stated in the information that the components and parts used in the manufacture of their respective brand of automobiles are often sourced from independent original equipment suppliers (hereinafter, referred to as “OESs”) and other suppliers who are restrained by the OPs from selling the parts/components in the open market. Such restriction on the ability of the OESs to sell the spare parts/components further limits the access of such spare parts/components in the open market, thereby, allowing the OPs to create a monopoly-like situation wherein they become the sole supplier of the spare parts/components of their respective brand of automobiles. Such restrictions allow the OPs to influence and determine the price of the spare parts/components used to repair and maintain the respective brands of automobiles. . . . The Informant has stated that effective competition at each level of automotive aftermarket is essential for fostering innovation and keeping mobility affordable. It has been contended that if a consumer is given a choice of getting his vehicle serviced/repaired at a workshop of his choice, it will foster competition among service providers which will in turn will not only lead to improvement in quality of service and a competitive pricing policy by the OPs, but also encourage innovation in the market. The Informant has alleged that due to the restrictive trade practices of the OPs, effective competition at each level of the Indian automotive industry is getting adversely affected. The Informant has also alleged that the anti-competitive practices by the OPs have resulted in denial of market access to independent workshops which are usually micro, small and medium enterprises (MSMEs). The Informant has stated that MSMEs give employment to 45% of industrial workers. Furthermore, on the one hand the Government has introduced several policies and initiatives to encourage and support the MSMEs and on the other hand the current practices of the OPs are adversely affecting the sector. . . . The DG Report has identified following two separate product markets for the passenger vehicle sector in India: 1) The Primary Market: consisting of the manufacturing and the sale of the passenger vehicles. 2) The Secondary Market which is essentially the “Aftermarket”. “Aftermarket” is the expression used to describe a market comprising complementary or secondary products and services which are purchased after another product i.e. the primary product which they relate to. According to the DG report the aftermarket in the present case comprises of spare parts, diagnostic tools, technical manuals and after sales repair and maintenance services that are required to be purchased after the purchase of primary product.

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The DG further identified the two segments of the aftermarket for passenger vehicle sector in India. They are: a) Supply of spare parts, including the diagnostic tools, technical manuals, catalogues etc. for the aftermarket usage; and b) Provision of after sale services, including servicing of vehicles, maintenance and repair services. . . . The DG has analyzed the practices and conduct of each OEM in terms of provisions of section 4 of the Act. The DG notes that the dominance of the OEMs emerge to a large extent on account of purported holding of relevant intellectual property rights over the spare parts being manufactured by the OESs or the OEMs themselves. Moreover, the DG after an exhaustive analysis of several international precedents have concluded that though the mere possession of a protective right does not amount to abuse of dominance by the holder of such protective rights, however, such exclusive rights may be prohibited when they result in discriminatory condition of sale, fixing of prices for spare parts at an unfair level or refusal to continue to manufacture spare parts of a particular type of automobile which is still in use. . . . Further, based upon its investigation and analysis of international case-law and practices, the DG concluded that spare parts, diagnostic tools, manuals etc. of each OEM would constitute essential facilities for the independent repairers to be able to provide consumers with effective after sale repair and maintenance work and for such independent repairers to effectively compete with the authorized dealers of the OEMs. The DG has pointed out that the essential factors to be taken into account in determining whether spare parts, diagnostic tools, manuals etc. of each OEM would constitute essential facilities for the independent repairers, are: (a) control of the essential facility by the monopolist; (b) the inability to duplicate the facility; (c) the denial of the use of the facility, and (d) the feasibility of providing the facility. The DG observed that due to the usage of high technology most of the models of automobiles manufactured by the OEMs require sophisticated diagnostic tools, technical manuals for proper diagnosis, service and repair. Therefore access to such technology is critical for any entity to undertake after sale service to compete effectively with the authorized dealers of the OEMs. Additionally, as explained above, the DG has found each OEM to be dominant with respect to its brand of automobiles and the spare parts of each brand of automobile is unique and cannot be replicated by the independent repairers from alternate sources. Therefore, based upon such considerations, the DG has concluded that the essential facilities doctrine is applicable to the restrictive practices of the OEMs, since the DG’s investigation has revealed that by not making such material available to the independent repairers, the OEMs have put such repairers at a distinctly disadvantageous position and jeopardized their ability to undertake repairs of the automobiles manufactured by the OEMs. . . . The DG report also dealt with, in detail, the rationale of the restriction claimed by the OEMs for restricting OESs from distributing the spare parts manufactured by them without the consent of the OEMs in the open market. The OEMs have claimed the exemptions under section 3(5)(i) of the Act stating that the restrictions imposed upon

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the OESs are reasonable since considerable investments have been made in research and development facilities for developing the products. The DG noted that such an exemption is granted to certain categories of intellectual property rights holders to protect their intellectual property by imposing reasonable restrictions, as may be necessary to protect such intellectual property rights. The DG while reviewing the documents evidencing the grant of the intellectual property right upon an OEM found that there were several issues relating to the fact whether the OEMs actually are in the possession of a particular intellectual property right. In some of the instances the OEMs could not provide sufficient documentary evidence linking the design of a particular spare part with the claimed intellectual right protection over such design. Some of the intellectual property rights claimed by the OEMs are actually held by their overseas parent corporation and such proprietary technology has been transferred to the OEMs through technology transfer agreements (“TTA”). However, such TTAs do not contain any specific details of the intellectual property rights that are being transferred to the OEMs. Thus, given the lack of adequate information, the DG could not verify the claim of such OEMs that they were in possession of a legally valid intellectual property right. The DG also noted that the intellectual property rights claimed by the OEMs were territorial in nature and the particular right is vested upon the holder of such intellectual property rights only in a given jurisdiction. Thus even if the parent corporation of the OEMs held such rights in the territories where such rights were originally granted, the same cannot be granted upon the OEMs operating in India by entering into a TTA. Thus, the OEMs pursuant to a TTA were holding a right to exploit a particular intellectual property right held by its parent corporation and not the intellectual property right itself. Consequently, the DG concluded that such OEMs could not avail of the exemption provided in section 3(5)(i) of the Act. During investigation before the DG, OEMs also claimed protection in the form of copyrights over the drawings, designs, specifications etc. for every spare part manufactured on their behalf by the respective OESs. The DG after a thorough study of several judgments relating to the Indian copyright law has concluded that the copyright protection claimed by several of the OEMs over the designs, drawings and specifications of their respective spare parts are not available to the OEMs. The DG has come to this conclusion based upon the fact that though there are no requirements to register the copyright over a design of a spare part under the [Indian] Copyright Act, 1957, the right has been limited by the Copyright Act, which mandates that the copyright over the designs registered under the [Indian] Design Act, 1911 or such designs which are capable of being registered under the Designs Act, but not registered, shall cease to exists once the concerned design has been applied more than 50 times by industrial process by the owner of the copyright or his licensee. Given this background the DG has concluded that copyright may not subsist in the designs and drawings of all the spare parts, as claimed by the OEMs. The OEMs have further contended that the know-how provided by the OEMs to the OESs to enable the OESs to manufacture the spare parts for the OEMs is confidential in nature and is protected as a trade secret. The DG has rightly pointed out that confidential information must be in fact confidential and backed by an obligation/duty

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of confidence owed between the parties sharing such information. The DG has concluded that the OEMs need to satisfy that the information provided to the OESs qualify to be protected as “trade secret”. Additionally, the DG has further stated that trade secrets are not provided in section 3(5)(i) as one of the various forms of intellectual property rights whose holder can avail of an exemption from the provisions of section 3 of the Act. The DG observed that even in cases which are covered in terms of section 3(5)(i) of the Act, only reasonable conditions, as may be necessary for protecting of rights under various legislations referred therein, can be imposed. Notwithstanding the fact that OEMs have not established that they possess valid intellectual property rights in India for being considered for the exemption under section 3(5)(i) of the Act, during the course of investigation it was examined whether based on available facts and circumstances, restrictions imposed by the OEMs could be termed as “reasonable”. The DG after examining the agreements between the OEMs and the OESs have found that in most instances the OESs are restricted from selling spare parts to third parties without “prior consent”. The DG has also revealed that not a single instance of such permission by any OEM has been confirmed. The DG has further stated that the reason for the OESs not approaching the OEMs could be either that OES do not expect to get the permission or are apprehensive that any such request would be viewed adversely by the OEMs. Hence, the DG is of the opinion that the requirement of “prior consent” before OESs can sell spare parts to third parties acts as a major deterrent and effectively amounts to prohibition on OESs from direct sales in the aftermarket. . . . OEMs have submitted that the DG in its reports, has failed to appreciate that the various OESs, manufacture the spare parts of the respective OEMs with the aid of design, drawings, technical specification, technology, know-how, tooling, quality parameters etc., provided by the OEMs. Consequently, the proprietary interest in the product will lie solely with the OEMs and their respective OESs are precluded in law to deal in any other manner in terms of contract/agreement inter se the parties. OEMs have submitted that section 3(5)(i) of the Competition Act, expressly permits a person or enterprise to impose reasonable restrictions as may be necessary for protecting any of his IPRs which have been or may be conferred upon him under the provisions of the statutes specified in the section. As per the OEMs, the restrictions imposed in their contracts with their respective OESs and authorized dealers are permissible under Section 3(5) of the Competition Act, wherein a person may be allowed to impose conditions that are reasonable and necessary for protecting its IPRs in its commercial dealings with other enterprises. OEMs have submitted that such restrictions are further justified under the provisions of section 3(5) of the Competition Act inter alia, to: (a) safeguard the buyers from purchasing spurious and counterfeit spares; (b) to maintain the quality of the spare parts; (c) to ensure that the spare parts meet the quality standards through quality and safety tests carried out by the OEM; (d) to ensure organized system of warranty support to end consumers. OEMs have stated that even if they are not the actual owner of certain IPRs, their respective parent company are the owners of the same and they are entitled to protect the IPRs through their subsidiaries in India pursuant to the various technology agreements entered into between the overseas parent company and the Indian

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subsidiary company. OEMs have stated that such technology agreements need not mention each spare part but it gives the right to their Indian subsidiary to use and regulate the IPRs in India for the benefit of the parent company. Further, OEMs have stated that even by assuming that the IPRs of its parent companies are territorial, the same by virtue of the provisions of the Copyright Act, 1957, can be enforced and regulated by their subsidiaries in India and that the OEMs are entitled, under section 3(5) of the Competition Act to impose reasonable contractual restrictions to protect the IPRs held by their parent overseas companies, in India. OEMs have submitted that the DG has patently erred in its analysis of the restrictions placed by section 15 of the [Indian] Copyright Act. While the OEMs admit that certain spare parts of their branded cars enjoy design protection in India, not all spare parts are protected as designs, since spare parts are not a homogeneous group of mechanical parts. Such spare parts range from complex mechanical and electronic items to simple mechanical products, hence, all spare parts cannot be protected under the [Indian] Designs Act. OEMs have submitted that for all such spare parts, copyright protection is available and the restriction of section 15(2) of the Copyright Act is not applicable in such instances. Hence, the OEMs have submitted that the decision of the DG that the OEMs may not secure IPR protection for all its spare parts, under India’s copyright laws is incorrect. OEMs have argued that the designs of their respective spare parts are protected either under the Designs Act or under the Copyright Act and further, since such spare parts are manufactured using the OEM’s trade secrets and confidential information, OEMs would still be entitled to protection under the established common law principles. . . . In the present case, the independent service providers require the spare parts and diagnostic tools compatible to the various models of automobiles manufactured by the various OEMs to carry out their economic activity of providing repair and maintenance services in the Indian automobile aftermarket. As discussed earlier, each OEM is a dominant player in the aftermarket for the supply of spare parts and diagnostic tools and through a network of contracts effectively controls the supply of such spare parts and diagnostic tools in the aftermarket. The OEMs through their own or related network of authorized distributors also operate in the aftermarket for aftersale repair and maintenance services of their own brand of cars. Each OEM have two type of customers; one in the primary market and the other in the secondary market. These customers are: (a) car owners who purchase the automobiles manufactured by the OEMs in the primary market and (b) independent service providers in the aftermarket. An owner of a car cannot fit the spare parts into the machine by himself and requires the services of a specialized technician. Therefore, the owner of automobiles does not operate in the aftermarket as purchasers of spare parts but require the service of firms engaged in maintenance and repair work. The independent repairers, who are not part of the official dealer network of the OEMs, do operate in the market for as purchasers of spare parts of the automobiles manufactured by the OEMs. Therefore, the independent service providers are customers of the OEMs in the aftermarket and further compete with the OEMs in the repairs and maintenance service aftermarket. . . .

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Section 3(5)(i) provides: (5) Nothing contained in this section shall restrict – (i) the right of any person to restrain any infringement of , or to impose reasonable conditions, as may be necessary for protecting any of his rights which have been or may be conferred upon him under— (a) the Copyright Act, 1957 (14 of 1957); (b) the Patents Act, 1970 (39 of 1970); (c) the Trade and Merchandise Marks Act, 1958 (43 of 1958) or the Trade Marks Act, 1999 (47 of 1999); (d) the Geographical Indications of Goods (Registration and Protection) Act, 1999 (48 of1999); (e) the Designs Act, 2000 (16 of 2000); (f) the Semi-conductor Integrated Circuits Layout-Designs Act, 2000 (37 of 2000. C. No. 03 of 2011

Several OEMs have relied upon the aforesaid exemptions and stated that on account of these provisions, the restrictions of sales on OESs, of their proprietary parts to third parties without prior consent would fall within ambit of reasonable condition to prevent infringements of their IPRs. It has been contended that significant investments are made into research and development facilities by them based on which these products are manufactured. In this connection, certain European Commission decisions have also been relied upon by the OEMs. In determining whether the agreements entered between the OEMs and the OESs would fall within the ambit of the provisions of section 3(5)(i) of the Act; it is necessary to consider, inter alia, the following: a) whether the right which is put forward is correctly characterized as protecting an intellectual property; and b) whether the requirements of the law granting the IPRs are in fact being satisfied. The DG during the course of the investigation has provided an opportunity to the OEMs to confirm the status of the IPRs held by them in India along with the necessary details justifying the claim of exemption pursuant to section 3(5)(i) of the Act. The Commission has noted that none of the OEMs have submitted the relevant documentary evidence to successfully establish the grant of the applicable IPRs, in India, with respect to the various spare parts pursuant to which such OEMs have claimed the exemption under section 3(5)(i) of the Act. The Commission is of the opinion under section 3(5)(i) allows an IPR holder to impose reasonable restrictions to protect his rights ‘which have been or may be conferred upon him under’ the specified IPR statutes mentioned therein. The statute is clear in its requirement that an IPR must have been conferred (or may be conferred) upon the IPR holder prior to the exception under section 3(5)(i) being available. Therefore, before the OEMs are permitted to seek the exemption under section 3(5)(i) they must establish that their IPRs have been granted protection (or that the OEMs have initiated the process of being granted protection) under the specified IPR statutes in India. The Commission, after reviewing the

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submissions of the findings of the DG and the submissions of the OEMs is not satisfied regarding both the characterization of certain rights, claimed by the OEMs, as IPRs as well as regarding the fact that the OEMs could not provide sufficient evidence to establish their claim over a particular type of IPR. Even in those cases where the OEMs have registered/applied for registration of certain designs, patents, however, the details of specific spare parts to which these correspond, have not been furnished. Hence, it has not been possible to relate these claimed rights under the applicable IPR laws to individual spare parts that are protected. In our view in the absence of the OEMs ability to first establish their claim of IPRs in the spare parts and the diagnostic tools they cannot avail of the exemption provided in section 3(5)(i) of the Act. The OEMs have submitted that some of the IPRs claimed by the OEMs are validly held by their overseas parent corporation and such proprietary technology has been transferred to the OEMs through technology transfer agreements (“TTA”). The Commission notes that a particular IPR claimed by the OEMs are territorial in nature and the particular right is vested upon the holder of such IPR only in a given jurisdiction. Thus, even if the parent corporation of the OEMs held such rights in the territories where such rights were originally granted, the same cannot be granted upon the OEMs operating in India by entering into a TTA, unless such rights have been granted upon the OEMs pursuant to the provisions of the statutes specified under section 3(5)(i) of the Act. Thus, the OEMs pursuant to a TTA were holding a right to exploit a particular IPR held by its parent corporation and not the IPR right itself. Consequently, such OEMs could not avail of the exemption provided in section 3(5)(i) of the Act. It is pertinent to add here, that the Commission is not the competent authority to decide, for example if a patent/trademark that is validly registered under the applicable laws of another country fulfills the legal and technical requirement or is capable of being registered under the Indian IPR statutes, specified under section 3(5) of the Competition Act. Such a mandate would lies with the IPR enforcement agencies of India. For the Commission to appreciate a party’s validly foreign registered IPR, in the context of section 3(5) of the Act, satisfactory documentary evidence needs to be adduced to establish that, the appropriate Indian agency administering the IPR statutes, mentioned under section 3(5)(i) have: (a) validly recognized such foreign registered IPRs under the applicable Indian statues, especially where such IPR statutes prescribe a registration process, or (b) where such process has been commended under the provisions of the applicable Indian IPR statutes and the grant/recognition from the Indian IPR agency is imminent. The OEMs have further submitted that they have a valid claim of copyright protection over its engineering drawings for the various spare parts and the technical manuals as ‘literary works’ under the Copyright Act. Since any work which is the subject matter of copyright need not be registered to get protection, the OEMs have claimed that the non-registration of the designs and technical drawings of their spare parts and diagnostic tools under section 2(o) of the Copyright Act, does not deprive them of the full copyright protection under the Copyright Act. Consequently, the OEMs have submitted that they are entitled to avail the exemption under section 3(5)(i) of the Act. However, the DG after a thorough study of several judgments relating to the Indian copyright law has concluded that the copyright protection claimed by several of

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the OEMs over the designs, drawings and specifications of their respective spare parts are not available to the OEMs. The DG has come to this conclusion based upon the fact that though there are no requirements to register the copyright over a design of a spare part under the Copyright Act, the right has been limited by the Copyright Act, which mandates that the copyright over the designs registered under the [Indian] Design Act, 1911 or such designs which are capable of being registered under the Designs Act, but not registered, shall cease to exists once the concerned design has been applied more than 50 times by industrial process by the owner of the copyright or his licensee. Given this background the DG has concluded that copyright does not subsist in the designs and drawings of all the spare parts, as claimed by the OEMs. The Commission has noted the submissions of the OEMs regarding the applicability of the provisions of section 15 of the Copyright Act to the copyright over the designs of the spare parts and the diagnostic tools. The OEMs have submitted that the drawings and/or the tools/moulds for the various spare parts that are supplied to the OESs are protected under the Copyright Act by virtue of the provisions of the International Copyright Order, 1999 implementing the provisions of the Berne Convention, read with section 33 of the Copyright Act, the copyright over the said drawings would ipso facto extend to the territory of India. The OEMs have further submitted that the Commission does not have jurisdiction to determine whether the protection under the Copyright Act, 1957 can subsist in relation to the spare parts pursuant to the provisions of section 15(2) of the Copyright Act. The Commission is of the opinion that it does not need to determine the applicability of the provisions of section 15 of the Copyright Act to the designs of the spare parts and diagnostic tools required to repair the various models of automobiles manufactured by the OEMs in order to determine the applicability of the exception of section 3(5)(i) of the Act to the agreements entered between the OEMs and the OESs. The Commission notes that the exemption under section 3(5)(i) allows an IPR holder to “impose reasonable conditions, as may be necessary for protection any of his rights”. In view of the Commission, the concept of protection of an IPR is qualified by the word “necessary”. So the question that one should ask is: can the IPR holder be able to protect his IPR, even if such restriction was not present. For example, what the OESs will sell to the open market are spare parts which are finished products (e.g. bumpers, bonnet/hoods, car gears, fog lights etc.). All such products are finished products and selling them in the open market does not necessarily compromise the IPR such products. For example, selling a Xerox photocopier machine will not compromise the patent held by Xerox on the “image loop” that captures the photocopies page and reproduces it. The intellectual property required by the OESs to manufacture a spare part (e.g. car gear) will be protected contractually pursuant to the agreement between the OEMs and the OESs. Merely selling of the spare parts, which are manufactured end products, does not necessarily compromise upon the IPRs held by the OEMs in such products. Therefore to answer the question posed above, in our opinion, the OEMs could contractually protect their IPRs as against the OESs and still allow such OESs to sell the finished products in the open market. The DG’s investigation has further revealed that apart from spare parts even diagnostic tools, manuals and catalogues form a part of the secondary spare parts

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market. The OEMs have claimed that such diagnostic tools, manuals and catalogues are proprietary information and hence available only to the authorized vendors of the OEMs. However, as in the case of spare parts, selling a diagnostic tool in the open market does not compromise the IPRs of the OEMs in such diagnostic tools and equipment. For example a medical imaging machine (e.g. a CT scan machine) helps medical practitioners to better diagnose diseases. Does selling of a CT Scan machine to a hospital results in compromising the intellectual property right of the maker of the CT Scan machine? If that was the case then all CT Scan manufacturers would have to open up diagnostic centres were only their trained personnel would be able to medically treat people. Merely selling an automobile diagnostic machine in the open market does not compromise the intellectual property that an OEM may hold in such machines. Therefore, the Commission is of the view that the restrictions imposed upon the OESs form selling spare parts directly into the aftermarket are not within the purview of the exemption of section 3(5)(i) of the Act. The Commission finds the argument of the OEMs of putting the restrictions on OESs for sale of their proprietary parts to third parties as reasonable conditions for claiming the exemption under section 3(5)(i) of the Act unacceptable devoid of any merit. Therefore, since the exception under section 3(5)(i) of the Act is not applicable to the agreements between OEMs and OESs, the contravention found by the Commission under section 3(4)(c) & (d) read with section 3(1) of the Act stands established. . . . In view of the aforesaid discussions and for reasons recorded earlier, the Commission is of the considered opinion that the Opposite Parties (OPs)have contravened the provisions of sections 3(4)(b), 3(4)(c), 3(4)(d), 4(2)(a)(i) and (ii), 4(2)(c) and 4(2)(e) of the Act, as applicable. As elucidated in detail in the order, the Commission does not accept the “unified systems market” in this case specifically, and in the Indian market conditions in general. The kind of parameters which have been defined even in other jurisdictions and literature for accepting the systems market approach do not normally exist in the Indian market, including in regard to availability of relevant information (e.g. life-cycle cost) to the consumers, his ability/inability to take a rational/analytical decision based on complex data which may or may not be available, the reputational impact of anti-competitive conduct in the aftermarket on the firm’s product in the primary market etc. These factors are aggravated in the Indian market situation due to some globally recognised different characteristics of Indian consumer (including cost-consciousness) and the complex nature of aftermarkets. In deciding the remedies in this case, the Commission’s primary objective is to correct the distortions in the aftermarket, to provide corrective measures to make the market more competitive, to eradicate practices having foreclosure effects and to put an end to the present anti-competitive conduct of the parties. The aim of the Commission is to provide more freedom to Original Equipment Suppliers (OESs) in sale of spare parts, and more choice to consumers and independent repairers. The Commission considers it necessary to (i) enable the consumers to have access to spare parts and also be free to choose between independent repairers and authorized dealers and (ii) enable the independent repairers participate in the aftermarket and provide services in a competitive manner and to have access to essential inputs such as spare

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parts and other technical information for this purpose, as part of a more competitive eco-system which is equally fair to the OPs and their authorized network also: In view of the foregoing, the Commission, therefore, orders the following under section 27 of the Act:— . . . OPs are directed to allow OESs to sell spare parts in the open market without any restriction, including on prices. OESs will be allowed to sell the spare parts under their own brand name, if they so wish. Where the OPs hold intellectual property rights on some parts, they may charge royalty/fees through contracts carefully drafted to ensure that they are not in violation of the Competition Act, 2002. . . .12

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ENFORCING INTELLECTUAL PROPERTY RIGHTS Threats to Sue 53. Halsey v. Brotherhood, 1880. L.R. 15 Cn.D. 51413 UNITED KINGDOM CHANCERY DIVISION

Jessel, M.R. The defendant has a right to manufacture steam-engines according to two several patents granted to him in the year 1873, which, as far as I can see, have never been challenged. They are not alleged in the statement of claim to have been challenged. He alleges that the plaintiff is making and selling engines which are infringements of his patent. It is said that he is not entitled to tell persons buying the plaintiff’s engines that they are infringements and that those persons are liable to an action ; and that he is not entitled even to give a notice that these engines are infringements of his patent rights unless he follows up that notice by some legal proceeding. I must entirely dissent from that proposition. There is, as far as I am aware, no law in this country compelling a man to assert his legal right by action. He may, if he thinks fit, give notice to persons, the notices being given bona fide, that they are infringing his legal rights: in many cases it is his duty to do so before bringing an action. In some cases the Legislature has compelled him to do so before bringing an action.

12. In 2010 the Administrative Council of Economic Defense (CADE)—the national competition authority of Brazil, which operates as an administrative tribunal—reached a similar conclusion, except for the protection of intellectual property rights. By contrast with the CCI, CADE simply held that enforcing exclusive design rights against the sale in the aftermarket of car body spare parts made (or imported) by independent manufacturers was an abuse of a position of dominance, hence a violation of the competition statute. In other words, CADE did not take design exclusive rights into consideration. See CADE, Preliminary Investigation nr. 08012.002673/2007-51, vote by Counsel Carlos Emmanuel Joppert Ragazzo, 15 December 2010, available at . The CCI decision, in this regard, is in conformity with India’s international obligations under Article 26.2 of the TRIPS Agreement, whereas CADE has violated it. 13. Available at Courtney Stanhope Kenny, A Selection of Cases Illustrative of the English Law of Tort (University Press, Cambridge, 1904), 506-508.

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Take, for instance, those cases of infringement of copyrights and designs, and so on, where the seller is only liable if he knows that the right has been infringed; there you must let him know before bringing an action, or your action would fail . . . Take the late cases before me, as to trespassing on a common belonging to the lord of the manor: there it is most desirable that the lord should, before bringing an action, give notice to everybody not to trespass. In the cases to which I refer many of the persons were trespassing ignorantly, being incited to do so by persons who ought to have known better. Many of these trespassers were not worth suing; indeed it would have been a cruelty to sue them, because the only result would have been to ruin them and take the property of unfortunate cottagers who had trespassed in ignorance and by reason of the persuasion of others. One can see that there are a number of cases of that sort where a man is always required, (not by law, but by propriety), to give notice of his rights to persons who are infringing them and request them to desist. Now, is there any reason in the world for saying there is any different law with regard to patents? A man says, “I have a monopoly under the patent; you are infringing it; now please to desist”; or, “I give notice that A B is infringing. He is not worth suing: I give notice to everybody not to buy of A B.” If that is done bona fide in assertion of his legal right, as far as I know there is no obligation on him to bring an action. The person may desist on warning being given, and then there is no occasion for bringing an action. The person may desist ; or if he does not desist he may not be worth suing, and a man is not bound in addition to the loss incurred by the infringement, to incur the further costs of bringing an expensive action. . . . It is a totally different thing where a man, knowing he has no legal right, threatens proceedings for a collateral purpose. There he may be liable to an action. If a man, with a view to prevent another man carrying on his business, (knowing he has himself no patent, or knowing that he has an invalid patent, or, knowing that the thing manufactured by the other man is no infringement), for the purpose of injuring the other man in his trade, threatens the purchasers, or advertises that the thing is an infringement, of course he is liable like any person who makes a false assertion to the injury of another in his trade; because it is an untrue assertion and not made bona fide. The mere fact of a man mentioning he has a right, and that something is an infringement of it, does not per se give a ground of action. It is obvious that such a course of conduct, adopted bona fide, does not constitute a case in which an action could be maintained; for the essence of the case is the falsity of the assertion and the want of good faith in making it. That is, the assertion is made, not for the purpose of preserving the alleged legal right, but for a different purpose, and has injured the plaintiff in his trade. Now I come to the second point, which is rather different. Although the man who gives the notice is not subject to an action for damages, is he liable to be restrained by injunction ? I think he would be liable to be restrained by injunction if certain other proceedings are adopted by the persons threatened. If, for instance, the vendor of the machines finds his customers interfered with, and writes to the person who has given the notice and says, “My machines are not an infringement; if you go on threatening without bringing an action against me to try that question, I shall apply for an injunction to restrain you from interfering with my trade”; and then the defendant does not bring an action and takes no proceedings as is the case here and the plaintiff comes

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for an injunction, he may be entitled to it if he shows that the defendant’s statement is false, because the defendant’s threat would be a threat to continue making a statement to the injury of the plaintiff. And if it is a false statement, the plaintiff would be entitled to restrain the continuance of it to his injury, although he may not be entitled to bring an action for damages for the false statement. For if the defendant says, “I insist that those are infringements, and I will give notice to all your customers,” the plaintiff has a right to try that question by bringing his action for injunction. But if in answer to that action the defendant says, “I did make the statement, and I will make the statement, but the statement is true,” and he proves the statement to be true, it appears to me plain that that is a good defence to the action. I do not think that it is a good defence to the action for an injunction merely to say, “I made the statement bona fide”; because if the defendant is challenged, and says, “the statement is true, and I now maintain it,” and he fails in maintaining it, and it turns out to be false, I think then that bona fides ought not to defend him from an injunction against continuing to make it. But if he succeeds in showing that the statement is true, that is another thing. Therefore it appears to me that in the present case the plaintiff must make out, if he wants to maintain an action for damages, that the defendant has not been acting bona fide. If he wants an injunction, he must make out that the defendant intends to persevere in making the representations complained of, although his allegation of infringement by the plaintiff is untrue. Action dismissed.

54. Granby Marketing Services Limited v. Interlego AG, [1984] RPC 209 UNITED KINGDOM CHANCERY DIVISION Judgment by Vinelott J. This is an application to strike out a statement of claim on the ground that it discloses no cause of action or alternatively is frivolous or vexatious or otherwise an abuse of the process of the court. The plaintiff, Granby Marketing Services Limited, carries on the business of, inter alia, acting as agents in the promotion of clients’ products. They have had a long association with the Kellogg Company of Great Britain Limited, which company they have assisted in schemes for the promotion of their products, in particular promotional campaigns under which a purchaser of Kellogg products is given a free gift or the right to purchase goods at a favourable price. The defendants are Interlego AG, a Swiss Company, and its subsidiary, Lego (UK) Limited, who are part of an international group based, I understand, in Denmark and who manufacture well-known model building kits, in particular but not exclusively building brick sets. . . . In April 1982, Kelloggs invited the plaintiff to act on their behalf in the promotion of their products by making the arrangements necessary for the institution of a campaign whereby purchasers of Kelloggs’ products could obtain free or on offer model building kits manufactured on behalf of an Australian company, Alex Folley

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(Victoria) Pty Limited, by its Philippine subsidiary. It is common ground that Kelloggs and the plaintiff had previously negotiated with the defendant for a similar promotional campaign using the defendant’s building kits. The negotiations broke down because the defendant was associated with a promotional campaign run by another company, which also manufactured breakfast cereals. It is alleged that on or about 8 July 1982 Kelloggs and the plaintiff entered into separate contracts for a total of 310,000 building kits for immediate delivery and for a further 300,000 for delivery in February 1983. The plaintiff, in turn, ordered the kits from the United Kingdom agents of the Folley companies. The kits were delivered as to part in December 1982 and as to the balance in May 1983. It is alleged that, in January or February 1983, the defendant, through their solicitors, threatened Kelloggs with proceedings for infringement of copyright in drawings of sundry building kits if Kelloggs proceeded with its promotional campaign using Folley products, and that those threats, continued in force until 6 April 1983. I think that I should read in full the remainder of this allegation in the statement of claim. In fact there was no infringement of any copyright in such drawings, but thereafter, by reason of such threats and by reason of the making of such threats and/or the failure of the defendants to withdraw or discontinue the same. Kelloggs thereafter wrongfully refused to proceed with the contracts, giving as a reason the threat by the defendants and such wrongful refusal continued until execution of the agreement dated 6 April 1983 hereinafter pleaded.

It is said that the breach of the contracts was caused or induced by those threats, and that they were made with the knowledge that the contracts either existed or alternatively almost certainly would exist, and with the intention that the contracts should be broken by Kelloggs or were made recklessly, not caring whether the contracts existed and whether they were broken or not. . . . Lastly, it is alleged that, as a result of the defendant’s threats, Kelloggs in breach of the contracts, refused to proceed with them or to accept delivery of the kits, and required the plaintiff, of whom of course, Kellogs was a long-established and valuable client, to agree to the mutual discharge of the contracts. That was done by the agreement of 6 April 1983. Under that agreement, Kelloggs agreed to make an ex gratia payment to the plaintiff of £12,000. The claim is for damages for inducing Kelloggs to break their contracts with the plaintiff, with the consequence that the plaintiff was left with kits from the Folley companies for which they had paid or had contracted to pay. That is all I need to say about the facts. It appears that there is no clear decision, at least of the English courts, whether a defendant who in good faith asserts a legal right which he claims would be infringed by the performance of a contract between the plaintiff and a third party, intending that the contract be not performed, can be made liable in an action brought by the plaintiff for unjustified interference with his contractual relationship with the third party. Mr Hoffman submits that, although there is no clear decision that no such action will lie, it has been assumed sub silentio in a very long series of cases that it will not. . . . Both these cases were decided before the tort of wrongful interference with contractual rights emerged in Lumley v. Gye (1853) 3 El & Bl 113. However, they were

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cited in 1869 in the Court of Queen’s Bench in the case of Wren v. Weild (1869) LR & 4 QB 730. That was heard after the decision in Lumley v. Gye. In Wren v. Weild, the plaintiff, who manufactured spooling machines, alleged that the defendant had falsely and maliciously told customers of the plaintiff, some of whom had purchased and some of whom intended to purchase the plaintiff’s machines, that they were an infringement of his, the defendant’s patent and that if they used the machines without paying royalties, he would start proceedings against them for infringement. The plaintiff failed to establish that the claim was made by the defendant wrongfully and without an honest belief in its truth, and the action failed. Blackburn J said at page 734: No action precisely like this has ever been brought, but there is a well-known action for slander of title, where an unfounded assertion that the owner of real property has not title to it—if made under such circumstances that the law would imply malice, or if express malice be proved, and special damages shown, such as, for instance, that a bargain to sell the land is lost—is held to give a cause of action. And we see no reason why a similar rule should not apply where the false and malicious assertion related to goods and the damage arises from the loss of a bargain to sell them.

Then, having referred to Green v. Button, he continues: But it is obvious that where a person claims a right in himself which he intends to enforce against a purchaser, he is entitled, and indeed in common fairness bound, to give the intended purchaser warning of such his intention: see Pitt v Donovan; and consequently, we think no action can lie for giving such preliminary warning, unless either it can be shown that the threat was made mala fide, only with the intent to injure the vendor, and without any purpose to follow it up by an action against the purchaser, or that the circumstances were such as to make the bringing of an action altogether wrongful.

Mr Lightman points out that that case was decided not long after the decision in Lumley v. Gye when the limits of the tort of wrongful interference with contractual relations were perhaps imperfectly defined. That cannot however be said of Halsey v. Brotherhood (1880) Ch D 514, another case concerning a patent. . . . These decisions led to a change in the law. By the Patents, Designs and Trade Marks Act 1883, section 32, commonly referred to as the “threats section”, it was provided that, where a person claiming to be the patentee of an invention threatens another with proceedings for infringement, any person aggrieved thereby may bring an action and obtain an injunction against repetition of the threats and recover damages if the acts relied upon did not amount to an infringement, but subject to the proviso that the section is not to apply if the person making the threats proposes with due diligence to commence and prosecute an action for infringement. That section was re-enacted with minor amendments in section 36 of the Patents and Designs Act 1907. A defect in this provision was revealed in Ellis and Sons Limited v. Pogson (1923) 40 RPC 62. The defendant applied for a patent and the complete specification was filed. Later the grant of a patent was refused. The plaintiff, who had opposed the grant of a patent, complained that, between the filing of the complete specification and the refusal of the grant, the defendant threatened a customer of the plaintiff with proceedings, in consequence of which the customer had returned goods which he had

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purchased and cancelled further orders. It was held that section 36 had no application, as a patent had never been granted. I should read a short passage from the judgment of PO Lawrence J. He said at page 66: The opposition proceedings brought on behalf of the plaintiffs came to a head on the 24 March 1922, and the grant of the patent was then finally refused. Therefore, as a matter of fact, there never was and cannot now be, any patent in existence in respect of the invention of Mr Pogson in respect of which he threatened proceedings or liability against Messrs Olney, Amsden & Sons Limited. The result of those threats was undoubtedly to cause damage to the plaintiffs. Messrs Olney, Amsden & Sons Limited stopped the sale, returned some of the goods, cancelled the orders, and the sale of the ‘laddkit needles’ was, in consequence of the threats, stopped for at least two months.

Then, having referred to the fact that the patent had been refused, he said: In my opinion, there being no patent, he could not in fact threaten legal proceedings or liability in respect of an alleged infringement of the patent, nor could the person aggrieved recover damages by proving that the alleged infringement to which the threats related was not in fact an infringement of the patent, in both cases because there is no patent in existence.

That decision was affirmed in the Court of Appeal at page 179 in the same volume, where Warrington J said: “The learned judge has decided that the section creates a new cause of action. Of course it does. At common law it was an essential of a cause of action against a man uttering threats in respect of property that those threats should arise in malice. Malice was an essential to the cause of action”. It is noteworthy that in that case the threats made by the defendant had induced the customer not only to cancel future orders which had not matured into a contract, but also to refuse to perform an existing contract. Nonetheless, it was not suggested anywhere in that case by the court or by counsel that, by inducing the customer to break his contract, the defendant had committed the tort of unlawful interference with contractual relations. The defect in section 36 which came to light in Ellis v. Pogson was cured by section 6 of the Patents and Designs Act, 1932 which substituted a new section 36. The new section applies where the person making these threats is or is not entitled to an interest in a patent or an application for a patent as well as where the threat is for infringement of an existing patent. The amended section has appeared in every subsequent Patents Act, and a similar, though not identical, provision appears in the Registered Designs Act 1949, section 26. In all these cases, it has been assumed by judges of the highest authority that no action for wrongful interference with contractual relations will lie if all the defendant has done is to assert in good faith a legal right claimed by him and to threaten proceedings if that right is infringed. Moreover, that there was no such cause of action must have been assumed by the legislature when section 32 was passed. There is no case in England in which a claim for relief for wrongful interference with contractual relations on the part of a defendant who in good faith asserted a legal

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right has actually been advanced. However, a very similar claim was made and held to be unfounded in Australia in James v. The Commonwealth (1939) 62 CLR 339. That case stemmed from a decision of the Privy Counsel (James v. The Commonwealth [1936] AC 578) where it was held that certain legislation restricting trade in dried fruit was ultra vires and unlawful. One claim made in the second action was that officials of the Commonwealth Government, in reliance on the invalid legislation, had threatened ship owners, railway companies and other carriers with legal proceedings if they carried the plaintiff’s goods across state boundaries. It was said that the carriers threatened with proceedings were common carriers, and that the principle in Lumley v. Gye applied in that, although there were no contacts between the plaintiff and the common carriers which were broken in consequence of the threats, the carriers were induced by the threats not to carry out their public duty of carrying the plaintiff’s goods for proper reward. I need only cite two passages from the judgment of Dixon J as he then was, who gave the leading judgment. He said at page 367: It was suggested on behalf of the plaintiff that the ships which otherwise might have carried the plaintiff’s goods between the States were common carriers and were therefore bound at law to accept the goods for carriage in the absence of some reasonable justification for refusing them. As the Act and regulations were void, they could not, according to the contention, relieve the ship owners from a liability in tort for the refusal. The Commonwealth therefore, it was suggested had been guilty of inducing a breach of duty and was liable on the principle which goes under the name of Lumley v. Gye. This ground of liability, although suggested during the opening by the plaintiff’s counsel, was not during the hearing elaborated or developed by evidence or argument. But it requires consideration.

Then, having made some observations as to the liability of a common carrier, he stated the question in the following terms: The question which appears to me to arise in the present case under the head of justification or excuse is whether the bona fide execution of a law for the time being upheld as valid by the competent judicial power amounts to just cause or excuse notwithstanding that the law is afterwards found to be invalid.

He answered that question in a passage which I think I should read in full. He said: I do not think that a bona fide assertion as to the state of the law and an intention to resort to the courts made known to the third party can be considered a wrongful inducement or procurement. The situation is simply that the executive, charged with the execution of the law, under a bona fide mistake as to the state of the law, proposes to proceed by judicial process. The courts are established by and under the Constitution for the purpose, among others of determining whether the executive is or is not mistaken in its view of the law which it seeks to enforce against the individual and judicial process is the appointed means for bringing the question up for decision. To treat a proposal or threat to institute proceedings as a wrongful procurement of a breach of duty is to ignore the fact that, assuming bona fides, the law always countenances resort to the courts, whether by criminal or civil process, as the proper means of determining any assertion of right. In all other cases of procurement to be found there has been an element of impropriety, or of reliance upon some power or influence independent of lawful authority. An

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intention to put the law in motion cannot be considered a wrongful procurement or inducement, simply because it turns out that the legal position maintained was ill founded.

The principle there stated seems to me to apply equally where a private citizen asserts a private right and states his intention to enforce that right, if necessary by application to the court. That seems to be the position also in the United States of America. In the Second Restatement of Law of Torts, in section 773 it is said: One who, by asserting in good faith a legally protected interest of his own or threatening in good faith to protect the interest by appropriate means, intentionally causes a third person not to perform an existing contract or enter into a prospective contractual relation with another does not interfere improperly with the other’s relation if the actor believes that his interest may otherwise be impaired or destroyed by the performance of the contract or transaction.

Mr. Lightman concedes that no wrong is committed if a defendant who claims a legal right asserts it by actually commencing proceedings against a person who is allegedly infringing it and if that person is thereby induced to break his contract with the plaintiff. He concedes also that no wrong is committed if a defendant who claims a legal right threatens to commence proceedings if the person against whom the threat is directed has not entered into contractual relations with the plaintiff, but is deterred from doing so by the threats. He submits that an action does lie if a threat is made before an action is commenced and if the person against whom the threat is made is thereby induced to break his contract with the plaintiff. No hint of any such distinction is to be found in any of these cases to which I have referred, and indeed, in Wren v. Weild, Blackburn J stressed that a person who claims a right is sometimes in common fairness bound to give warning of his intention to commence proceedings; and Sir George Jessel, MR pointed out that in copyright cases amongst others he is under a duty to do so, in that the claim can only be enforced against someone who infringes copyright with knowledge of its existence. However, Mr Lightman founds his submission on a passage in the judgment of Whitford J in Jaybeam Limited v. Abru Aluminium Limited [1976] RPC 308. In that case, the defendant owned a copyright in drawings relating to a lightweight step-ladder and a registered design relating to it. The plaintiff manufactured a similar step-ladder. The defendant’s solicitors wrote to a customer of the plaintiff making certain demands. Implicit in the letter was a claim that the defendant owned the copyright in drawings for their step-ladder which was infringed by the plaintiff’s step-ladder. They added: Notwithstanding the above and as a separate matter we would also draw your attention to the fact that Abru are registered proprietors of registered design number 940,140.

As regards the claim to be the proprietor of a registered design, the case fell within the threats section in the 1949 Act. As to that, Whitford J said at page 314 that: the plaintiffs are undoubtedly entitled to relief in respect of the issue of the threat, more particularly because, although I am prepared to accept for present purposes

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that there may be an arguable case or possibly an arguable case that what the IPC were selling and what the plaintiffs were making is an infringement of the registered design, the ground of justification is not so thoroughly made out that relief pending the trial should be withheld. Threats of this kind are of tremendous potential damage. Nobody wants to be involved in litigation, let alone litigation about registered designs and patents, which is no doubt why provisions of this sort have been specifically enacted.

He then went on to deal with the copyright claim in a passage which I shall read in full. He said: The copyright position is an entirely different position. So far as threats of proceedings on registered designs are concerned, there is specific statutory provision, a prohibition against threats. So far as copyright is concerned, there is no such statutory provision. The importance of that has perhaps not been quite so acute until in recent years people have come to realise, as the defendants have, that under the provisions of the existing Act manufactured articles which could previously have only been protected under a registered design can confidently be asserted to be an infringement of copyright in drawings. he penalties which may be secured under the Act, particularly by way of damages for conversion, are enormous and threat of proceedings in respect of infringement of copyright may in the end be even more persuasive than the threat of proceedings in respect of infringement of patents of registered designs. However that may be, counsel for the plaintiffs quite rightly accepted there is no statutory provision prohibiting threats and that if he is to succeed in this action he has to succeed on some other basis. That is why he advances the alternative bases of malicious falsehood on the one hand or interference with business relations – possibly interference with contractual relations—on the other.

I do not think I need read the next paragraph, but he continues: Let me assume for the moment that the case so far as infringement of copyright is concerned when the action comes may go the one way or the other. Can the plaintiffs succeed in restraining the sending out of letters of this character on the basis of malicious falsehood or some sort of interference with business relations? Once again counsel for the defendants did not argue that it was impossible that the plaintiffs should succeed on one or other of these heads. I myself take the view that it is indeed possible that they may succeed on one or other of these heads. Counsel for the defendants accepted that at the trial of the action the plaintiffs might be entitled to some sort of relief of the kind which they seek in this motion, though he said for interlocutory purposes the relief sought goes much too wide.

That passage seems to me to afford flimsy support for Mr. Lightman’s submission. Whitford J clearly thought that the plaintiff might succeed at the trial in establishing that the threats were made maliciously. Moreover the ground on which he thought the plaintiff might, even in the absence of malice, succeed on the other of the heads he mentions namely interference with business relations, referred to earlier as including “possibly interference with contractual relations”, is not examined, no doubt because it was conceded in argument that the plaintiff’s case in inducing breach of contract was arguable but not strong. None of the relevant authorities were cited to him. I do not therefore feel constrained by the respect which is due to a decision of Whitford J on a

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matter relating to copyright law to hold that the facts relied on in the statement of claim can found a possible cause of action. In my judgment, therefore, this application succeeds.

55. Virginia Panel Corp. v. Mac Panel Co., 133 F.3d 860 (Fed. Cir. 1997) UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT Opinion by Lourie, Circuit Judge. . . . VP owns the ‘005 patent, which is directed to a mechanism invented by VP employees for engaging an “interchangeable test adapter” (ITA) and a “receiver.” As explained in the written description portion of the patent specification, ITAs and receivers are typically the two primary components of Automatic Test Equipment (ATE) used for the diagnostic testing of systems having thousands of electronic connections, such as airplane black boxes. To achieve a suitable precision engagement between the electrical contacts of the ITA and those of the receiver, the claimed mechanism requires that the ITA be suspended from “fixed hanger plates” on opposite sides of the receiver. Furthermore, the contacts of the ITA must be drawn into contact with the receiver contacts through “reciprocating” movement of “slide plates” relative to the hanger plates. . . . MAC, VP’s sole competitor in the relevant ATE market, makes an ITA/receiver interface which uses a “rotating latch mechanism” to push the ITA into contact with the receiver and to achieve proper alignment between the components’ electrical contacts. After it became apparent that MAC was making significant inroads into VP’s share of the ATE market in the mid-1980s and early 1990s, VP launched what it called a “Big MAC Attack.” Apparently as part of this “attack,” VP notified MAC’s customers (including a number of government contractors and agencies) that it believed that certain MAC ITAs infringed the ‘005 patent, asked them to “cease and desist in using and selling such infringing items” and either implicitly or explicitly threatened suit. VP also notified its own customers, both old and new, that warranty service for VP parts would not be extended to VP parts that had been used with non-VP components. At about the same time, during contract negotiations with ASCOR, one of MAC’s customers, VP proposed an exclusive license agreement under the ‘005 patent in which ASCOR would agree to purchase all ATE components, including a number of unpatented components, from VP, not MAC. Apparently on the advice of counsel, VP never entered into this agreement. In 1988, to further strengthen its market position, VP also became the sole source subcontractor under GE/Martin Marietta’s Consolidated Automated Support System (CASS) Test Program Sets contract with the Navy. In 1993, VP filed suit asserting that MAC willfully infringed the ‘005 patent . . . and that MAC violated 15 U.S.C. §1125(a) (1994), Lanham Act §43(a), by falsely advertising that it had qualified as a supplier under the CASS contract. MAC defended on numerous grounds including invalidity and unenforceability, based on asserted misuse of the ‘005 patent; MAC also asserted antitrust and state false advertising

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counterclaims based in large part on VP’s above-mentioned conduct. Following the parties’ pre-trial motions, the district court granted summary judgment that MAC did not literally infringe the ‘005 patent, concluding that the “fixed hanger plate” limitation was not literally met. The court then bifurcated the proceedings into a standard “infringement” trial, in which infringement under the doctrine of equivalents was tried, and an “antitrust” trial. In the latter trial, both MAC’s patent misuse defense and its antitrust counterclaims were tried, along with the parties’ unfair competition and state false advertising claims. . . . In the antitrust trial, a different jury found that VP had misused the ‘005 patent and had violated both federal antitrust law and state false advertising law, and that MAC had not violated §1125(a). . . . VP cross-appeals from the decisions to enhance damages by only ten percent and not to award attorney fees, as well as from the decisions that it engaged in patent misuse and violated the antitrust laws. . . . In the Virginia Panel II trial, MAC advanced four basic allegations of patent misuse: that VP (1) sent infringement notices, including requests to cease and desist infringing activities, to government contractors without informing those contractors of the affirmative defense provided by 28 U.S.C. §1498 (1994),14 (2) threatened to void its warranties on ITAs that were used with non-VP components, (3) proposed to ASCOR a licensing agreement conditioned on ASCOR’s purchase of unpatented products, and (4) explicitly threatened to enforce its ‘005 patent against ASCOR and GDE Systems, even though those companies were government contractors subject to §1498. At the close of the Virginia Panel II trial, the jury found that VP had misused its patents, including the ‘005 patent. In its post-trial order, the district court refused to set aside the jury verdict on VP’s renewed motion for judgment as a matter of law (JMOL), concluding, inter alia, that “there was evidence which, if believed by a reasonable jury, is sufficient to support a jury verdict on any of the four allegations [of misuse] advanced by [MAC].” . . . Specifically, the court pointed to VP’s threats of suit implicit in the infringement letters and explicitly made to a GDE Systems representative, VP’s threats to void express warranties, and the licensing proposal made to ASCOR. Id. Accordingly, the district court set aside the patent infringement damages it had earlier awarded to VP. . . . VP argues that as a matter of law its conduct does not amount to patent misuse. It asserts that the infringement notices and threats of suit were proper because they were based on the good faith belief that its patents were being infringed and that those to whom it sent notices were not totally free from liability by virtue of §1498. It also asserts that its other conduct cannot be characterized as patent misuse because none of it amounts to an attempt to extend the scope of its patents. MAC responds that VP’s 14. Note 7 of the opinion reads: Section 1498 provides, in relevant part: Whenever an invention described in and covered by a patent of the United States is used or manufactured by or for the United States without license . . . the owner’s remedy shall be by action against the United States in the United States Court of Federal Claims for the recovery of his reasonable and entire compensation for such use and manufacture. 28 U.S.C. § 1498(a) (1994).

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attempts to extend the effective scope of its patent rights were manifest in its concerted efforts to dominate the ATE market and accordingly that substantial evidence supports the jury verdict of misuse. We agree with VP that none of the conduct on which MAC relied can constitute patent misuse as a matter of law. . . . Patent misuse is an affirmative defense to an accusation of patent infringement, the successful assertion of which “requires that the alleged infringer show that the patentee has impermissibly broadened the ‘physical or temporal scope’ of the patent grant with anticompetitive effect.” Windsurfing Int’l, Inc. v. AMF, Inc., 782 F.2d 995, 1001 (Fed. Cir. 1986) (quoting Blonder-Tongue Lab., Inc. v. University of Ill. Found., 402 U.S. 313, 343 (1971)); see also USM Corp. v. SPS Techs., Inc., 694 F.2d 505, 510 (7th Cir. 1982) (“In application, the doctrine [of patent misuse] has largely been confined to a handful of specific practices by which the patentee seemed to be trying to ‘extend’ his patent grant beyond its statutory limits.”). . . . When a practice alleged to constitute patent misuse is neither per se patent misuse nor specifically excluded from a misuse analysis by §271(d), a court must determine if that practice is “reasonably within the patent grant, i.e., that it relates to subject matter within the scope of the patent claims.” Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 708 (Fed. Cir. 1992). If so, the practice does not have the effect of broadening the scope of the patent claims and thus cannot constitute patent misuse. Id. If, on the other hand, the practice has the effect of extending the patentee’s statutory rights and does so with an anti-competitive effect, that practice must then be analyzed in accordance with the “rule of reason.” Id. Under the rule of reason, “the finder of fact must decide whether the questioned practice imposes an unreasonable restraint on competition, taking into account a variety of factors, including specific information about the relevant business, its condition before and after the restraint was imposed, and the restraint’s history, nature, and effect.” State Oil Co. v. Khan, 118 S. Ct. 275, 279 (1997) (citing Arizona v. Maricopa County Med. Soc., 457 U.S. 332, 343 & n.13 (1982)). VP’s practices did not constitute patent misuse because they did not broaden the scope of its patent, either in terms of covered subject matter or temporally. That VP sent infringement notices to various government contractors, even notices that threatened suit and injunctions, did not indicate that VP attempted to broaden its patent monopoly. As we stated in Mallinckrodt, 976 F.2d at 709: “A patentee that has a good faith belief that its patents are being infringed violates no protected right when it so notifies infringers.” Accordingly, a patentee must be allowed to make its rights known to a potential infringer so that the latter can determine whether to cease its allegedly infringing activities, negotiate a license if one is offered, or decide to run the risk of liability and/or the imposition of an injunction. See Loctite Corp. v. Ultraseal Ltd., 781 F.2d 861, 877 (Fed. Cir. 1985) (noting “the public policy of erecting a barrier against thwarting patentees from asserting legitimate patent rights”). That applies even to warning a company like MAC, that, at least in its role as a supplier to the United States, could not be subject to liability or enjoined from practicing the claimed invention. While section 1498 clearly restricts a patentee’s remedies against government contractors’ infringing acts, it does not make those acts non-infringing and it certainly does not prohibit the sending of infringement notices to government contractors. The

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statute only provides an affirmative defense for applicable government contractors by establishing that, as to goods “used or manufactured by or for the United States,” the contractor will not be liable for its infringing acts. 28 U.S.C. § 1498; see also Manville Sales Corp. v. Paramount Sys., Inc., 917 F.2d 544, 554 (Fed. Cir. 1990) (noting that section 1498 is applied as “a codification of a defense”). Moreover, as VP accurately points out, the Federal Acquisition Regulations (FAR) explicitly contemplate that patentees will send infringement notices directly to contractors. The FAR provisions, which impose contractual obligations on government contractors, instruct contractors to notify their respective Contracting Officers “promptly and in reasonable detail [of] each notice or claim of patent . . . infringement based on the performance of [the] contract.” FAR § 52.227-2 (1996); see also 48 C.F.R. §§ 27.201-1 and 27.201-2 (1996). The government has an interest in being notified of its potential liability. As reflected in the cited FAR provision, the contractor may be in the better position to receive the infringement notice and in turn notify the government. Consistent with the FAR, and based on its good faith belief that the government contractors were infringing its patent rights, VP was entitled to have sent such notices to government contractors that it had identified as users and sellers of MAC’s infringing ITA/receiver interfaces. Furthermore, even if the jury concluded that VP attempted to extend the remedial scope of its patents by sending infringement notices where no injunction could be obtained, such conduct did not violate the rule of reason. VP could not have been certain that the allegedly infringing devices were only to be used by the United States government. As VP points out, the record indicates that the allegedly infringing devices were typically used by government contractors for their own purposes and were often sold to foreign governments. Such devices were not subject to the provisions of section 1498. Only after the contractors received VP’s notices of infringement could those contractors adequately evaluate whether they were immune from suit or would be subject to liability based on a contractual obligation to the government. Accordingly, VP’s threats to seek injunctions against MAC’s customers, whether in the form of an infringement notice or in direct negotiations, did not constitute patent misuse because VP had a good faith belief that those it notified were using a device that infringed the ‘005 patent. See 35 U.S.C. § 271(d)(3) (“No patent owner otherwise entitled to relief from infringement or contributory infringement of a patent shall be . . . deemed guilty of misuse . . . by reason of his having . . . sought to enforce his patent rights against infringement or contributory infringement.”). . . . In sum, VP’s allegedly predatory practices did not constitute patent misuse because they did not extend VP’s patent rights nor were they unreasonable competitive practices. Accordingly, such practices were legally insufficient to render the ‘005 patent unenforceable. The jury verdict that VP misused the ‘005 patent is therefore reversed and the district court is instructed to award damages to VP based on the adjudicated acts of infringement. . . .

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Nuno Pires de Carvalho 56. CVD, Inc. v. Raytheon Co., 769 F.2d 842 (1st Cir. 1985)

UNITED STATES COURT OF APPEALS FOR THE FIRST CIRCUIT Opinion by Re, Chief Judge. . . . The dispute between plaintiffs, CVD, Inc., Robert Donadio and Joseph Connolly, both former Raytheon employees, and defendant Raytheon pertains to the manufacture of zinc selenide (ZnSe) and zinc sulfide (ZnS) by a process known as chemical vapor deposition (cvd). On August 28, 1981, plaintiffs Donadio, Connolly, and CVD initiated this action, contending that defendant Raytheon attempted to monopolize the market for ZnSe and ZnS made by the cvd process, in violation of 15 U.S.C. §2 (1982), and that a licensing agreement between the plaintiffs and Raytheon was an unreasonable restraint of interstate commerce and trade in violation of 15 U.S.C. §1 (1982). The complaint sought damages and a declaratory judgment that the agreement between Raytheon and CVD, purporting to license the cvd process, was void and unenforceable. The defendant counterclaimed for breach of contract, misappropriation of trade secrets, breach of fiduciary duty, and violation of the Massachusetts consumer protection statute. . . . Raytheon, a Delaware corporation with executive offices in Massachusetts, is a diversified company specializing in commercial and military electronics, materials and weapons. In 1959, plaintiff-appellee Donadio was hired as an engineer in the Advanced Materials Department at Raytheon. He was employed there until he resigned in the fall of 1979 in order to form CVD. Plaintiff-appellee Connolly was hired by Raytheon in 1972, and was employed there continuously until he also left to form CVD. Donadio and Connally had signed employment agreements promising to protect Raytheon’s proprietary information. Both were involved in the manufacture of zinc selenide and zinc sulfide by chemical vapor deposition (ZnSe/cvd or ZnS/cvd). This process combines vaporized zinc solids with hydrogen sulfide or hydrogen selenide in specially modified, high-temperature (approximately 900 degrees centigrade) vacuum furnaces. The resulting solid materials are further processed into high precision optical materials which are used to make, among other things, infrared windows for lasers, high-speed aircraft, and missiles. These materials are the only suitable materials for certain demanding optical uses. Most of Raytheon’s work on these materials had been done under contracts with the federal government. As part of its obligation under these contracts, Raytheon was required to provide periodic reports that detailed the technology and processes used in the production operation. In the fall of 1979, Donadio informed his supervisor, Dr. James Pappis, the manager of the Advanced Materials Department, that he intended to leave Raytheon to start a new company to manufacture ZnS and ZnSe by the cvd process. Pappis replied that this would present legal difficulties in light of Donadio’s employment agreement and Raytheon’s trade secrets. The next day Pappis consulted with Leo Reynolds, a patent attorney with Raytheon, who spoke with Pappis briefly, and examined some drawings and the government reports for the purpose of determining whether the cvd process contained trade secrets.

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The following day Donadio and Connolly met with Pappis, Reynolds, Joseph Pannone, the Patent Counsel for Raytheon, and another Raytheon executive. Reynolds told Donadio and Connolly that they could not manufacture ZnS and ZnSe by the cvd process without using Raytheon trade secrets. Although Donadio disputed Reynolds’ assertion that trade secrets were involved, Reynolds threatened to sue if they began to manufacture ZnS/cvd or ZnSe/cvd without a license from Raytheon. Soon thereafter, Donadio and Connolly were asked to leave Raytheon. After this meeting, Donadio retained an attorney, Jerry Cohen, who specialized in intellectual property. In discussions with Raytheon, Cohen took the position that there were no trade secrets in Raytheon’s chemical vapor deposition process since the technology had been published in government reports, and, therefore, was in the public domain. Raytheon asserted, and later attempted to prove at trial, that important details were not included in the reports, and that, consequently, the reports were too vague to permit anyone to reproduce the cvd system. Cohen asked Reynolds for a list of what Raytheon claimed to be trade secrets. Reynolds refused to comply with the request on the ground he could not provide an “all-inclusive” list. At a later meeting, Reynolds read orally a list of claimed secrets but Cohen disputed all the items on the list. In attempting to settle the dispute, Cohen proposed an agreement in which CVD would not be obligated to pay royalties if CVD could prove that no Raytheon trade secrets were used in its operations. This proposal was refused. Several other formulas for resolving the dispute were also discussed. Raytheon, however, held firm to its position that the plaintiffs could not manufacture ZnS/cvd or ZnSe/cvd without using Raytheon trade secrets, and insisted on a royalty rate based upon a flat percentage of revenue or volume for a ten-year period. Eventually, on February 15, 1980, an agreement was signed, providing for a 15% royalty on earnings for ZnSe and 8% for ZnS. No payments were ever made by CVD under the contract, however, and in 1981 plaintiffs filed the present action. . . . This case presents a difficult question pertaining to the interaction of the federal antitrust laws and state trade secrets law. Guidance in resolving these questions can be found in analogous, but not identical, issues presented in cases in which patent infringement suits have been brought in bad faith with an intent to restrain competition or monopolize. See, e.g., Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172 (1965); Handgards, Inc. v. Ethicon, Inc., 743 F.2d 1282 (9th Cir. 1984), cert. denied, 469 U.S. 1190 (1985) (Handgards II); Kearney & Trecker Corp. v. Cincinnati Milacron Inc., 562 F.2d 365 (6th Cir. 1977); Rex Chainbelt, Inc. v. Harco Products, Inc., 512 F.2d 993 (9th Cir.), cert. denied, 423 U.S. 831 (1975). In examining “bad faith” patent infringement claims, courts have balanced the public interest in free competition, as manifested in the antitrust laws, with the federal interest in the enforcement of the patent laws, and the first amendment interest in the free access to courts. See, e.g., Walker Process, supra, 382 U.S. at 177-78; Handgards, Inc. v. Ethicon, Inc., 601 F.2d 986, 993-96 (9th Cir. 1979), cert. denied, 444 U.S. 1025 (1980) (Handgards I); Kobe, Inc. v. Dempsey Pump Co., 198 F.2d 416, 424-25 (10th Cir.), cert. denied, 344 U.S. 837 (1952). In the Walker Process case, the Supreme Court held that the enforcement of a patent obtained by fraud may constitute monopolization

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or attempted monopolization in violation of section 2 of the Sherman Act, provided the other elements of a monopolization claim are established. 382 U.S. at 177-78. In evaluating actions brought under this theory, courts have protected the federal interests in patent law enforcement and the free access to the courts by requiring, in addition to the other necessary elements of an antitrust claim, “clear and convincing evidence” of fraud in asserting or pursuing patent infringement claims. See, e.g., Handgards I, supra, 601 F.2d at 996; Norton Co. v. Carborundum Co., 530 F.2d 435, 444 (1st Cir. 1976); Cataphote Corp. v. DeSoto Chemical Coatings, Inc., 450 F.2d 769, 772 (9th Cir. 1971), cert. denied, 408 U.S. 929 (1972). Hence, a patentee who has a good faith belief in the validity of a patent will not be exposed to antitrust damages even if the patent proves to be invalid, or the infringement action unsuccessful. The requirement of clear and convincing evidence is intended to prevent a frustration of the patent laws. It also ensures the free access to the courts by allowing honest patentees to protect their patents without undue risk of incurring liability for asserting their rights. There are, of course, significant differences between patent and trade secret protection. The scope of protectible trade secrets is far broader than the scope of patentable technology. See, e.g., Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 486 (1974); Atlantic Wool Combing Co. v. Norfolk Mills, Inc., 357 F.2d 866, 869 (1st Cir. 1966). Under Massachusetts law, a trade secret may consist of: any formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. It may be . . . a process of manufacturing . . . . A trade secret is a process or device for continuous use in the operation of the business. Generally it relates to the production of goods, as, for example, a machine or formula for the production of an article.

Eastern Marble Products Corp. v. Roman Marble, Inc., 364 N.E.2d 799, 801 (1977), quoting, Restatement of Torts § 757 comment b; J.T. Healy & Son, Inc. v. James A. Murphy & Son, Inc. 260 N.E.2d 723, 729 (1970). The basis for the federal patent system is found expressly in the Constitution. See U.S. Const. art. I, §8, cl. 8. A patent confers a legal monopoly for a limited period of time. In return for the patent, the patentee must fully disclose the patented invention or process. After the expiration of the statutory period, the patentee loses all exclusive rights to the patent. See, e.g., Kewanee Oil Co., supra, 416 U.S. at 480-81. The cornerstone of a trade secret, however, is secrecy. Once a trade secret enters the public domain, the possessor’s exclusive rights to the secret are lost. Moreover, unlike a patent, a trade secret affords no rights against the independent development of the same technology or knowledge by others. See, e.g., Kewanee Oil Co., supra, 416 U.S. at 475-76; A. & E. Plastik Pak Co. v. Monsanto Co., 396 F.2d 710, 714-15 (9th Cir. 1968). As with patent law, the rationale behind state trade secret law is to encourage invention, and to provide innovators with protection for the fruits of their labors. See, e.g., Kewanee Oil Corp., supra, 416 U.S. at 481-85. In addition, trade secret law is intended to maintain and promote standards of commercial ethics and fair dealing. Id.

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In this case, the court must resolve a dispute which brings into focus the tension between the antitrust laws and the public interest in the licensing of trade secrets. Generally, there is a significant public interest in the licensing of trade secrets. By licensing a trade secret, the licensor partially releases his monopoly position and effectively disseminates information. See Kewanee Oil Co., supra, 416 U.S. at 486; A. & E. Plastik Pak, supra, 396 F.2d at 715. The result, it is hoped, is greater competition that will enure to the benefit of the public. Like the holders of other intellectual property rights, possessors of trade secrets are entitled to assert their rights against would-be infringers and to defend their rights in court. See Handgards I, supra, 601 F.2d at 993 (citing Eastern Railroad Presidents Conference v. Noerr Motor Freight, 365 U.S. 127 (1961), and United Mine Workers v. Pennington, 381 U.S. 657 (1965)). Nevertheless, the assertion in bad faith of trade secret claims, that is, with the knowledge that no trade secrets exist, for the purpose of restraining competition does not further the policies of either the antitrust or the trade secrets laws. Cf. Handgards I, supra, 601 F.2d at 993; . . . Thus, it seems clear that the assertion of a trade secret claim in bad faith, in an attempt to monopolize, can be a violation of the antitrust laws. See A. & E. Plastik Pak Co., supra, 396 F.2d at 715. Similarly, it is well established that an agreement which purports to license trade secrets, but in reality, is no more than a sham, or device designed to restrict competition, may violate the antitrust laws. A. & E. Plastik Pak Co., supra, 396 F.2d at 715. Cf. United States v. Imperial Chemical Industries, 100 F. Supp. 504, 592 (S.D.N.Y. 1951). We believe that the proper balance between the antitrust laws and trade secrets law is achieved by requiring an antitrust plaintiff to prove, in addition to the other elements of an antitrust violation, by clear and convincing evidence, that the defendant asserted trade secrets with the knowledge that no trade secrets existed. In order to prove a contract or combination in restraint of trade in violation of section 1 of the Sherman Act, the plaintiff must also prove that the defendant had market power in the relevant market, and the specific intent to restrain competition. To succeed in an attempted monopolization claim under section 2 of the Sherman Act, the plaintiff must prove that the defendant had the specific intent to monopolize the relevant market, and a dangerous probability of success. As other courts have noted, a specific intent to monopolize or restrain competition can often be inferred from a finding of bad faith. Handgards II, supra, 743 F.2d at 1293 (quoting Handgards I, supra, 601 F.2d at 993 n. 13). This case differs from the Walker Process line of cases in that Raytheon did not actually initiate litigation against the plaintiffs. Instead, the evidence indicates that it used the threat of litigation to exact a licensing agreement from the plaintiffs. In this case, litigation with Raytheon would have proved ruinous to the newly formed corporation, and effectively foreclosed competition in the relevant market. Under these circumstances, we hold that the threat of unfounded trade secrets litigation in bad faith is sufficient to constitute a cause of action under the antitrust laws, provided that the other essential elements of a violation are proven. . . .

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Trade Secrets and Bad Faith The proof as to the existence of trade secrets and the defendant’s bad faith in asserting them, if they did not exist, is necessarily intertwined. As noted, in order to be protected by law, a trade secret must be kept in secret. See U.S.M. Corp. v. Marson Fastener Corp., 393 N.E.2d 895, 899 (1979); J.T. Healy & Son, Inc. v. James A. Murphy & Son, Inc., 260 N.E.2d 723, 730 (1970). Heroic measures to ensure secrecy are not essential, but reasonable precautions must be taken to protect the information. See U.S.M. Corp., supra, 397 Mass. at 97-98, 393 N.E. 2d at 900. Whether a trade secret exists depends in each case “on the conduct of the parties and the nature of the information.” Eastern Marble Products Corp. v. Roman Marble, Inc., 364 N.E.2d 799, 802 (1977); Jet Spray Cooler, Inc. v. Crampton, 282 N.E. 2d 921, 925 (1972). Although the fact that a product is unique tends to prove that a trade secret exists, see Curtiss-Wright Corp. v. Edel-Brown Tool & Die Co., 407 N.E.2d 319, 326 (1980), “uniqueness without more is not commensurate with possession of a trade secret.” Dynamics Research Corp. v. Analytic Sciences Corp., 400 N.E.2d 1274, 1286 (1980); Laughlin Filter Corp. v. Bird Machine Co., 65 N.E.2d 545, 546-47 (1946). It is also “well settled that an employee upon terminating his employment may carry away and use the general skill or knowledge acquired during the course of the employment.” Junker v. Plummer, 67 N.E.2d 667, 669 (1946). See Jet Spray Cooler, Inc. v. Crampton, 282 N.E. 2d 921, 924 (1972); Dynamics Research Corp. v. Analytic Sciences Corp., 400 N.E.2d 1274, 1282 (1980); . . . This principle effectuates the public interest in labor mobility, promotes the employee’s freedom to practice a profession, and freedom of competition. See Club Aluminum Co. v. Young, 160 N.E. 804, 805-06 (1928); Dynamics Research Corp. v. Analytic Sciences Corp., 400 N.E.2d 1274, 1282 (1980). The existence of trade secrets in Raytheon’s ZnS/cvd and ZnSe/cvd manufacturing process depends upon the degree of public disclosure of the relevant information. It is the determination of this Court that the jury could have found sufficient evidence that the essential information contained in the cvd technology had entered the public domain, and, therefore, Raytheon possessed no trade secrets in this technology. Furthermore, there was sufficient evidence for the jury to find that Raytheon knew that no trade secrets existed. Hence, it was proper for the jury to conclude that Raytheon’s assertion of trade secrets and exaction of the licensing agreement were in bad faith. Specifically, upon the evidence presented, the jury could have found the following facts to support its conclusions. The process of chemical vapor deposition generally was well known in the scientific community. Raytheon regularly published schematics, diagrams, run conditions, and other detailed information related to the production of ZnS/cvd and ZnSe/cvd in periodic reports supplied to the government as part of Raytheon’s contractual obligations. Although some of the reports were temporarily classified by the government for security purposes, all of these reports were available to the public by 1979. At trial, the plaintiffs demonstrated that nearly all the details originally claimed as trade secrets were published in the reports. There was also evidence that the details not specifically mentioned in the reports were either obvious or insignificant, or both.

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In addition, Raytheon employees had published papers relating to cvd technology in scientific journals. Raytheon had also produced a film about this technology which was shown to a convention of engineers (and later to the jury). Photographs of the interior of the cvd furnace were published in various publications. Raytheon employees gave lectures and speeches on the technology to various groups, often accompanied by viewgraphs or slides of the equipment. Although access to the facility was limited, visitors were permitted to view the furnaces. Donadio testified that, based on the information disclosed to the public, a competent engineer could construct and operate a viable system for the production of zinc selenide or zinc sulfide through chemical vapor deposition. It is also noteworthy that the furnaces built by CVD were smaller than Raytheon’s latest furnaces and differed in certain dimensions. Notwithstanding the extent of this public disclosure, Raytheon argues that the information in the public domain was too vague and incomplete to enable anyone to reproduce the system without costly trial and error experimentation. Defendant presented expert testimony in support of this view. Nevertheless, the jury was not required to believe the defendant’s evidence. See Ford Motor Co. v. Webster’s Auto Sales, Inc., 361 F.2d 874, 885 (1st Cir. 1966). Although Donadio’s testimony was consistent with his self-interest, it was nevertheless based upon his personal knowledge and expert opinion founded on over 20 years of experience in chemical vapor deposition. Moreover, on cross-examination, the defendant’s experts admitted that many of the details claimed to be trade secrets would occur as logical, if not obvious, choices to a competent engineer designing a system. Under these circumstances, it is not for this Court to judge the credibility of witnesses. The jury, therefore, was entitled to, and apparently did, rely upon and give credence to the plaintiffs’ evidence over that of the defendant. Also significant, as to both the existence of trade secrets and the issue of bad faith, was Raytheon’s failure to follow its own established procedures for the protection of trade secrets. For example, despite a written policy that all confidential drawings and documents were to be stamped with a restrictive legend warning of the document’s confidential nature, none of the engineering drawings for the cvd furnaces was stamped or marked with any restrictive legend. Furthermore, there was no evidence that Donadio or Connolly took any engineering drawings with them when they left Raytheon. Indeed, there was evidence, albeit inconclusive, tending to suggest that Raytheon had altered drawings after the commencement of this litigation to conform to CVD drawings. There was also sufficient evidence for the jury to conclude that Raytheon had made a policy decision not to protect at least certain aspects of the cvd process. For example, Raytheon’s patent department instructed Raytheon’s engineering personnel that an “invention disclosure should be submitted on every new or improved device, system, method or composition of matter . . . which is more than routine engineering.” These forms were reviewed by a committee and a determination was made as to how they should be protected. The disclosures were then assigned a status code reflecting the committee’s determination. Code 3 meant that the item should be protected as a trade secret. Code 2 indicated that a patent application would not be filed, and that the

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item was not to be protected as a trade secret. Items that were designated for protection as trade secrets were filed in a file section referred to as the “trade secrets drawer.” Evidence introduced at trial indicated that no invention disclosures relating to the manufacture of zinc selenide or zinc sulfide by the cvd process were ever designated for protection as a trade secret. Moreover, nothing related to ZnS/cvd or ZnSe/cvd was found in the “trade secrets drawer.” It appears that the only invention disclosure relating to ZnSe/cvd was filed in 1973, prior to the development of Raytheon’s more advanced furnaces. This disclosure was classified status code 2, i.e., “Do not protect.” Raytheon introduced evidence tending to minimize the significance of these facts. Nevertheless, the jury could properly and fairly have drawn the inference that, since Raytheon did not follow its formalized procedures in protecting ZnS/cvd and ZnSe/cvd technology, it did not have the intention to maintain the technology as a trade secret. Other evidence that would tend to prove bad faith includes the fact that Reynolds asserted trade secrets, and threatened litigation, after only a cursory investigation without thoroughly examining the majority of the government reports or the extent of public disclosure. Reynolds also refused to give Cohen a list of claimed secrets. From this, the jury could have inferred that Reynolds could not make such a list because he knew that there were no secrets. There was also testimony that Cohen pointed out to Reynolds that all the items Reynolds claimed were trade secrets at their January 22, 1980 meeting were in fact published in the government reports. In short, the record reveals the extensive public disclosure, Raytheon’s failure to follow its own procedures for trade secret protection, its refusal to specify trade secrets in asserting its claims or in the agreement, and its insistence on a flat ten-year term at 15% and 8% royalty rates. In light of these facts, the jury could have concluded that Raytheon knew it had no trade secrets, yet nevertheless asserted them in bad faith in order to restrain competition and monopolize the ZnS/cvd and ZnSe/cvd markets. . . . It is also well established that the federal interest in the “full and free use of ideas in the public domain” will override state law in conflict with it. Lear, Inc. v. Adkins, 395 U.S. 653, 668, 674 (1969). Cf. Dynamics Research Corp. v. Analytic Sciences Corp., 400 N.E.2d 1274, 1288 (1980) (an “agreement which seeks to restrict the employee’s right to use an alleged trade secret which is not such in fact or in law is unenforceable as against public policy”). In Lear, Inc. v. Adkins, 395 U.S. 653 (1969), the Supreme Court held that the policies underlying the federal patent laws outweighed principles of state contract law when a patent licensee wished to challenge the validity of the licensed patent. Thus, the Court held that a licensee was not estopped from challenging the validity of its patent in court, and rescinding the licensing agreement if successful. In this case, the jury found that Raytheon had no trade secrets in its cvd process. The jury further found that Raytheon knew it had no trade secrets, yet asserted their existence in order to exact a licensing agreement from CVD and restrain competition. Donadio and Connolly testified that, although they believed that no trade secrets existed, they agreed to sign the licensing agreement with Raytheon because they had no alternative. Donadio testified that threatened litigation with Raytheon would have

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foreclosed them from obtaining financing for their new company. Thus, the plaintiffs testified, the threat of litigation with Raytheon would have effectively prevented them from entering into the business. Both men had been asked to resign from Raytheon and were unemployed. However, since they did not believe that Raytheon possessed any trade secrets, there was no evidence that they “relied” on any material misrepresentation in entering into the license. Nor do these facts establish duress to the extent that the plaintiffs were placed “under the influence of fear as preclude[d] [them] from exercising free will and judgment.” See Coveney v. President & Trustees, 445 N.E.2d 136, 140 (1983) (quoting Avallone v. Elizabeth Arden Sales Corp., 183 N.E.2d 496, 499 (1962)). Essentially, fraud under Massachusetts law is derived from the common law tort of deceit or misrepresentation. The practice at issue in this case, the assertion of claims in bad faith, is a predatory practice under the antitrust laws. As a cause of action, it descends directly from the Walker Process case and its progeny. Under the antitrust laws, plaintiffs need not necessarily be deceived. They are often simply the victims of the predatory practices of a powerful competitor who seeks to restrain competition or monopolize the market. The assertion of trade secret claims in bad faith has been identified as a predatory practice. See A. & E. Plastik Pak, supra, 396 F.2d at 715. Thus, the behavior complained of in this case is properly analyzed according to established principles of antitrust law, rather than under a common law fraud theory of action. Reliance, therefore, is not an essential element to be proven. . . . As an additional defense, Raytheon argues that the plaintiffs did not suffer the type of injury that the antitrust laws were designed to prevent. . . . In Brunswick, the Supreme Court explained that [HN25] an antitrust plaintiff must prove more than injury causally related to an antitrust violation. A plaintiff must prove that its injury flowed from the anti-competitive nature of the defendant’s acts: Plaintiffs must prove antitrust injury, which is to say injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendants’ acts unlawful. The injury should reflect the anticompetitive acts made possible by the violation. It should, in short, be “the type of loss that the claimed violations . . . would be likely to cause.” Zenith Radio Corp. v. Hazeltine Research, 395 U.S. [100] at 125

429 U.S. at 489 (emphasis in original) (footnote omitted). See Engine Specialties, Inc. v. Bombardier Ltd., 605 F.2d 1, 12 (1st Cir. 1979), cert. denied, 446 U.S. 983 (1980). In effect, the evidence indicates that Raytheon gave Donadio and Connolly three choices: (1) defend a trade secrets infringement suit against Raytheon; (2) refrain from competing with Raytheon in the manufacture of ZnS/cvd and ZnSe/cvd; or (3) take a license from Raytheon for the use of alleged trade secrets. All of the choices would have had an adverse economic impact on the plaintiffs, as well as an anticompetitive effect. Indeed, the first two alternatives would have been fatal to CVD’s existence as a viable concern. Since Raytheon asserted its claim in bad faith, with the intent to restrain competition, it is the type of offense the antitrust laws are designed to prevent. The injury to CVD, legal expenses incurred in attempting to resolve Raytheon’s bad faith claims, reflects the anticompetitive effect of acts with an anticompetitive intent. See

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Handgards II, supra, 743 F.2d at 1297; Kearney & Trecker Corp. v. Cincinnati Milacron, Inc., 562 F.2d 365, 374 (6th Cir. 1977). In Handgards II, supra, an antitrust case based on the bad faith assertion of patent claims, the defendant argued that its earlier offers to license the plaintiff precluded a finding of antitrust injury. The Ninth Circuit rejected this contention finding that, while licensing offers may be considered as evidence of good faith, “any offer to license a patent that it knew was invalid cannot preclude a finding of antitrust injury as a matter of law.” Id. at 1295. The court, therefore, upheld the award of legal fees expended in defending bad faith litigation as a proper element of antitrust damages. The fact that the plaintiffs here succumbed to the defendant’s pressure in order to establish themselves as a manufacturer of ZnS/cvd and ZnSe/cvd does not deprive them of standing under the antitrust laws. . . .

[B]

Suppression

35. The association of suppression of the invention by the patentee and antitrust is very subtle and not always evident, but it exists. Actually, it stems from the legislative history of Article 5(2)(A) of the Paris Convention, whose language was introduced in 1925 inspired by a United Kingdom statute that associated patents with monopolies. The patent being deemed a monopoly, refusal to place the product on the market was deemed per se an abuse. Concepts have evolved since then, and the same language that was introduced in the Paris Convention in 1925 serves today a more sophisticated view, according to which not every case of suppression should justify a compulsory license, but rather suppression accompanied by some other factor that gave it the character of an abuse—for example, the refusal to license in the event the patented product is of wide consumer interest. 36. Is suppression unlawful and should it be sanctioned with a refusal of an injunction in the case the suppressor sues on infringement? The answer in the United States is not straightforward. Continental Paper Bag seems to answer ‘no’, but in eBay v. Mercexchange (see case no. 69) the same Court may have added a caveat to that answer. Discussing the view expressed by the District Court that a patentee who does not manufacture is not entitled to an injunction, Justice Clarence disagreed, and said that “For example, some patent holders, such as university researchers or self-made inventors, might reasonably prefer to license their patents, rather than undertake efforts to secure the financing necessary to bring their works to market themselves.” From this language one may infer that the simple fact that a patentee does not exploit the invention directly is not cause to refuse an injunction, but that fact, together with a refusal to license—or to settle an infringement action— might be.

57. Continental Paper Bag Co. v. Eastern Paper Bag Co., 210 U.S. 405 (1908) United States Supreme Court Mr. Justice McKenna delivered the opinion of the Court. . . . The next contention of the petitioner is that a court of equity has no jurisdiction to restrain the “infringement of letters patent the invention covered by which has long

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and always and unreasonably been held in nonuse . . . instead of being made beneficial to the art to which it belongs.” It will be observed that it is not urged that nonuse merely of the patent takes jurisdiction from equity, but an unreasonable nonuse. And counsel concedes indulgence to a nonuse which is “nonchargeable to the owner of the patent,” as lack of means, or lack of ability or opportunity to induce others to put the patent to use. In other words, a question is presented not of the construction of the law simply, but of the conduct of the patentee as contravening the supposed public policy of the law. The foundation of the argument of the petitioner is, as we have intimated, the policy of the patent laws executing the purpose of the Constitution of the United States to promote the progress of science and useful arts by securing for limited times to inventors the exclusive right to their respective discoveries. Art. 1, §8. And it is urged that the nonuse of an invention for seventeen years (of course, the whole term of the patent may be selected to test the argument) is not to promote the progress of the useful arts, and the contention is that equity should not give its aid to defeat the policy of the statute, but remit the derelict patentee to his legal remedy. The penalty does not seem to fit the case. It is conceded that the patent is not defeated—only that a particular remedy is taken away. It is conceded that the remedy at law remains. It is conceded, therefore, that a right has been conferred, but it is said that it may be infringed though the policy of the law is violated. The petitioner, further to sustain its side of the question, refers to the provision in §4921, giving power to the courts to grant injunctions. The provision is: The several courts vested with jurisdiction of cases arising under the patent law shall have power to grant injunctions according to the course and principles of courts of equity, to prevent the violation of any right secured by patent, . . .

And the petitioner cites Root v. Railway Company,105 U. S. 189, 216, for the contention that the statute does not confer power to grant the injunction, except as incidental to some other equity. It may be well, however, before considering what remedies a patentee is entitled to, to consider what rights are conferred upon him. The source of the rights is, of course, the law, and we are admonished at the outset that we must look for the policy of a statute, not in matters outside of it—not to circumstances of expediency and to supposed purposes not expressed by the words. The patent law is the execution of a policy having its first expression in the Constitution, and it may be supposed that all that was deemed necessary to accomplish and safeguard it must have been studied and provided for. It is worthy of note that all that has been deemed necessary for that purpose, through the experience of years, has been to provide for an exclusive right to inventors to make, use, and vend their inventions. In other words, the language of complete monopoly has been employed, and though at first only a remedy at law was given for a violation of the right, a remedy in equity was given as early as 1819. There has been no qualification, however, of the right, except as hereinafter stated. An exception which, we may now say, shows the extent of the right—a right so explicitly given and so complete that it would seem to need no further explanation than the word of the statute. It has, however, received explanation in a number of cases which bring

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out clearly the services rendered by an inventor to the arts and sciences and to the public. Those cases declare that he receives nothing from the law that he did not have before, and that the only effect of the patent is to restrain others from manufacturing and using that which he has invented. United States v. American Bell Telephone Company,167 U. S. 249. And it was further said in that case that the inventor could have kept his discovery to himself; but, to induce a disclosure of it, Congress has, by its legislation, made in pursuance of the Constitution, guaranteed to him an exclusive right to it for a limited time, and the purpose of the patent is to protect him in this monopoly—not to give him a use which he did not have before, “but only to separate to him an exclusive use.” And it was pointed out that the monopoly which he receives is only for a few years. The Court further said: Counsel seem to argue that one who has made an invention and thereupon applies for a patent therefor occupies, as it were, the position of a quasi-trustee for the public; that he is under a sort of moral obligation to see that the public acquires the right to the free use of that invention as soon as is conveniently possible. We dissent entirely from the thought thus urged. The inventor is one who has discovered something of value. It is his absolute property. He may withhold the knowledge of it from the public, and he may insist upon all the advantages and benefits which the statute promises to him who discloses to the public his invention.

And the same relative rights of the patentee and the public were expressed in prior cases, and we cite them because there is something more than the repetition of the same thought by doing so. It shows that, whenever this Court has had occasion to speak, it has decided that an inventor receives from a patent the right to exclude others from its use for the time prescribed in the statute. “And, for his exclusive enjoyment of it during that time, the public faith is pledged.” Chief Justice Marshall, in Grant v. Raymond, 31 U. S. 243. And, in Bloomer v. McQuewan, 14 How. 539, Chief Justice Taney said: The franchise which the patent grants consists altogether in the right to exclude everyone from making, using, or vending the thing patented without the permission of the patentee. This is all that he obtains by the patent.

In Patterson v. Kentucky,97 U. S. 501, it was said that an inventor’s own right to the use was not enlarged or affected by a patent. See also Wilson v. Rousseau, 45 U. S. 674; Seymour v. Osborne, 78 U. S. 533; Cammeyer v. Newton, 94 U. S. 225; Densmore v. Scofield, 102 U. S. 375. It may be said that these cases deal only with the right of a patentee, and not with the remedy, whether at law or equity, that he may at any time, or in all his situations, be entitled to. And there is no case in this Court that explicitly does so. However, in the three last cases cited, it was decided that patents are property, and entitled to the same rights and sanctions as other property. In Bement v. National Harrow Company,186 U. S. 70, 90, adopting the language of the Circuit Court of Appeals for the Sixth Circuit in Heaton Peninsular Company v. Eureka Specialty Company, 77 F. 294, it was said:

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If he [a patentee] see fit, he may reserve to himself the exclusive use of his invention or discovery. If he will neither use his device nor permit others to use it, he has but suppressed his own, . . . his title is exclusive, and so clearly within the constitutional provisions in respect of private property that he is neither bound to use his discovery himself nor permit others to use it. The dictum found in Hoe v. Knap, 27 F. 204, is not supported by reason or authority.

In Hoe v. Knap, Judge Blodgett refused an injunction against the infringer, holding that, “under a patent which gives a patentee a monopoly, he is bound to either use the patent himself or allow others to use it on reasonable terms.” In a number of the circuit courts of appeals, it has been decided that, as a consequence of the exclusive right of the patentee, he is entitled to an injunction against an infringer even though he (the patentee) does not use the patented device. The cases are inserted in the margin, also decisions of the circuit courts, some of which refine the right of a patentee and others holding that, as incident to the right, he is entitled to an injunction though he had not used his invention. Counsel for petitioner cites counter-cases which he contends are more direct authority. He also reviews the cases cited by respondent, and contends that they are not relevant to the question in the case at bar, which is not that of the simple nonuse of a patent, but a long and unreasonable nonuse of it. Judge Aldrich, in his dissenting opinion in the court of appeals, excluded the cases as authoritative for a different reason than counsel expresses. The learned judge said: Simple nonuse is one thing. Standing alone, nonuse is no efficient reason for withholding injunction. There are many reasons for nonuse which, upon explanation, are cogent; but when acquiring, holding, and nonuse are only explainable upon the hypothesis of a purpose to abnormally force trade into unnatural channels—a hypothesis involving an attitude which offends public policy, the conscience of equity, and the very spirit and intention of the law upon which the legal right is founded—it is quite another thing. This is an aspect which has not been considered in a case like the one here.

Respondent attacks the conclusion of Judge Aldrich and that of petitioner, and insists that there is nothing in the record to show that the nonuse of the patent was either unreasonable or sinister. A very strong argument is presented by respondent. Its counsel pointedly say that “there is no record evidence at all on the subject or character of complainants’ [respondents’] use or nonuse,” and points out that neither the assignments of error on appeal to the circuit court of appeals nor the petition for rehearing in that court presented the question that the injunction should be denied on the ground of mere nonuse or unreasonable nonuse. Let us see what the courts say, and what petitioner says. The circuit court says: We have stated that no machine for practical manufacturing purposes was ever constructed under the Liddell patent. The record also shows that the complainant, so to speak, locked up its patent. It has never attempted to make any practical use of it, either itself or through licenses, and apparently its proposed policy has been to avoid this. In this respect, it has not the common excuse of a lack of means, as it is unquestioned that the complainant is a powerful and wealthy corporation. We have no doubt that the complainant stands in the common class of manufacturers

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who accumulate patents merely for the purpose of protecting their general industries and shutting out competitors.

The comment of the circuit court of appeals is: The machine of the patent in suit is mechanically operative, as was shown experimentally for the purposes of this suit, but it has not been put into commercial use. No reason for the nonuser appears in the evidence, so far as we can discover. The defendant’s machine has been an assured commercial success for some years. It was suggested at the oral argument that an unused patent is not entitled to the protection given by the extraordinary remedy of an injunction. This contention was not made in the defendant’s printed brief. While this question has not been directly passed upon, so far as we are informed, in any considered decision of the Supreme Court, yet the weight of authority is in favor of the complainant.

The cases were cited. If these statements are to be reconciled, it can only be by supposing that the circuit court inferred the motive of the respondents from the unexplained nonuse of the patent. But petitioner has given its explanation of the purpose of respondent. Quoting Judge Aldrich, that the patent in suit has been “deliberately held in nonuse for a wrongful purpose,” petitioner asks, “What was that wrongful purpose? It was the purpose to make more money with the existing old reciprocating Lorenz & Honiss machines and the existing old complicated Stilwell machines than could be made with new Liddell machines, when the cost of building the latter was taken into account. And this purpose was effective to cause the long and invariable nonuse of the Liddell invention notwithstanding that new Liddell machines might have produced better paper bags than the old Lorenz & Honiss machines or the old Stilwell machines were producing.” But, granting all this, it is certainly disputable that the nonuse was unreasonable, or that the rights of the public were involved. There was no question of a diminished supply or of increase of prices, and can it be said as a matter of law that a nonuse was unreasonable which had for its motive the saving of the expense that would have been involved by changing the equipment of a factory from one set of machines to another? And even if the old machines could have been altered, the expense would have been considerable. As to the suggestion that competitors were excluded from the use of the new patent, we answer that such exclusion may be said to have been of the very essence of the right conferred by the patent, as it is the privilege of any owner of property to use or not use it, without question of motive. Connolly v. Union Sewer Pipe Co.,184 U. S. 546. The right which a patentee receives does not need much further explanation. We have seen that it has been the judgment of Congress from the beginning that the sciences and the useful arts could be best advanced by giving an exclusive right to an inventor. The only qualification ever made was against aliens, in the act of 1832. That act extended the privilege of the patent law to aliens, but required them “to introduce into public use in the United States the invention or improvement within one year from the issuing thereof,” and indulged no intermission of the public use for any period longer than six months. A violation of the law rendered the patent void. The act was

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repealed in 1836. It is manifest, as is said in Walker on Patents, §106, that Congress has not “overlooked the subject of nonuser of patented inventions.” And another fact may be mentioned. In some foreign countries, the right granted to an inventor is affected by nonuse. This policy, we must assume, Congress has not been ignorant of, nor of its effects. It has nevertheless selected another policy; it has continued that policy through many years. We may assume that experience has demonstrated its wisdom and beneficial effect upon the arts and sciences. From the character of the right of the patentee, we may judge of his remedies. It hardly needs to be pointed out that the right can only retain its attribute of exclusiveness by a prevention of its violation. Anything but prevention takes away the privilege which the law confers upon the patentee. If the conception of the law that a judgment in an action at law is reparation for the trespass, it is only for the particular trespass that is the ground of the action. There may be other trespasses and continuing wrongs and the vexation of many actions. These are well recognized grounds of equity jurisdiction, especially in patent cases, and a citation of cases is unnecessary. Whether, however, a case cannot arise where, regarding the situation of the parties in view of the public interest, a court of equity might be justified in withholding relief by injunction we do not decide. . . .

58. Julius E. Foster v. American Machine & Foundry Co., 492 F.2d 1317 (2nd Cir. 1974) UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT Opinion by Gurfein, D.J.: This is an appeal from a judgment of the District Court, Palmieri, J., confirming the Report of the Special Master, Dana M. Raymond, which awarded the plaintiff reasonable royalties for the defendants’ infringement of his patent in the amount of $344,000 with interest from the date of the filing of the Master’s Report, which denied injunctive relief, and which ordered a compulsory licensing on a reasonable royalty fixed by the Court, in lieu thereof. . . . The plaintiff is the inventor of Patent No. 2,882,384 entitled “Welding System.” This welding system is essentially an impeding device. “It relates to the progressive continuous welding of such items as sheet metal tubes with the aid of a pair of electrodes to which is applied an alternating current voltage for the purpose of supplying electric current for heating the edges of the tube to weld the same together in a continuous process as the sheet metal is folded into tubular form and drawn past the electrodes.” (297 F. Supp. at 514). The Foster patent included “use” claims as well as “apparatus” claims. The utility of the invention is found in Judge Palmieri’s description of the prior art and the teachings of the patent in suit: “Welding apparatus of this character had long preceded the Foster invention, since at least the early 1920’s, but was subject to spotty heating effects that produced discontinuous welding spots or

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beads which left the welded tube with spaced unwelded regions and stressconcentration weakened zones, which prohibited the use of such tubes in applications where they were required to pass fluids or the like or where they were to be pressurized.” 297 F. Supp. at 514. The Foster patent relates to an improvement in electrical contact resistance welding, one of several systems for longitudinal welding of pipes and tubes, which was exemplified in the Foster patent by application to low frequency welding. The key feature of the Foster patent is the use of electromagnets, positioned in the vicinity of the welding zone, for the purpose of controlling or influencing the path of the welding current. The appellant, Julius E. Foster, the patentee and the owner of the patent in suit, is a patent solicitor and a member of the Bar of the State of New York and of the Commonwealth of Pennsylvania. He has been at the Bar for almost fifty years. He has never engaged in any manufacturing or other business connected with the patent in suit. The principal defendant and real party in interest is American Machine & Foundry Co. (AMF). Infringement of the patent has occurred as a result of the commercial activity of AMF’s wholly-owned subsidiary, AMF Thermatool, Inc., and its predecessors, and the individual proprietors of such predecessor corporations (herein collectively referred to as Thermatool.) Thermatool manufactured welding machinery, which included as a component an impeder which embodied the process protected by Foster’s patent. Thermatool in turn sold and leased the welding systems, both those containing the infringing impeder and those without it, to foreign and domestic mill producers for the production of longitudinally welded tubes and pipes. The Master found that “the value of the impeder process, as disclosed in the Foster patent, constitutes a minor but significant fraction of the total value of Thermatool’s welding technology.” The primary issue on this appeal is the amount of damages to which Foster is entitled. . . . Appellant contends that the District Court erred in denying an injunction and adjudging, in lieu thereof, a compulsory licensing in favor of appellant at the royalty fixed by the Court. We do not find any difficulty in agreeing with Judge Palmieri that an injunction would be an inappropriate remedy in this case. An injunction to protect a patent against infringement, like any other injunction, is an equitable remedy to be determined by the circumstances. 35 U.S.C. § 283. It is not intended as a club to be wielded by a patentee to enhance his negotiating stance. See Hoe v. Boston Daily Advertiser Corp., 14 Fed. 914 (C.C. Mass. 1883). Here, as the District Court noted, the defendant manufactures a product; the appellant does not. In the assessment of relative equities, the court could properly conclude that to impose irreparable hardship on the infringer by injunction, without any concomitant benefit to the patentee, would be inequitable. Nerney v. New York, N.H. & H.R.Co., 83 F.2d 409, 410-411 (2 Cir. 1936); American Safety Device Co. v. Kurland Chemical Co., 68 F.2d 734 (2 Cir. 1934). Instead, the District Court avoided ordering a cessation of business to the benefit of neither party by compensating appellant in the form of a compulsory license with

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royalties. This Court has approved such a “flexible approach” in patent litigation. Royal-McBee Corp. v. Smith-Corona Marchant, Inc., 295 F.2d 1, 6 (2 Cir. 1961). Here the compulsory license is a benefit to the patentee who has been unable to prevail in his quest for injunctive relief. To grant him a compulsory royalty is to give him half a loaf. In the circumstance of his utter failure to exploit the patent on his own, that seems fair. . . .

[C]

Abuses of the Judicial (or Administrative) Process 37. The function of intellectual property being the promotion and preservation of product and business differentiation, the rights it generates are naturally exercised in a context of business rivalry. To keep competitors away from their differentiating assets, intellectual property owners request the assistance of courts. There is nothing wrong or immoral in that: the intervening court imposes the respect of the exclusive rights and thereby ensures rivalry and competition, and punishes copying, parasitism, and dishonesty. In other words, the procompetitive function of intellectual property resides in the exercise of the right to exclude. This is not a paradox or a contradiction, but the consequence of a fundamental notion of competition, which is based on rivalry, exclusivity, differentiation among manufacturers, merchants, and service providers. It is differentiation that permits consumers’ choices. However, it is not rare that courts are called to protect abusive intents under the pretext of the exercise of intellectual property rights. When the judiciary tolerates such behavior, it becomes an adversary of differentiation and free competition. 38. The judicial process may be abused under two different modalities: (a) abusive or predatory litigation (known as “sham litigation”); and (b) use of the judicial procedure in order to achieve objectives not permitted by Law. 39. Litigation is a sham when, objectively, the plaintiff’s request is groundless. Under this modality, thus, the plaintiff knows that he/she will lose the suit. In a variation of this modality, the plaintiff believes he/she can win, but his/her case is based on an invalid certificate, and to whose invalidity the plaintiff has knowingly contributed. The United States Supreme Court has developed two different tests to assess these two sub-modalities: the “PRE” test and the “Walker Process” test. Both have been widely adopted by courts around the world. 40. The situation in the second modality is different: the plaintiff is based on a right that is formally legitimate (or to which informality he/she has not contributed), but he seeks illegitimate objectives. In this way, the plaintiff wants the help of the court to reach objectives that otherwise he/she could not reach. 41. An important principle that applies to abuses of the process was stated by the Mercoid court: “patentees and licensees cannot secure aid from the court to bring such an event to pass, ‘unless it is in accordance with policy to grant that help.’ (citation omitted). And the determination of that policy is not ‘at the mercy’ of the parties . . . nor dependent on the usual rules governing the settlement of private litigation.” (see case no. 40).

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[1]

Sham Litigation

[a]

PRE Test 59. Professional Real Estate Investors, Inc. v. Columbia Pictures Inds., Inc., 508 U.S. 49 (1993) SUPREME COURT OF THE UNITED STATES

Justice Thomas delivered the opinion of the Court. This case requires us to define the “sham” exception to the doctrine of antitrust immunity first identified in Eastern Railroad Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961), as that doctrine applies in the litigation context. Under the sham exception, activity “ostensibly directed toward influencing governmental action” does not qualify for Noerr immunity if it “is a mere sham to cover . . . an attempt to interfere directly with the business relationships of a competitor.” Id., at 144. We hold that litigation cannot be deprived of immunity as a sham unless the litigation is objectively baseless. The Court of Appeals for the Ninth Circuit refused to characterize as sham a lawsuit that the antitrust defendant admittedly had probable cause to institute. We affirm. Petitioners Professional Real Estate Investors, Inc., and Kenneth F. Irwin (collectively, PRE) operated La Mancha Private Club and Villas, a resort hotel in Palm Springs, California. Having installed videodisc players in the resort’s hotel rooms and assembled a library of more than 200 motion picture titles, PRE rented videodiscs to guests for in-room viewing. PRE also sought to develop a market for the sale of videodisc players to other hotels wishing to offer in-room viewing of prerecorded material. Respondents, Columbia Pictures Industries, Inc., and seven other major motion picture studios (collectively, Columbia), held copyrights to the motion pictures recorded on the videodiscs that PRE purchased. Columbia also licensed the transmission of copyrighted motion pictures to hotel rooms through a wired cable system called Spectradyne. PRE therefore competed with Columbia not only for the viewing market at La Mancha but also for the broader market for in-room entertainment services in hotels. In 1983, Columbia sued PRE for alleged copyright infringement through the rental of videodiscs for viewing in hotel rooms. PRE counterclaimed, charging Columbia with violations of §§1 and 2 of the Sherman Act, 26 Stat. 209, as amended, 15 U.S.C. §§ 1-2, and various state-law infractions. In particular, PRE alleged that Columbia’s copyright action was a mere sham that cloaked underlying acts of monopolization and conspiracy to restrain trade. The parties filed cross-motions for summary judgment on Columbia’s copyright claim and postponed further discovery on PRE’s antitrust counterclaims. Columbia did not dispute that PRE could freely sell or lease lawfully purchased videodiscs under the Copyright Act’s “first sale” doctrine, see 17 U.S.C. § 109(a), and PRE conceded that the playing of videodiscs constituted “performance” of motion pictures, see 17 U.S.C. §101

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(1988 ed. and Supp. III). As a result, summary judgment depended solely on whether rental of videodiscs for in-room viewing infringed Columbia’s exclusive right to “perform the copyrighted work[s] publicly.” §106(4). Ruling that such rental did not constitute public performance, the District Court entered summary judgment for PRE. 228 U.S.P.Q. (BNA) 743 (CD Cal. 1986). The Court of Appeals affirmed on the grounds that a hotel room was not a “public place” and that PRE did not “transmit or otherwise communicate” Columbia’s motion pictures. 866 F.2d 278 (CA9 1989). See 17 U.S.C. §101 (1988 ed. and Supp. III). On remand, Columbia sought summary judgment on PRE’s antitrust claims, arguing that the original copyright infringement action was no sham and was therefore entitled to immunity under Eastern Railroad Presidents Conference v. Noerr Motor Freight, Inc., supra. Reasoning that the infringement action “was clearly a legitimate effort and therefore not a sham,” . . . the District Court granted the motion: It was clear from the manner in which the case was presented that [Columbia was] seeking and expecting a favorable judgment. Although I decided against [Columbia], the case was far from easy to resolve, and it was evident from the opinion affirming my order that the Court of Appeals had trouble with it as well. I find that there was probable cause for bringing the action, regardless of whether the issue was considered a question of fact or of law. Id., at 63, 243.

The court then denied PRE’s request for further discovery on Columbia’s intent in bringing the copyright action and dismissed PRE’s state-law counterclaims without prejudice. The Court of Appeals affirmed. 944 F.2d 1525 (CA9 1991). After rejecting PRE’s other allegations of anticompetitive conduct, . . . the court focused on PRE’s contention that the copyright action was indeed sham and that Columbia could not claim Noerr immunity. The Court of Appeals characterized “sham” litigation as one of two types of “abuse of . . . judicial processes”: either “misrepresentations . . . in the adjudicatory process” or the pursuit of “a pattern of baseless, repetitive claims” instituted “without probable cause, and regardless of the merits.” 944 F.2d at 1529 (quoting California Motor Transport Co. v. Trucking Unlimited, 404 U.S. 508, 513 (1972)). PRE neither “allege[d] that the [copyright] lawsuit involved misrepresentations” nor “challenge[d] the district court’s finding that the infringement action was brought with probable cause, i.e., that the suit was not baseless.” 944 F.2d at 1530. Rather, PRE opposed summary judgment solely by arguing that “the copyright infringement lawsuit [was] a sham because [Columbia] did not honestly believe that the infringement claim was meritorious.” Ibid. The Court of Appeals rejected PRE’s contention that “subjective intent in bringing the suit was a question of fact precluding entry of summary judgment.” Ibid. Instead, the court reasoned that the existence of probable cause “preclude[d] the application of the sham exception as a matter of law” because “a suit brought with probable cause does not fall within the sham exception to the Noerr-Pennington doctrine.” 944 F.2d at 1531, 1532. Finally, the court observed that PRE’s failure to show

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that “the copyright infringement action was baseless” rendered irrelevant any “evidence of [Columbia’s] subjective intent.” Id., at 1533. It accordingly rejected PRE’s request for further discovery on Columbia’s intent. The Courts of Appeals have defined “sham” in inconsistent and contradictory ways. We once observed that “sham” might become “no more than a label courts could apply to activity they deem unworthy of antitrust immunity.” Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. 492, 508, n.10 (1988). The array of definitions adopted by lower courts demonstrates that this observation was prescient. PRE contends that “the Ninth Circuit erred in holding that an antitrust plaintiff must, as a threshold prerequisite . . . , establish that a sham lawsuit is baseless as a matter of law.” . . . It invites us to adopt an approach under which either “indifference to . . . outcome,” ibid., or failure to prove that a petition for redress of grievances “would . . . have been brought but for [a] predatory motive,” . . . would expose a defendant to antitrust liability under the sham exception. We decline PRE’s invitation. Those who petition government for redress are generally immune from antitrust liability. We first recognized in Eastern Railroad Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961), that “the Sherman Act does not prohibit . . . persons from associating together in an attempt to persuade the legislature or the executive to take particular action with respect to a law that would produce a restraint or a monopoly.” Id., at 136. Accord, Mine Workers v. Pennington, 381 U.S. 657, 669 (1965). In light of the government’s “power to act in [its] representative capacity” and “to take actions . . . that operate to restrain trade,” we reasoned that the Sherman Act does not punish “political activity” through which “the people . . . freely inform the government of their wishes.” Noerr, 365 U.S. at 137. Nor did we “impute to Congress an intent to invade” the First Amendment right to petition. 365 U.S. at 138. Noerr, however, withheld immunity from “sham” activities because “application of the Sherman Act would be justified” when petitioning activity, “ostensibly directed toward influencing governmental action, is a mere sham to cover . . . an attempt to interfere directly with the business relationships of a competitor.” Id., at 144. In Noerr itself, we found that a publicity campaign by railroads seeking legislation harmful to truckers was no sham in that the “effort to influence legislation” was “not only genuine but also highly successful.” Ibid. In California Motor Transport Co. v. Trucking Unlimited, 404 U.S. 508 (1972), we elaborated on Noerr in two relevant respects. First, we extended Noerr to “the approach of citizens . . . to administrative agencies . . . and to courts.” 404 U.S. at 510. Second, we held that the complaint showed a sham not entitled to immunity when it contained allegations that one group of highway carriers “sought to bar . . . competitors from meaningful access to adjudicatory tribunals and so to usurp that decisionmaking process” by “institut[ing] . . . proceedings and actions . . . with or without probable cause, and regardless of the merits of the cases.” Id., at 512 (internal quotation marks omitted). We left unresolved the question presented by this case—whether litigation may be sham merely because a subjective expectation of success does not motivate the litigant. We now answer this question in the negative and hold that an objectively reasonable effort to litigate cannot be sham regardless of subjective intent.

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Our original formulation of antitrust petitioning immunity required that unprotected activity lack objective reasonableness. Noerr rejected the contention that an attempt “to influence the passage and enforcement of laws” might lose immunity merely because the lobbyists’ “sole purpose . . . was to destroy [their] competitors.” 365 U.S. at 138. Nor were we persuaded by a showing that a publicity campaign “was intended to and did in fact injure [competitors] in their relationships with the public and with their customers,” since such “direct injury” was merely “an incidental effect of the . . . campaign to influence governmental action.” Id., at 143. We reasoned that “the right of the people to inform their representatives in government of their desires with respect to the passage or enforcement of laws cannot properly be made to depend upon their intent in doing so.” Id., at 139. In short, “Noerr shields from the Sherman Act a concerted effort to influence public officials regardless of intent or purpose.” Pennington, 381 U.S. at 670. Nothing in California Motor Transport retreated from these principles. Indeed, we recognized that recourse to agencies and courts should not be condemned as sham until a reviewing court has “discern[ed] and draw[n]” the “difficult line” separating objectively reasonable claims from “a pattern of baseless, repetitive claims . . . which leads the factfinder to conclude that the administrative and judicial processes have been abused.” 404 U.S. at 513. Our recognition of a sham in that case signifies that the institution of legal proceedings “without probable cause” will give rise to a sham if such activity effectively “bar[s] . . . competitors from meaningful access to adjudicatory tribunals and so . . . usurp[s] the decision making process.” Id., at 512. Since California Motor Transport, we have consistently assumed that the sham exception contains an indispensable objective component. We have described a sham as “evidenced by repetitive lawsuits carrying the hallmark of insubstantial claims.” Otter Tail Power Co. v. United States, 410 U.S. 366, 380 (1973) (emphasis added). We regard as sham “private action that is not genuinely aimed at procuring favorable government action,” as opposed to “a valid effort to influence government action.” Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. at 500, n.4. And we have explicitly observed that a successful “effort to influence governmental action . . . certainly cannot be characterized as a sham.” Id., at 502. See also Vendo Co. v. Lektro-Vend Corp., 433 U.S. 623, 645 (1977) (Blackmun, J., concurring in result) (describing a successful lawsuit as a “genuine attempt to use the . . . adjudicative process legitimately” rather than “a pattern of baseless, repetitive claims”). Whether applying Noerr as an antitrust doctrine or invoking it in other contexts, we have repeatedly reaffirmed that evidence of anticompetitive intent or purpose alone cannot transform otherwise legitimate activity into a sham. See, e.g., FTC v. Superior Court Trial Lawyers Assn., 493 U.S. 411, 424 (1990); NAACP v. Claiborne Hardware Co., 458 U.S. 886, 913-914 (1982). Cf. Vendo, supra, at 635-636, n.6, 639, n.9 (plurality opinion of Rehnquist, J.); id., at 644, n., 645 (Blackmun, J., concurring in result). Indeed, by analogy to Noerr’s sham exception, we held that even an “improperly motivated” lawsuit may not be enjoined under the National Labor Relations Act as an unfair labor practice unless such litigation is “baseless.” Bill Johnson’s Restaurants, Inc. v. NLRB, 461 U.S. 731, 743-744 (1983). Our decisions therefore establish that the legality of objectively reasonable petitioning “directed toward obtaining governmental action” is

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“not at all affected by any anticompetitive purpose [the actor] may have had.” Noerr, 365 U.S. at 140, quoted in Pennington, supra, at 669. Our most recent applications of Noerr immunity further demonstrate that neither Noerr immunity nor its sham exception turns on subjective intent alone. In Allied Tube, supra, at 503, and FTC v. Trial Lawyers, supra, at 424, 427, and n.11, we refused to let antitrust defendants immunize otherwise unlawful restraints of trade by pleading a subjective intent to seek favorable legislation or to influence governmental action. Cf. National Collegiate Athletic Assn. v. Board of Regents of Univ. of Okla., 468 U.S. 85, 101, n.23 (1984) (“Good motives will not validate an otherwise anticompetitive practice”). In Columbia v. Omni Outdoor Advertising, Inc., 499 U.S. 365 (1991), we similarly held that challenges to allegedly sham petitioning activity must be resolved according to objective criteria. We dispelled the notion that an antitrust plaintiff could prove a sham merely by showing that its competitor’s “purposes were to delay [the plaintiff’s] entry into the market and even to deny it a meaningful access to the appropriate . . . administrative and legislative fora.” Id., at 381 (internal quotation marks omitted). We reasoned that such inimical intent “may render the manner of lobbying improper or even unlawful, but does not necessarily render it a ‘sham.’” Ibid. Accord, id., at 398 (Stevens, J., dissenting). In sum, fidelity to precedent compels us to reject a purely subjective definition of “sham.” The sham exception so construed would undermine, if not vitiate, Noerr. And despite whatever “superficial certainty” it might provide, a subjective standard would utterly fail to supply “real ‘intelligible guidance.’” Allied Tube, supra, at 508, n.10. We now outline a two-part definition of “sham” litigation. First, the lawsuit must be objectively baseless in the sense that no reasonable litigant could realistically expect success on the merits. If an objective litigant could conclude that the suit is reasonably calculated to elicit a favorable outcome, the suit is immunized under Noerr, and an antitrust claim premised on the sham exception must fail. Only if challenged litigation is objectively meritless may a court examine the litigant’s subjective motivation. Under this second part of our definition of sham, the court should focus on whether the baseless lawsuit conceals “an attempt to interfere directly with the business relationships of a competitor,” Noerr, supra, at 144 (emphasis added), through the “use [of] the governmental process—as opposed to the outcome of that process—as an anticompetitive weapon,” Omni, 499 U.S. at 380 (emphasis in original). This two-tiered process requires the plaintiff to disprove the challenged lawsuit’s legal viability before the court will entertain evidence of the suit’s economic viability. Of course, even a plaintiff who defeats the defendant’s claim to Noerr immunity by demonstrating both the objective and the subjective components of a sham must still prove a substantive antitrust violation. Proof of a sham merely deprives the defendant of immunity; it does not relieve the plaintiff of the obligation to establish all other elements of his claim. A winning lawsuit is by definition a reasonable effort at petitioning for redress and therefore not a sham. On the other hand, when the antitrust defendant has lost the underlying litigation, a court must “resist the understandable temptation to engage in post hoc reasoning by concluding” that an ultimately unsuccessful “action must have been unreasonable or without foundation.” Christiansburg Garment Co. v. EEOC, 434 U.S. 412, 421-422 (1978). Accord, Hughes v. Rowe, 449 U.S. 5, 14-15 (1980) (per

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curiam). The court must remember that “even when the law or the facts appear questionable or unfavorable at the outset, a party may have an entirely reasonable ground for bringing suit.” Christiansburg, supra, at 422. Some of the apparent confusion over the meaning of “sham” may stem from our use of the word “genuine” to denote the opposite of “sham.” See Omni, supra, at 382; Allied Tube, 486 U.S. at 500, n.4; Noerr, supra, at 144; Vendo Co. v. Lektro-Vend Corp., supra, at 645 (Blackmun, J., concurring in result). The word “genuine” has both objective and subjective connotations. On one hand, “genuine” means “actually having the reputed or apparent qualities or character.” Webster’s Third New International Dictionary 948 (1986). “Genuine” in this sense governs Federal Rule of Civil Procedure 56, under which a “genuine issue” is one “that properly can be resolved only by a finder of fact because [it] may reasonably be resolved in favor of either party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986) (emphasis added). On the other hand, “genuine” also means “sincerely and honestly felt or experienced.” Webster’s Dictionary, supra, at 948. To be sham, therefore, litigation must fail to be “genuine” in both senses of the word. We conclude that the Court of Appeals properly affirmed summary judgment for Columbia on PRE’s antitrust counterclaim. Under the objective prong of the sham exception, the Court of Appeals correctly held that sham litigation must constitute the pursuit of claims so baseless that no reasonable litigant could realistically expect to secure favorable relief. See 944 F.2d at 1529. The existence of probable cause to institute legal proceedings precludes a finding that an antitrust defendant has engaged in sham litigation. The notion of probable cause, as understood and applied in the common-law tort of wrongful civil proceedings, requires the plaintiff to prove that the defendant lacked probable cause to institute an unsuccessful civil lawsuit and that the defendant pressed the action for an improper, malicious purpose. Stewart v. Sonneborn, 98 U.S. 187, 194 (1879); Wyatt v. Cole, 504 U.S. 158, 176 (1992) (Renhquist, C. J., dissenting); . . . Cf. Wheeler v. Nesbitt, 65 U.S. 544, 549-550 (1861) (related tort for malicious prosecution of criminal charges). Probable cause to institute civil proceedings requires no more than a “reasonable belief that there is a chance that [a] claim may be held valid upon adjudication” (internal quotation marks omitted). Hubbard v. Beatty & Hyde, Inc., 343 Mass. 258, 262 (1961); Restatement (Second) of Torts §675, Comment e, pp. 454-455 (1977). Because the absence of probable cause is an essential element of the tort, the existence of probable cause is an absolute defense. See Crescent City Live Stock Co. v. Butchers’ Union Slaughter-House Co., 120 U.S. 141, 149 (1887); Wheeler, supra, at 551; Liberty Loan Corp. of Gadsden v. Mizell, 410 So. 2d 45, 48 (Ala. 1982). Just as evidence of anticompetitive intent cannot affect the objective prong of Noerr’s sham exception, a showing of malice alone will neither entitle the wrongful civil proceedings plaintiff to prevail nor permit the factfinder to infer the absence of probable cause. Stewart, supra, at 194; Wheeler, supra, at 551; . . . When a court has found that an antitrust defendant claiming Noerr immunity had probable cause to sue, that finding compels the conclusion that a reasonable litigant in the defendant’s position could realistically expect success on the merits of the challenged lawsuit. Under our decision today, therefore, a

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proper probable-cause determination irrefutably demonstrates that an antitrust plaintiff has not proved the objective prong of the sham exception and that the defendant is accordingly entitled to Noerr immunity. The District Court and the Court of Appeals correctly found that Columbia had probable cause to sue PRE for copyright infringement. Where, as here, there is no dispute over the predicate facts of the underlying legal proceeding, a court may decide probable cause as a matter of law. Crescent, supra, at 149; Stewart, supra, at 194; Nelson v. Miller, 227 Kan. 271, 277 (1980); Stone v. Crocker, 41 Mass. 81, 84-85 (1831); . . . See also Director General of Railroads v. Kastenbaum, 263 U.S. 25, 28, 68 L. Ed. 146, 44 S. Ct. 52 (1923) (“The question is not whether [the defendant] thought the facts to constitute probable cause, but whether the court thinks they did”). Columbia enjoyed the “exclusive right . . . to perform [its] copyrighted” motion pictures “publicly.” 17 U.S.C. §106(4). Regardless of whether it intended any monopolistic or predatory use, Columbia acquired this statutory right for motion pictures as “original” audiovisual “works of authorship fixed” in a “tangible medium of expression.” §102(a)(6). Indeed, to condition a copyright upon a demonstrated lack of anticompetitive intent would upset the notion of copyright as a “limited grant” of “monopoly privileges” intended simultaneously “to motivate the creative activity of authors” and “to give the public appropriate access to their work product.” Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417, 429 (1984). When the District Court entered summary judgment for PRE on Columbia’s copyright claim in 1986, it was by no means clear whether PRE’s videodisc rental activities intruded on Columbia’s copyrights. At that time, the Third Circuit and a District Court within the Third Circuit had held that the rental of video cassettes for viewing in on-site, private screening rooms infringed on the copyright owner’s right of public performance. Columbia Pictures Industries, Inc. v. Redd Horne, Inc., 749 F.2d 154 (1984); Columbia Pictures Industries, Inc. v. Aveco, Inc., 612 F. Supp. 315 (MD Pa. 1985), aff’d, 800 F.2d 59 (1986). Although the District Court and the Ninth Circuit distinguished these decisions by reasoning that hotel rooms offered a degree of privacy more akin to the home than to a video rental store, see 866 F.2d 278, 280-281, copyright scholars criticized both the reasoning and the outcome of the Ninth Circuit’s decision, . . . The Seventh Circuit expressly “decline[d] to follow” the Ninth Circuit and adopted instead the Third Circuit’s definition of a “public place.” Video Views, Inc. v. Studio 21, Ltd., 925 F.2d 1010, 1020, cert. denied, 502 U.S. 861 (1991). In light of the unsettled condition of the law, Columbia plainly had probable cause to sue. Any reasonable copyright owner in Columbia’s position could have believed that it had some chance of winning an infringement suit against PRE. Even though it did not survive PRE’s motion for summary judgment, Columbia’s copyright action was arguably “warranted by existing law” or at the very least was based on an objectively “good faith argument for the extension, modification, or reversal of existing law.” Fed. Rule Civ. Proc. 11. By the time the Ninth Circuit had reviewed all claims in this litigation, it became apparent that Columbia might have won its copyright suit in either the Third or the Seventh Circuit. Even in the absence of supporting authority, Columbia would have been entitled to press a novel copyright claim as long as a similarly situated reasonable litigant could have perceived some likelihood of success. A court could

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reasonably conclude that Columbia’s infringement action was an objectively plausible effort to enforce rights. Accordingly, we conclude that PRE failed to establish the objective prong of Noerr’s sham exception. Finally, the Court of Appeals properly refused PRE’s request for further discovery on the economic circumstances of the underlying copyright litigation. As we have held, PRE could not pierce Columbia’s Noerr immunity without proof that Columbia’s infringement action was objectively baseless or frivolous. Thus, the District Court had no occasion to inquire whether Columbia was indifferent to the outcome on the merits of the copyright suit, whether any damages for infringement would be too low to justify Columbia’s investment in the suit, or whether Columbia had decided to sue primarily for the benefit of collateral injuries inflicted through the use of legal process. Contra, Grip-Pak, Inc. v. Illinois Tool Works, Inc., 694 F.2d 466, 472 (CA7 1982), cert. denied, 461 U.S. 958 (1983). Such matters concern Columbia’s economic motivations in bringing suit, which were rendered irrelevant by the objective legal reasonableness of the litigation. The existence of probable cause eliminated any “genuine issue as to any material fact,” Fed. Rule Civ. Proc. 56(c), and summary judgment properly issued. . . .

60. Monsanto Company v. Comisión Nacional de la Defensa de la Competencia, Case 13.676/07 ARGENTINA - Federal Court of Appeals for Civil and Commercial Matters (Third Chamber) 1. On 30 of October 2006 the National Commission of Defense of Competition (hereinafter CNDC) provisionally concluded . . . that Monsanto Europe NV, Monsanto Technology LLC. and Monsanto Argentina SAIC—controlled by Monsanto Company—as well as Monsanto Company itself (hereinafter Monsanto) could be involved in practices afoul of Law 25.156, and therefore decided to charge it of the facts listed in Annex I . . . In said Annex I, CNDC emphasized that Monsanto seemed to have launched in various countries of the European Economic Community legal proceedings—and obtained cease and desist orders in the Netherlands, Denmark and Spain for the first quarter of 2005—aiming at obstructing the commerce of soy flour and other derived products originated in Argentina, alleging the infringement of intellectual property rights in “Round Up Ready Soya” (“RR Soya”), and with the intent of charging royalties from those who sold or traded those products. Moreover, it stated that those acts caused damages to the European importers of Argentinean products and created a state of legal uncertainty as regards the international trade of products derived from soya produced in Argentina, with harmful effects and consequences on the production, transformation and trade of that products. . . . It clarified that, although Monsanto owned intellectual property rights in the active principle of gliphosate, in Argentina the application for the revalidation patent for the gene was rejected on the ground that, when it was filed (1995), it was in the public

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domain. Nevertheless, Monsanto had charged royalties through the agreements with the seed producers that developed seeds contained the mentioned gene. Moreover, the Commission noted that the introduction of the technical package “RR Soya-Gliphosate” had contributed to higher productivity and, thus, to a remarkable growth of the production and the surface planted with soya in the country (50%), “Soya RR” representing 98%. Consequently, Monsanto had gained through the direct sale of “RR Soya” seeds—or through royalties imposed on seed producers—and of “Round Up” herbicide. It also noted that Monsanto owns intellectual property rights in “RR Soya” in Europe. Concerning the legal proceedings launched by Monsanto in Europe, it said that cautionary injunctions had been obtained in the absence of any decision on whether there was effectively an infringement of the alleged patents, and added that, in accordance with the defenses presented by the importers of soy flour in the EEC, the rights invoked by Monsanto were not legitimate, given that: a) those rights only can reach the soya seeds for planting, but not the soya seeds for commercialization as grain, let alone the products derived therefrom; b) there was no infringement of the Argentinean patent law because Monsanto, on its own fault, has no patent on the RR gene in the country in which the seed was planted; c) in the processed product it is impossible to differentiate the origin of the soya that was used as ingredient, because a portion of the soya seeds is or was sold by Monsanto itself or by its licensees, or it was legitimately acquired as a result of the multiplication done by the producer itself, and therefore it is impossible to determine whether royalties were paid or not for the use of the gene. . . . It is opportune to remind that the National Constitution recognized the right of petition to governmental authorities (art. 14). Petitions to the bodies of administration of justice are linked to the right of jurisdiction. This right has a constitutional basis and has been acknowledged by the Supreme Court of Justice of the Nation . . . The first of the consequences that are associated with the right of petition (art. 14 of the National Constitution) is of not being sanctioned as a result of petitioning something to a State body (right of simple petition). On the other hand, from arts 18 and 33 of the National Constitution emerges the right to jurisdiction, which means the possibility of acceding to a court of justice and obtaining a decision that constitutes a reasoned derivation of applicable law; it is a qualified right of petition, whose owner has, above the owner of a “right of simple petition,” the prerogative of not being sanctioned by exercising it and obtaining an answer from the State . . . From that perspective, one concludes that the right of petition, in general, and the right to jurisdiction, in special, obey a constitutional hierarchy, taking into account that they ensure the access to justice and the due procedure, which is indispensable to obtain a judicial decision concerning other rights that may have the same ranking. Therefore, the simple lodging of a judicial action may not constitute in itself an unlawful act. However, that constitutional right—like all other rights recognized by the Fundamental law—is not absolute, i.e., it is susceptible both of being regulated (arts. 14 and 28 of the National Constitution) and of being limited, with a view either of

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coordination the right of one with the right of another, or with the objective of achieving its social function in accordance with the common good. . . The relativity of rights lends a constitutional basis to the theory of abuse of rights, according to which subjective rights are limited or must attend a social function, as set by law . . . However, the requirements of the abusive exercise of rights are necessarily . . . of an exceptional character, and therefore judges must make a restrictive use of that institute . . . In the matter of antitrust, the case law of the courts of the United States has elaborated, based on two opinions of the Supreme Court of 1961 and 1965 (Noerr v. Eastern Railroads, 365 US 127, SCt. and Pennington v. United Mine Workers, 381 US 657), the doctrine known as “Noerr-Pennington”—invoked by the appellants—according to which unilateral or concerted actions aimed at influencing government decisions are not anticompetitive, even if they have the objective of restraining competition or harming other competitors, thereby leading to the conclusion that antitrust law sanctions those practices of restraint of trade that result from the actions of private agents, not the situations arising from decisions by the government in the exercise of its administrative and regulatory functions. Nevertheless, United States courts have deemed as part of a punishable anticompetitive strategy certain practices of private agents that consist of abusing administrative and judicial procedures, with the purpose of restricting the access of competitors to the market, including “frivolous litigation” (Professional Real Estate Investors, Inc. v. Columbia Pictures Industries, Inc., of 1993, 508 US 49 Sct.), i.e., those actions that have no solid ground, other than the sole objective of delaying a given situation so as to interfere directly in the commercial relations of a competitor . . . 7. In this context one must conclude that neither the CNDC’s decision that dismissed the objection raised by Monsanto Company and Monsanto Argentina as regards lack of ground, nor the act that motivated the opening of the proceeding under art. 29 of the Competition Law, contains any reason whatsoever that allows to infer that the lodging of legal actions in some countries of the EEC against the alleged infringement of Monsanto’s European patents is susceptible of constituting a conduct that, in itself, may be punished in accordance with Law 25,156. Nor does the Commission explain how those legal actions, alone, have the purpose of limiting, restraining, deceiving, or distorting competition or market entry, in a way that prejudices the general economic interest, and thus it justifies the opening of the proceeding for investigating the companies involved in the alleged practices that gave cause to it. . . . Anyway, CNDC apparently suggests that the blameful conduct would consist of a strategy elaborated by Monsanto—based on its legal situation concerning the “RR Gene” in Argentina—with the purpose of charging in an illegitimate manner royalties on exports of soya flour from our country . . . Such was deduced in Europe through the launching of legal actions, which, according to the records, would not have been decided. And with that evidence, one cannot conclude but that—so far—it is just about the right of petition to the judicial authorities of foreign countries, for which the CNDC has failed demonstrate, even

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prima facie at this preliminary stage, how it would affect the relevant geographic market as well as the product—regarding which no precisions have been submitted—with potential harm to the general economic interest. The remaining practices that the Commission took into account to dismiss the objection filed would be the precautionary measures adopted in the aforementioned courts. Neither of these acts can, in principle, be attributed the effects intended by the CNDC, given that, besides being judicial decisions of courts of European countries, it has not been shown in any way that, by their nature and extent, they would have the object or effect foreseen in art. 1 of Law Act 25,156. Nor, in the present circumstances, can a statement, even preliminary, be issued that relates to the legitimacy of the rights and defenses that each of the parties have invoked in legal proceedings in course in Europe, especially when they are still pending decisions by the engaged courts. On the other hand, from the records of this case, it does not emerge that the right to petition has been improperly exercised for the purpose of restricting competition. . . . In short, at this time there are no factual elements in the record that are sufficient to determine that Monsanto Company and/or Monsanto Argentina incurred, according to the statement of the facts and the reasoning that led to the lodging of this procedure and the provisions of art. 29 of the Competition Law, in some practice contrary to the defense of competition, under Law 25.156, for which reason the objection of lack of ground raised by the investigated companies and dismissed by the CNDC, must be admitted. . . .

61. Sanofi Aventis v. Instituto Nacional da Propriedade Industrial (INPI), Civil Appeal 2008.51.01.817159-7 (2010) FEDERAL REGIONAL COURT OF THE SECOND REGION, BRAZIL (Second Specialized Chamber) Opinion delivered by Federal Appellate Judge Liliane Roriz. In the case at bar, the firm Sanofi-Aventis proposed an ordinary action aiming to obtain the correction of the term of protection of pipeline patent PI 1100249-2, so as to adjust it to the extended term accorded to patent EP 373.998, upon which it was based, in accordance with the provisions of §4 of art. 230 of the Industrial Property Law. The learned judge a quo decided to accept the preliminary objection raised by INPI, on laches, thereby dismissing the action on merits, in accordance with art 269, IV, of the Code of Civil procedure, and deeming the plaintiff-appellant as abusive litigator. ... The appellant objects the decision on the argument that art. 56 of the Industrial Property Law says explicitly that the action for questioning the validity of a patent may be proposed at any time during its term, which fits the case at bar, where the action aims precisely at challenging/invalidating the term of the patent in question, which was wrongly accorded by INPI, so that the correct term be accorded.

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It states, moreover, that the decisum has wrongly assumed that the appellant has behaved abusively, to the extent the litigator should be sanctioned only when the abuse of the right to petition is proved, having in view that the Judiciary may not ignore the constitutional guaranties, including that of full access to the Judicary, otherwise the parties will be inhibited from fighting for what they understand is their right. . . . [T]he patent owner had until 11/05/2004 to challenge in court the term set [on the patent], if he disagreed. However, the action was proposed on 02/12/2008 only—the last day of the patent term—much beyond the deadline for initiating the action. Moreover, because no preliminary injunction was granted so as to protect the effects of the action until its final decision, the patent feel in public domain on the next day after the beginning of the action, thereby cancelling the right to obtain the requested extension. Finally, the appellant attacks the fine imposed on abusive litigation, as per art. 17, proviso III, of the Code of Civil Procedure: Art. 17. It shall be deemed litigator in bad faith the one who: (…) III – uses the procedure to attain an illegal objective.

The recognition of bad faith litigation presumes the part’s willful misconduct, i.e., a conduct intentionally malicious and reckless, incompatible with the duty of acting with loyalty. . . . It should be added that in the national legal system the principle of the presumption of good faith in legal relationships prevails, whereas the recognition of bad faith unequivocally requires proof. In the case at bar, the deciding judge saw bad faith in the circumstance of the action having been initiated on the last day of the patent term, as follows: . . . it must be recognized that, in initiating this suit on the last day of the patent term, the plaintiff has obtained, in fact, the extension of her monopoly term by one year, given that hardly another company will commercialize the same product on the market, given the threat of unduly infringing the plaintiff’s patent. . . .

As said above, the patent term expired during the course of the action, given that the plaintiff has not obtained a preliminary injunction that could have protected its privilege, the plaintiff herself having admitted that she had not even requested such measure. . . . Therefore, the fact that the action was initiated on the last day of the patent term has not conferred, concretely, the extension of the monopoly, as the averred by learned judge. In other words, the “benefit” supposedly obtained by the plaintiff has never existed. On the other hand, the possibility that other firms may have been inhibited from commercializing the same product on the market is a merely indirect consequence, arising from a business option of those firms, such behavior not being susceptible of being considered as plaintiff’s bad faith.

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Moreover, there is no evidence in the record that those other firms were harmed by the exercise of appellant’s right to seek judicial remedy. It is worth emphasizing that, at that time, there was no decision on what the deadline for that kind of action would be, which strengthens the conclusion of absence of bad faith. On the other hand, it is not possible to say that the appellant, in initiating the action, sought an “illegal objective,” for it only wished to make its legal thesis to prevail, in accordance with the reasons stated in the initial briefing. Therefore I conclude that the defense of a wrong legal thesis, given its inapplicability to the facts, or even the starting of a law suit affected by laches, do not configure, alone, bad faith litigation, to the extent they do not necessarily translate hypothesis of manifestly willful misconduct. Thus, I conclude by accepting the appellant’s plea and exclude the fine that was imposed on her on ground of bad faith litigation. . . .

[b]

Walker Process Test 42. The Nobelpharma court has proposed a distinction between the enforcement of intellectual property acquired through simple omission and the enforcement of intellectual property acquired through fraud. In the first case, it would be a matter of inequitable conduct, whose consequence would be unenforceability. In the second case the consequences would be more severe because it would involve an antitrust violation (if, besides the fraud, market power and anticompetitive effects are shown). The Walker Process test would apply to the second case, only. Following the distinction proposed by the Nobelpharma opinion, the YKK case (Brazil) would be a case of inequitable conduct (the dishonest competitor behaved opportunistically, but with no fraud), regardless of any market power the plaintiff could have. 43. However, Nobelpharma’s distinction may be disputable. In effect, the proposed distinction seems to lend a moralistic tone to antitrust law, given that the heavy sanctions of antitrust only would apply in the face of fraud, as opposed to simple ommission. However, the moralistic tone is specific to unfair competition law, not to antitrust law, which is based on objective criteria. Actually, other courts have failed to see that distinction. Take, for example, CVD, INC. v. Raytheon Co. (case no. 56). In that opinion, the Court of Appeals for the First Circuit held that “the assertion of a trade secret claim in bad faith, in an attempt to monopolize, can be a violation of the antitrust laws.” However, trade secrets are not prone to be acquired through fraud, because acquisition of rights in secrets does not depend on any formality. It is true that the court has noted that Raytheon had neglected a formal aspect (the declaration of interest by the company’s Patent Department in keeping the information secret), but that was an aspect that was internal to the company and was not determinant to ensure the protection of corresponding rights. Raytheon’s failure in following internal procedures was taken as a suggestion that the company was aware that the information was not secret. 44. After all, in “inequitable conduct” the conduct that is sanctioned as being inequitable is the claim of knowingly invalid rights, not the acquisition of the rights. Therefore, even where intellectual property rights may be acquired without the need for a formal administrative procedure, such as trade secrets and copyrights, their enforcement may be deemed inequitable.

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62. Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172 (1965) SUPREME COURT OF THE UNITED STATES Mr. Justice Clark delivered the opinion of the Court. The question before us is whether the maintenance and enforcement of a patent obtained by fraud on the Patent Office may be the basis of an action under § 2 of the Sherman Act, and therefore subject to a treble damage claim by an injured party under §4 of the Clayton Act. The respondent, Food Machinery & Chemical Corp. (hereafter Food Machinery), filed this suit for infringement of its patent No. 2,328,655 covering knee-action swing diffusers used in aeration equipment for sewage treatment systems. Petitioner, Walker Process Equipment, Inc. (hereafter Walker), denied the infringement and counterclaimed for a declaratory judgment that the patent was invalid. After discovery, Food Machinery moved to dismiss its complaint with prejudice because the patent had expired. Walker then amended its counterclaim to charge that Food Machinery had “illegally monopolized interstate and foreign commerce by fraudulently and in bad faith obtaining and maintaining . . . its patent . . . well knowing that it had no basis for . . . a patent.” It alleged fraud on the basis that Food Machinery had sworn before the Patent Office that it neither knew nor believed that its invention had been in public use in the United States for more than one year prior to filing its patent application when, in fact, Food Machinery was a party to prior use within such time. The counterclaim further asserted that the existence of the patent had deprived Walker of business that it would have otherwise enjoyed. Walker prayed that Food Machinery’s conduct be declared a violation of the antitrust laws and sought recovery of treble damages. The District Court granted Food Machinery’s motion and dismissed its infringement complaint along with Walker’s amended counterclaim, without leave to amend and with prejudice. The Court of Appeals for the Seventh Circuit affirmed, 335 F.2d 315. We granted certiorari, 379 U.S. 957.We have concluded that [HN3] the enforcement of a patent procured by fraud on the Patent Office may be violative of § 2 of the Sherman Act provided the other elements necessary to a §2 case are present. In such event the treble damage provisions of §4 of the Clayton Act would be available to an injured party. As the case reaches us, the allegations of the counterclaim, as to the fraud practiced upon the Government by Food Machinery as well as the resulting damage suffered by Walker, are taken as true. We, therefore, move immediately to a consideration of the legal issues presented. Both Walker and the United States, which appears as amicus curiae, argue that if Food Machinery obtained its patent by fraud and thereafter used the patent to exclude Walker from the market through “threats of suit” and prosecution of this infringement suit, such proof would establish a prima facie violation of § 2 of the Sherman Act. On the other hand, Food Machinery says that a patent monopoly and a Sherman Act monopolization cannot be equated; the removal of the protection of a patent grant

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because of fraudulent procurement does not automatically result in a § 2 offense. Both lower courts seem to have concluded that proof of fraudulent procurement may be used to bar recovery for infringement, Precision Instrument Mfg. Co. v. Automotive Maintenance Machinery Co., 324 U.S. 806 (1945), but not to establish invalidity. As the Court of Appeals expressed the proposition, “only the government may ‘annul or set aside’ a patent,” citing Mowry v. Whitney, 14 Wall. 434 (1872). It went on to state that no case had “decided, or hinted that fraud on the Patent Office may be turned to use in an original affirmative action, instead of as an equitable defense. . . . Since Walker admits that its anti-trust theory depends on its ability to prove fraud on the Patent Office, it follows that . . . Walker”s second amended counterclaim failed to state a claim upon which relief could be granted.” 335 F.2d, at 316. We have concluded, first, that Walker’s action is not barred by the rule that only the United States may sue to cancel or annul a patent. It is true that there is no statutory authority for a private annulment suit and the invocation of the equitable powers of the court might often subject a patentee “to innumerable vexatious suits to set aside his patent.” Mowry, supra, at 441. But neither reason applies here. Walker counterclaimed under the Clayton Act, not the patent laws. While one of its elements is the fraudulent procurement of a patent, the action does not directly seek the patent’s annulment. The gist of Walker’s claim is that since Food Machinery obtained its patent by fraud it cannot enjoy the limited exception to the prohibitions of §2 of the Sherman Act, but must answer under that section and §4 of the Clayton Act in treble damages to those injured by any monopolistic action taken under the fraudulent patent claim. Nor can the interest in protecting patentees from “innumerable vexatious suits” be used to frustrate the assertion of rights conferred by the antitrust laws. It must be remembered that we deal only with a special class of patents, i. e., those procured by intentional fraud. Under the decisions of this Court a person sued for infringement may challenge the validity of the patent on various grounds, including fraudulent procurement. E. g., Precision Instrument Mfg. Co. v. Automotive Maintenance Machinery Co., 324 U.S. 806 (1945); Hazel-Atlas Co. v. Hartford-Empire Co., 322 U.S. 238 (1944); Keystone Driller Co. v. General Excavator Co., 290 U.S. 240 (1933). In fact, one need not await the filing of a threatened suit by the patentee; the validity of the patent may be tested under the Declaratory Judgment Act, 28 U. S. C. §2201 (1964 ed.). See Kerotest Mfg. Co. v. C-O Two Fire Equipment Co., 342 U.S. 180, 185 (1952). At the same time, we have recognized that an injured party may attack the misuse of patent rights. See, e. g., Mercoid Corp. v. Mid-Continent Investment Co., 320 U.S. 661 (1944). To permit recovery of treble damages for the fraudulent procurement of the patent coupled with violations of §2 accords with these long-recognized procedures. It would also promote the purposes so well expressed in Precision Instrument, supra, at 816: A patent by its very nature is affected with a public interest. . . . [It] is an exception to the general rule against monopolies and to the right to access to a free and open market. The far-reaching social and economic consequences of a patent, therefore, give the public a paramount interest in seeing that patent monopolies spring from backgrounds free from fraud or other inequitable conduct and that such monopolies are kept within their legitimate scope.

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Walker’s counterclaim alleged that Food Machinery obtained the patent by knowingly and willfully misrepresenting facts to the Patent Office. Proof of this assertion would be sufficient to strip Food Machinery of its exemption from the antitrust laws. By the same token, Food Machinery’s good faith would furnish a complete defense. This includes an honest mistake as to the effect of prior installation upon patentability—so-called “technical fraud.” To establish monopolization or attempt to monopolize a part of trade or commerce under § 2of the Sherman Act, it would then be necessary to appraise the exclusionary power of the illegal patent claim in terms of the relevant market for the product involved. Without a definition of that market there is no way to measure Food Machinery’s ability to lessen or destroy competition. It may be that the device—kneeaction swing diffusers—used in sewage treatment systems does not comprise a relevant market. There may be effective substitutes for the device which do not infringe the patent. This is a matter of proof, as is the amount of damages suffered by Walker. As respondent points out, Walker has not clearly articulated its claim. It appears to be based on a concept of per se illegality under § 2of the Sherman Act. But in these circumstances, the issue is premature. As the Court summarized in White Motor Co. v. United States, 372 U.S. 253 (1963), the area of per se illegality is carefully limited. We are reluctant to extend it on the bare pleadings and absent examination of market effect and economic consequences. However, even though the per se claim fails at this stage of litigation, we believe that the case should be remanded for Walker to clarify the asserted violations of §2 and to offer proof thereon. The trial court dismissed its suit not because Walker failed to allege the relevant market, the dominance of the patented device therein, and the injurious consequences to Walker of the patent’s enforcement, but rather on the ground that the United States alone may “annul or set aside” a patent for fraud in procurement. The trial court has not analyzed any economic data. Indeed, no such proof has yet been offered because of the disposition below. In view of these considerations, as well as the novelty of the claim asserted and the paucity of guidelines available in the decided cases, this deficiency cannot be deemed crucial. Fairness requires that on remand Walker have the opportunity to make its §2 claims more specific, to prove the alleged fraud, and to establish the necessary elements of the asserted §2 violation. . . .

63. Nobelpharma AB v. Implant Innovations, Inc., 141 F.3d 1059 (Fed. Cir. 1998) UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT Opinion by Lourie, Circuit Judge. Nobelpharma AB and Nobelpharma USA, Inc. (collectively, NP) appeal from the judgment of the United States District Court for the Northern District of Illinois holding that (1) U.S. Patent 4,330,891 is invalid under 35 U.S.C. § 112, P 1 (1994), for failure to

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disclose the best mode of carrying out the invention, (2) Implant Innovations, Inc. (3I) did not infringe the ‘891 patent, and (3) NP was not entitled to JMOL[judgment as a matter of law] or, in the alternative, a new trial following the jury verdict in favor of 3I on its antitrust counterclaim against NP, Dr. Per-Ingvar Branemark, and the Institute for Applied Biotechnology. See Nobelpharma AB v. Implant Innovations, Inc., 930 F. Supp. 1241 (N.D. Ill. 1996). We conclude that the district court did not err in granting judgment that the patent is invalid as a matter of law at the close of NP’s case-in-chief, and that it did not err in denying NP’s motion for JMOL or a new trial on the antitrust counterclaim. Accordingly, the decision of the district court is affirmed. Drs. Branemark and Bo-Thuresson af Ekenstam are the named inventors on the ‘891 patent, the application for which was filed in 1980 and claimed priority from a Swedish patent application that was filed in 1979. The patent claims “an element intended for implantation into bone tissue.” This “element,” when used as part of a dental implant, is placed directly into the jawbone where it acts as a tooth root substitute. The implants described and claimed in the patent are preferably made of titanium and have a network of particularly-sized and particularly-spaced “micropits.” These micropits, which have diameters in the range of about 10 to 1000 nanometers or, preferably, 10 to 300 nanometers, allow a secure connection to form between the implant and growing bone tissue through a process called “osseointegration.” Branemark is also one of the authors of a book published in 1977, entitled “Osseointegrated Implants in the Treatment of the Edentulous Jaw Experienced from a 10-Year Period” (hereinafter “the 1977 Book”). As its title suggests, this book describes a decade-long clinical evaluation of patients who had received dental implants. The 1977 Book includes a single page containing four scanning electron micrographs (SEMs) of titanium implants that exhibit micropits. The caption describing these SEMs reads, in part: “Irregularities are produced during manufacturing in order to increase the retention of the implants within the mineralized tissue.” 3I determined, based on measurements and calculations that it presented to the trial court, that the micropits shown in the 1977 Book have diameters within the range claimed in the ‘891 patent. However, the 1977 Book does not specifically refer to “micropits.” In preparing to file the Swedish patent application, af Ekenstam submitted a draft written description of the invention to the inventors’ Swedish patent agent, Mr. Barnieske. This draft referred to the 1977 Book in the following translated passage: In ten years of material pertaining to titanium jaw implants in man, Branemark et al. [in the 1977 Book] have shown that a very high frequency of healing, as stated above, can be achieved by utilizing a carefully developed surgical technique and adequately produced implants.

However, Barnieske deleted all reference to the 1977 Book from the patent application that was ultimately filed in Sweden. Similarly, the 1977 Book is not mentioned in the U.S. patent application filed by Barnieske on behalf of Branemark and af Ekenstam. In June 1980, while the U.S. patent application was pending, Branemark entered into an exclusive license agreement with NP covering the claimed technology. Barnieske kept NP informed of the prosecution of the U.S. patent application and received

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assistance from NP’s U.S. patent agent. The ‘891 patent issued in 1982; NP has since asserted it in at least three patent infringement suits. In July 1991, while Branemark was a member of NP’s Board of Directors, NP brought this suit alleging that certain of 3I’s dental implants infringed the ‘891 patent. 3I defended on the grounds of invalidity, unenforceability, and non-infringement. 3I also brought an antitrust counterclaim, based in part on the assertion that NP attempted to enforce a patent that it knew was invalid and unenforceable. Specifically, 3I alleged that when NP brought suit, NP was aware that the inventors’ intentional failure to disclose the 1977 Book to the U.S. Patent and Trademark Office (PTO) would render the ‘891 patent unenforceable. During its case-in-chief, NP introduced portions of a deposition of Branemark that apparently was conducted several years before this trial began in connection with a lawsuit involving neither NP nor 3I. NP also introduced into evidence portions of that deposition that were counter-designated for introduction by 3I. Branemark’s deposition testimony included his admissions that one “could consider” the procedure used to manufacture the micropitted surface a trade secret, and “it might be” that there are details “important to making” the micropitted surface that are not disclosed in the patent. At the close of NP’s case-in-chief, the district court granted 3I’s motion for JMOL of invalidity and non-infringement. The court held that the patent was invalid under §112, P 1, for failure to disclose the best mode and that NP had failed to prove infringement. The court then denied NP’s motion for JMOL on 3I’s antitrust counterclaim, proceeded to inform the jury that the court had held the patent invalid, and allowed 3I to present the counterclaim to the jury. After trial limited to the antitrust issue, the jury found in special verdicts, inter alia, that 3I had proven that (1) “the inventors or their agents or attorneys obtained the ‘891 patent through fraud,” (2) NP “had knowledge that the ‘891 patent was obtained by fraud at the time this action was commenced against 3I,” and (3) NP “brought this lawsuit against 3I knowing that the ‘891 patent was either invalid or unenforceable and with the intent of interfering directly with 3I’s ability to compete in the relevant market.” The jury awarded 3I approximately $ 3.3 million in compensatory damages, an amount the court trebled pursuant to section 4 of the Clayton Act, 15 U.S.C. § 15 (1994). The court declined to rule on whether the patent was unenforceable for inequitable conduct, concluding that its judgment of invalidity rendered the issue of enforceability moot. Nobelpharma AB v. Implant Innovations, Inc., 875 F. Supp. 481 (N.D. Ill. 1995). The court then denied NP’s renewed motion for JMOL on the counterclaim or, in the alternative, for a new trial on both the counterclaim and the infringement claim. Nobelpharma AB, 930 F. Supp. at 1246. In denying NPs post-verdict motion for a new trial on the issue of infringement, the district court again concluded that the patent was invalid for failure to disclose the best mode. Id. at 1247-49. The court also concluded that NP was not entitled to JMOL on the counterclaim because, inter alia, “NP, as the assignee of the patent, maintained and enforced the patent with knowledge of the patent’s fraudulent derivation.” Id. at 1257. The court denied NP’s motion for a new trial on the counterclaim, holding, inter alia, that it did not err in its evidentiary rulings

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or in refusing to instruct the jury that in order to impose antitrust liability against NP, it must find NPs lawsuit “objectively baseless.” Id. at 1264. NP appealed to this court, challenging the district court’s grant of 3I’s motion for JMOL of invalidity and non-infringement and its denial of the post-verdict motion for JMOL or a new trial. . . . After the jury returned its verdict in favor of 3I on its counterclaim that NP violated the antitrust laws by bringing suit against 3I, the court denied NP’s motion for JMOL or, in the alternative, for a new trial under Fed. R. Civ. P. 50(b). In denying NP’s motion, the district court held that the verdict was supported, inter alia, by the jury’s factual findings that the patent was obtained through “NP’s knowing fraud upon, or intentional misrepresentations to, the [PTO]” and that “NP maintained and enforced the patent with knowledge of the patent’s fraudulent derivation” and with the intent of interfering directly with 3I’s ability to compete in the relevant market. 930 F. Supp. at 1257. The court further held, based on these findings, that the jury need not have considered whether NP’s suit was “objectively baseless.’ Id. at 1264. In support of its position that the court erred in denying its renewed motion for JMOL, NP argues that there was a lack of substantial evidence to support the jury’s findings that the patent was obtained through “fraud” and that NP was aware of that conduct when it brought suit against 3I. NP also argues that these findings, even if supported by substantial evidence, do not provide a legal basis for the imposition of antitrust liability. Finally, NP argues that it is entitled to a new trial because the court failed to instruct the jury that bringing a lawsuit cannot be the basis for antitrust liability if that suit is not “objectively baseless.” 3I responds that the jury’s explicit findings that the patent was procured through fraudulent conduct and that NP knew of that conduct when it brought suit were supported by substantial evidence, and that these findings provide a sound basis for imposing antitrust liability on NP. Responding to NP’s arguments for a new trial, 3I argues that an “objectively reasonable” or “objectively baseless” jury instruction was not necessary because the district court required that 3I prove that NP had actual knowledge of the fraud when it brought suit and that even if such an instruction had been necessary, NP waived this argument by failing to propose a jury instruction relating to an “objectively baseless” standard. We agree with 3I that the court did not err in denying NP’s motion for JMOL because substantial evidence supports the jury’s findings that the patent was fraudulently obtained and that NP sought to enforce the patent with knowledge of its fraudulent origin. Similarly, the court did not err in denying N’s motion for a new trial because NP was not prejudiced by any legally erroneous jury instruction. . . . A patentee who brings an infringement suit may be subject to antitrust liability for the anti-competitive effects of that suit if the alleged infringer (the antitrust plaintiff) proves (1) that the asserted patent was obtained through knowing and willful fraud within the meaning of Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172, 177 (1965), or (2) that the infringement suit was “a mere sham to cover what is actually nothing more than an attempt to interfere directly with the business relationships of a competitor,” Eastern R.R. Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127, 144 (1961); California Motor Transp. Co. v. Trucking

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Unlimited, 404 U.S. 508, 510 (1972) (holding that Noerr “governs the approach of citizens or groups of them . . . to courts, the third branch of Government”). See Professional Real Estate Investors, Inc. v. Columbia Pictures Indus., Inc., 508 U.S. 49, 62 n.6 (1993) (PRE) (declining to decide “whether and, if so, to what extent Noerr permits the imposition of antitrust liability for a litigant’s fraud or other misrepresentations”). In Walker Process, the Supreme Court held that in order “to strip [a patentee] of its exemption from the antitrust laws” because of its attempting to enforce its patent monopoly, an antitrust plaintiff is first required to prove that the patentee “obtained the patent by knowingly and willfully misrepresenting facts to the [PTO].” 382 U.S. at 177. The plaintiff in the patent infringement suit must also have been aware of the fraud when bringing suit. Id. at 177 & n.6. The Court cited prior decisions that involved the knowing and willful misrepresentation of specific facts to the Patent Office: Precision Instrument Manufacturing v. Automotive Maintenance Machinery Co., 324 U.S. 806 (1945) (misrepresenting that the inventor had conceived, disclosed, and reduced to practice the invention on certain dates); Hazel-Atlas Glass Co. v. Hartford-Empire Co., 322 U.S. 238 (1944) (misrepresenting that a widely known expert had authored an article praising the invention); and Keystone Driller Co. v. General Excavator Co., 290 U.S. 240 (1933) (involving an agreement to suppress evidence in the course of litigation). These cases indicate the context in which the Court established the knowing and willful misrepresentation test. Justice Harlan, in a concurring opinion, emphasized that to “achieve a suitable accommodation in this area between the differing policies of the patent and antitrust laws,” a distinction must be maintained between patents procured by “deliberate fraud” and those rendered invalid or unenforceable for other reasons. Walker Process, 382 U.S. at 179-80. He then stated: To hold, as we do not, that private antitrust suits might also reach monopolies practiced under patents that for one reason or another may turn out to be voidable under one or more of the numerous technicalities attending the issuance of a patent, might well chill the disclosure of inventions through the obtaining of a patent because of fear of the vexations or punitive consequences of treble-damage suits. Hence, this private antitrust remedy should not be deemed available to reach [Sherman Act] § 2 monopolies carried on under a nonfraudulently procured patent. Id. at 180.

Consistent with the Supreme Court’s analysis in Walker Process, as well as Justice Harlan’s concurring opinion, we have distinguished “inequitable conduct” from Walker Process fraud, noting that inequitable conduct is a broader, more inclusive concept than the common law fraud needed to support a Walker Process counterclaim. See, e.g., Hewlett-Packard Co. v. Bausch & Lomb Inc., 882 F.2d 1556, 1563 (Fed. Cir. 1989); FMC Corp. v. Manitowoc Co., 835 F.2d 1411, 1417-18 (Fed. Cir. 1987); Argus Chem., 812 F.2d at 1384-85; J.P. Stevens & Co. v. Lex Tex Ltd., 747 F.2d 1553, 1559 (Fed. Cir. 1984) (“Conduct before the PTO that may render a patent unenforceable is broader than common law fraud.”). Inequitable conduct in fact is a lesser offense than common law fraud, and includes types of conduct less serious than “knowing and willful” fraud.

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In Norton v. Curtiss, 433 F.2d 779, 792-94 & n.12 (CCPA 1970), our predecessor court explicitly distinguished inequitable conduct from “fraud,” as that term was used by the Supreme Court in Walker Process. The court noted that: the concept of “fraud” has most often been used by the courts, in general, to refer to a type of conduct so reprehensible that it could alone [**31] form the basis of an actionable wrong (e.g., the common law action for deceit.) . . . . Because severe penalties are usually meted out to the party found guilty of such conduct, technical fraud is generally held not to exist unless the following indispensable elements are found to be present: (1) a representation of a material fact, (2) the falsity of that representation, (3) the intent to deceive or, at least, a state of mind so reckless as to the consequences that it is held to be the equivalent of intent (scienter), (4) a justifiable reliance upon the misrepresentation by the party deceived which induces him to act thereon, and (5) injury to the party deceived as a result of his reliance on the misrepresentation. See, e.g., W. Prosser, Law of Torts, §§ 100-05 (3d ed. 1964); 37 C.J.S. Fraud § 3 (1943).

433 F.2d at 792-793; see also J.P. Stevens, 747 F.2d at 1559 (citing Norton). The court then contrasted such independently actionable common law fraud with lesser misconduct, including what we now refer to as inequitable conduct, which “fails, for one reason or another, to satisfy all the elements of the technical offense.” Norton, 433 F.2d at 793. Regarding such misconduct, “the courts appear to look at the equities of the particular case and determine whether the conduct before them . . . was still so reprehensible as to justify the court’s refusing to enforce the rights of the party guilty of such conduct.” Id. Inequitable conduct is thus an equitable defense in a patent infringement action and serves as a shield, while a more serious finding of fraud potentially exposes a patentee to antitrust liability and thus serves as a sword. See Korody-Colyer Corp. v. General Motors Corp., 828 F.2d 1572, 1578 (Fed. Cir. 1987); see also Norton, 433 F.2d at 796 (“Where fraud is committed, injury to the public through a weakening of the Patent System is manifest.”). Antitrust liability can include treble damages. See 15 U.S.C. §15(a) (1994). In contrast, the remedies for inequitable conduct, while serious enough, only include unenforceability of the affected patent or patents and possible attorney fees. See 35 U.S.C. §§ 282, 285 (1994). Simply put, Walker Process fraud is a more serious offense than inequitable conduct. In this case, the jury was instructed that a finding of fraud could be premised on “a knowing, willful and intentional act, misrepresentation or omission before the [PTO].” This instruction was not inconsistent with various opinions of the courts stating that omissions, as well as misrepresentations, may in limited circumstances support a finding of Walker Process fraud. See, e.g., Rolite, Inc. v. Wheelabrator Envtl. Sys., Inc., 958 F. Supp. 992, 1006 (E.D. Pa. 1997) (finding an allegation of “fraud by omission” in a Walker Process claim sufficient to overcome defendant’s motion to dismiss); United States v. Ciba-Geigy Corp., 508 F. Supp. 1157, 1170 (D.N.J. 1979) (stating, in the context of Walker Process: “A misrepresentation is material if the patent would not have issued ‘but for’ the omission”). We agree that if the evidence shows that the asserted patent was acquired by means of either a fraudulent misrepresentation or a fraudulent omission and that the party asserting the patent was aware of the

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fraud when bringing suit, such conduct can expose a patentee to liability under the antitrust laws. We arrive at this conclusion because a fraudulent omission can be just as reprehensible as a fraudulent misrepresentation. In addition, of course, in order to find liability, the necessary additional elements of a violation of the antitrust laws must be established. See Walker Process, 382 U.S. at 178. Such a misrepresentation or omission must evidence a clear intent to deceive the examiner and thereby cause the PTO to grant an invalid patent. See 433 F.2d at 794 (“The fact misrepresented must be ‘the efficient, inducing, and proximate cause, or the determining ground’ of the action taken in reliance thereon.”) (quoting 37 C.J.S. Fraud §18 (1943)). In contrast, a conclusion of inequitable conduct may be based on evidence of a lesser misrepresentation or an omission, such as omission of a reference that would merely have been considered important to the patentability of a claim by a reasonable examiner. See J.P. Stevens, 747 F.2d at 1559. A finding of Walker Process fraud requires higher threshold showings of both intent and materiality than does a finding of inequitable conduct. Moreover, unlike a finding of inequitable conduct, see, e.g., Molins PLC v. Textron, Inc., 48 F.3d 1172, 1178-79 (Fed. Cir. 1995), a finding of Walker Process fraud may not be based upon an equitable balancing of lesser degrees of materiality and intent. Rather, it must be based on independent and clear evidence of deceptive intent together with a clear showing of reliance, i.e., that the patent would not have issued but for the misrepresentation or omission. Therefore, for an omission such as a failure to cite a piece of prior art to support a finding of Walker Process fraud, the withholding of the reference must show evidence of fraudulent intent. A mere failure to cite a reference to the PTO will not suffice. The district court observed that the Supreme Court, in footnote six of its PRE opinion, “left unresolved the issue of how ‘Noerr applies to the ex parte application process,’ and in particular, how it applies to the Walker Process claim.” 930 F. Supp. at 1253 . . . The court also accurately pointed out that we have twice declined to resolve this issue. See FilmTec Corp. v. Hydranautics, 67 F.3d 931, 939 n.2 (Fed. Cir. 1995), cert. denied, 117 S. Ct. 62 (1996); Carroll Touch, Inc. v. Electro Mechanical Sys., Inc., 15 F.3d 1573, 1583 n.10 (Fed. Cir. 1993). Therefore, after reviewing three opinions from the Ninth and District of Columbia Circuit Courts of Appeals, see Hydranautics v. FilmTec Corp., 70 F.3d 533, 537-38 (9th Cir. 1995); Whelan v. Abell, 48 F.3d 1247, 1255 (D.C. Cir. 1995); Liberty Lake Invs., Inc. v. Magnuson, 12 F.3d 155, 158-60 (9th Cir. 1993), the district court made its own determination that PRE’s two-part test for a sham is inapplicable to an antitrust claim based on the assertion of a patent obtained by knowing and willful fraud. See 930 F. Supp. at 1253. We do not agree with that determination. PRE and Walker Process provide alternative legal grounds on which a patentee may be stripped of its immunity from the antitrust laws; both legal theories may be applied to the same conduct. Moreover, we need not find a way to merge these decisions. Each provides its own basis for depriving a patent owner of immunity from the antitrust laws; either or both may be applicable to a particular party’s conduct in obtaining and enforcing a patent. The Supreme Court saw no need to merge these separate lines of cases and neither do we. Consequently, if the above-described elements of Walker Process fraud, as well as the other criteria for antitrust liability, are met, such liability can be imposed without

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the additional sham inquiry required under PRE. That is because Walker Process antitrust liability is based on the knowing assertion of a patent procured by fraud on the PTO, very specific conduct that is clearly reprehensible. On the other hand, irrespective of the patent applicant’s conduct before the PTO, an antitrust claim can also be based on a PRE allegation that a suit is baseless; in order to prove that a suit was within Noerr’s “sham” exception to immunity, an antitrust plaintiff must prove that the suit was both objectively baseless and subjectively motivated by a desire to impose collateral, anti-competitive injury rather than to obtain a justifiable legal remedy. PRE, 508 U.S. at 60-61. As the Supreme Court stated: First, the lawsuit must be objectively baseless in the sense that no reasonable litigant could realistically expect success on the merits. If an objective litigant could conclude that the suit is reasonably calculated to elicit a favorable outcome, the suit is immunized under Noerr, and an antitrust claim premised on the sham exception must fail. Only if challenged litigation is objectively meritless may a court examine the litigant’s subjective motivation. Under this second part of our definition of sham, the court should focus on whether the baseless lawsuit conceals “an attempt to interfere directly with the business relationships of a competitor,” through the “use [of] the governmental process—as opposed to the outcome of that process—as an anticompetitive weapon.” . . . Of course, even a plaintiff who defeats the defendant’s claim to Noerr immunity by demonstrating both the objective and the subjective components of a sham must still prove a substantive antitrust violation. Proof of a sham merely deprives the defendant of immunity; it does not relieve the plaintiff of the obligation to establish all other elements of his claim.

Id. (footnotes and internal citations omitted). Thus, under PRE, a sham suit must be both subjectively brought in bad faith and based on a theory of either infringement or validity that is objectively baseless. Accordingly, if a suit is not objectively baseless, an antitrust defendant’s subjective motivation is immaterial. Id. In contrast with a Walker Process claim, a patentee’s activities in procuring the patent are not necessarily at issue. It is the bringing of the lawsuit that is subjectively and objectively baseless that must be proved. As for the present case, we conclude that there exists substantial evidence upon which a reasonable fact finder could strip NP of its immunity from antitrust liability. In particular, there exists substantial evidence that the 1977 Book was fraudulently kept from the PTO during patent prosecution. The jury could reasonably have found that the 1977 Book was fraudulently withheld and that it disclosed the claimed invention. First, the jury could reasonably have concluded that Branemark, through his Swedish patent agent, Barnieske, withheld the 1977 Book with the requisite intent to defraud the PTO. The initial disclosure to Barnieske, provided by Branemark’s co-inventor, af Ekenstam, indicated that the studies described in the 1977 Book verified the utility of the claimed invention. While Barnieske did testify that he did not recall his thoughts during the prosecution of the patent and that he would have submitted the 1977 Book to the PTO if he had considered it relevant, the jury was free to disbelieve him. Barnieske could not explain, even in retrospect, why he deleted all reference to the 1977 Book. Importantly, the 1977 Book was thought by at least one inventor to be relevant, as evidenced by the initial disclosure to the patent agent, but it was inexplicably not later disclosed to the

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PTO. Also, as the author of the 1977 Book and an inventor, Branemark presumably knew of the book’s relevance to the invention and could have directed Barnieske not to disclose the book to the PTO. Thus, the jury could properly have inferred that Branemark had the requisite intent to defraud the PTO based on his failure to disclose the reference to the PTO. Such a scheme to defraud is the type of conduct contemplated by Walker Process. Second, substantial evidence upon which a reasonable jury could have relied also indicates that the 1977 Book was sufficiently material to justify a finding of fraud. 3I’s expert witness, Dr. Donald Brunette, testified that the SEMs of the 1977 Book depict dental implants having all the elements of the claims asserted by NP. Specifically, he explained how he had determined that the SEMs depict a “biologically flawless material” suitable for use as a dental implant. He also explained how he determined that the depicted micropits have diameters within the claimed range of approximately 10 to 1000 nanometers. Even Branemark, in this deposition testimony, conceded that it would not have been difficult to calculate the size of the micropits depicted in the 1977 Book, given the magnification factors provided in the captions to the SEMs. Accordingly, a reasonable jury could have found, based on the unambiguous claim language, that the 1977 Book anticipated the patent and that the examiner would not have granted the patent if he had been aware of the 1977 Book. Third, the record indicates that a reasonable jury could have found that NP brought suit against 3I with knowledge of the applicants’ fraud. A reasonable jury could have found that two of NP’s then-officers, Dr. Ralph Green, Jr. and Mr. Mats Nilsson, were aware of the fraud based on Green’s testimony that Nilsson told him: “If the Patent Office did not receive a copy of [the 1977 Book], and if that were true, then we would have a larger problem and that was fraud.” Green’s testimony also indicates that NP was aware that the 1977 Book was highly material and, in fact, likely rendered the patent invalid. Green testified that he, Nilsson, and Mr. George Vande Sande obtained a legal opinion from NP’s attorney, Mr. David Lindley, who indicated that if “we were to sue anyone on the patent we would lose in the first round. . . . There was prior art, not the least of which was this textbook [the 1977 Book] that would invalidate the patent.” Regarding NPs motion for a new trial, we have concluded that the court’s instructions to the jury regarding fraud, to which NP did not object, substantially comport with the law. Specifically, the court emphasized to the jury that to strip NP of its immunity from the antitrust laws, 3I “must prove that the ‘891 patent was fraudulently . . . obtained by clear and convincing evidence.” The court also pointed out that only “knowing, willful and intentional acts, misrepresentations or omission” may support a finding of fraud and that the jury should approach such a finding with “great care.” As to reliance, the court instructed the jury that “materiality is shown if but for the misrepresentation or omission the ‘891 patent would not have been issued.” These instructions were not legally erroneous. Because we conclude that the finding of Walker Process fraud was supported by substantial evidence and was based upon a jury instruction that was not legally erroneous or prejudicial, we affirm the denial of NP’s motion for JMOL. NP was properly deprived of its immunity from the antitrust laws under Walker Process, and it

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could not have benefited from additional jury instructions regarding PRE or Noerr. The court’s refusal to so instruct the jury therefore does not require a new trial. . . . The district court did not err in holding the ‘891 patent invalid as a matter of law at the close of NP’s case-in-chief because NP itself introduced evidence that was fatal to the patent’s validity. Likewise, the district court did not err in denying NP’s motion for JMOL or a new trial on 3I’s antitrust counterclaim. A reasonable jury, applying the correct law, could have found that the facts of this case were sufficient to constitute fraud within the meaning of Walker Process. . . .

64. Semiconductor Energy Lab. Co., Ltd. v Samsung Electronics Co., Ltd., 204 F.3d 1368 (Fed. Cir. 2000) UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT Opinion by Michel, Circuit Judge. On October 10, 1996, Semiconductor Energy Laboratory Co., Ltd. (“SEL”) sued Samsung Electronics Co., Ltd., Samsung Electronics America, Inc., and Samsung Semiconductor, Inc. (collectively “Samsung”) in the United States District Court for the Eastern District of Virginia, alleging that Samsung’s production and sales of active matrix displays infringed SEL’s U.S. Patent No. 5,543,636 (“the ‘636 patent”) directed to semiconductor technology. The district court first granted SEL’s motion for summary judgment dismissing Samsung’s federal and New Jersey Racketeer Influenced and Corrupt Organizations (“RICO”) counterclaims. See SEL v. Samsung, 4 F. Supp. 2d 473 (E.D. Va. 1998) (“SEL 1”). After a seven-day bench trial, the district court also held the ‘636 patent to be unenforceable for SEL’s inequitable conduct before the Patent and Trademark Office (“PTO”). See SEL v. Samsung, 4 F. Supp. 2d 477 (E.D. Va. 1998) (“SEL 2”); SEL v. Samsung, 24 F. Supp. 2d 537 (E.D. Va. 1998) (“SEL 3”). Both parties appeal. Because we are not persuaded that the district court either abused its discretion in holding the ‘636 patent unenforceable for inequitable conduct or improperly dismissed Samsung’s federal and New Jersey RICO counterclaims, we affirm. SEL is a Japanese company specializing in the research and development of semiconductor technology. SEL engages in no manufacturing and supports its research efforts from revenues from patent licensing. Since 1980, SEL has filed over 5,000 patent applications worldwide and has been awarded approximately 1,500 U.S. and foreign patents. Dr. Shunpei Yamazaki, a solid state physicist and the president and majority shareholder of SEL, is the named inventor or co-inventor on most of SEL’s patents, including the ‘636 patent. Entitled “Insulated Gate Field Effect Transistor” (“IGFET”), the ‘636 patent claims a non-single crystal silicon thin film transistor (“TFT”), a type of IGFET. Such TFTs can be used to switch the pixels in an active matrix display unit on or off. The TFT includes a source, a drain, a silicon nitride gate insulator, an insulated substrate, and an intrinsic amorphous silicon channel region. The channel region is “sandwiched”

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between the gate insulator and the insulated substrate. By limiting the level of oxygen, carbon, or nitrogen in the channel region to an amount not exceeding 5 x 1018 atoms/cm3, the claimed invention greatly improves the TFT’ electrical properties and consequently overcomes potential deficiencies, such as hysteresis (blurring). . . . The ‘636 patent began as a former 37 C.F.R. §1.60 (1995) (“Rule 60”) divisional application, and thus had its own Information Disclosure Statement (“IDS”). The IDS, filed on November 15, 1995, was fifteen pages long. The IDS was accompanied by a Form PTO-1449 listing ninety references that it wished to make of record, each of which the examiner initialed. These references included Japanese Laid-Open Application No. 56-135968, assigned to Canon K.K. (“the Canon reference”). In the IDS, SEL submitted the entire 29-page Canon reference in its original Japanese, a concise explanation of its relevance, and an existing one-page partial English translation from a prior unrelated patent application. The concise explanation succinctly described the Canon reference as disclosing “the use of silicon nitride for a gate insulating layer of a thin film transistor.” The one-page partial translation covered four short sections of the Canon reference describing a TFT structure, a semiconductor layer consisting of amorphous silicon, a gate electrode coated with silicon nitride, and an empirical observation of the effect of substituting silicon oxide for silicon nitride. SEL also made of record three references that a potential licensee, IBM, had brought to its attention as important prior art for obviousness purposes: a 1983 article by C.C. Tsai, entitled “Amorphous Si Prepared in a UHV Plasma Deposition System” (“the Tsai article”), and two of Dr. Yamazaki’s solar cell patents, Japanese Patent Laid-Open Application Nos. 59-35423 (“the ‘423 application”) and 59-35488 (“the ‘488 application”). The Tsai article and the ‘423 and ‘488 applications all teach the reduction of impurities below the level claimed in the ‘636 patent. On October 10, 1996, SEL filed a complaint in the United States District Court for the Eastern District of Virginia alleging that Samsung’s active matrix displays and computers having such displays infringed three of SEL’s semiconductor patents: the ‘636 patent, U.S. Patent No. 5,521,400 (“the ‘400 patent”), and U.S. Patent No. 5,349,204 (“the ‘204 patent”). Samsung denied infringement and asserted numerous affirmative defenses, including non-enablement, obviousness, best mode violation, and inequitable conduct. . . . Patent applicants are required to prosecute patent applications with candor, good faith, and honesty. See Molins PLC v. Textron, Inc., 48 F.3d 1172, 1178 (Fed. Cir. 1995). “Inequitable conduct includes affirmative misrepresentation of a material fact, failure to disclose material information, or submission of false material information, coupled with an intent to deceive.” Id. The alleged infringer, whether a defendant in a patent infringement suit or a declaratory judgment plaintiff, must demonstrate by clear and convincing evidence both that the information was material and that the conduct was intended to deceive. See id. The court first discerns whether the withheld references or misrepresentations satisfy a threshold level of materiality and whether the applicant’s conduct satisfies a threshold showing of intent to deceive. See id. If these thresholds are satisfied, the trial

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court balances materiality and intent to determine whether the equities warrant the conclusion that inequitable conduct occurred. See id. at 1178, 33 U.S.P.Q.2D (BNA) at 1827. “In light of all circumstances, an equitable judgment must be made concerning whether the applicant’s conduct is so culpable that the patent should not be enforced.” Id. . . . 37 C.F.R. §1.56 (1995) (“Rule 56”) defines information as material to patentability when: It is not cumulative to information already of record or being made of record in the application, and (1) It establishes, by itself or in combination with other information, a prima facie case of unpatentability of a claim; or (2) It refutes, or is inconsistent with, a position the applicant takes in: (i) Opposing an argument of unpatentability relied on by the Office, or (ii) Asserting an argument of patentability.

A withheld reference may be highly material when it discloses a more complete combination of relevant features, even if those features are before the patent examiner in other references. Molins, 48 F.3d at 1180, 33 U.S.P.Q.2D (BNA) at 1828. . . . As Samsung’s expert, Dr. Fonash, explained, a fully translated Canon reference would have provided a “good blueprint” for making the exact device described by the 636 patent. Consequently, taken together with the Tsai article, the Canon reference would have rendered obvious the asserted claims of the ‘636 patent. “Intent need not be proven by direct evidence; it is most often proven by a showing of acts, the natural consequence of which are presumably intended by the actor.” Molins, 48 F.3d at 1180. “Generally, intent must be inferred from the facts and circumstances surrounding the applicant’s conduct.” Id. at 1180-81. . . . Proof of high materiality and that the applicant knew or should have known of that materiality makes it difficult to show good faith to overcome an inference of intent to mislead. See Critikon, Inc. v. Becton Dickinson Vascular Access, Inc., 120 F.3d 1253, 1257 (Fed. Cir. 1997). “The more material the omission or the misrepresentation, the lower the level of intent required to establish inequitable conduct, and vice versa.” Id. at 1256, 43 U.S.P.Q.2D (BNA) at 1668. . . . Again reiterating its arguments to the district court, SEL argues that it did not intend to mislead the examiner by submitting only a partial translation of the Canon reference and a concise statement not addressing its key teachings, such as its admonition to avoid impurities. SEL contends that Dr. Yamazaki subjectively believed that the Canon reference was valuable only for its disclosure of the conventional IGFET structure. . . . We perceive no clear error in the district court’s conclusion that SEL effectively failed to disclose the Canon reference to the PTO by providing a one-page, partial translation of the entire 29-page application. By submitting the entire untranslated Canon reference to the PTO along with a one-page, partial translation focusing on less material portions and a concise statement directed to these less material portions, SEL left the examiner with the impression that the examiner did not need to conduct any further translation or investigation. Thus, SEL deliberately deceived the examiner into

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thinking that the Canon reference was less relevant than it really was, and constructively withheld the reference from the PTO. SEL’s submission hardly satisfies the duty of candor required of every applicant before the PTO. . . . SEL’s contention that the PTO should not require applicants to translate all foreign references into English misses the critical point. The duty at issue in this case is the duty of candor, not a duty of translation. The duty of candor does not require that the applicant translate every foreign reference, but only that the applicant refrain from submitting partial translations and concise explanations that it knows will misdirect the examiner’s attention from the reference’s relevant teaching. Here, the desirability of the examiner securing a full translation was masked by the affirmatively misleading concise statement and one-page translation. Thus, we discern no clear error in the district court’s findings with respect to materiality and intent, and hold that the district court did not abuse its discretion in finding the ‘636 patent to be unenforceable for SEL’s inequitable conduct in providing a misleadingly incomplete, partial translation of the Canon reference and a narrow and incomplete concise statement. . . . The district court did not abuse its discretion in holding the ‘636 patent unenforceable for inequitable conduct. The district court correctly applied the statute, regulations, and case law, and did not make clearly erroneous findings of fact on materiality and deceptive intent. Under all the circumstances of record, the court did not seriously misjudge the import of the evidence, particularly the degree of materiality as against the level of deceptive intent, in reaching the conclusion that equity warranted rendering the patent unenforceable. . . .

65. HC 114.846 (YKK Case) (1982) BRAZIL – Court of Criminal Appeals of São Paulo (FIFTH CHAMBER) Opinion by Appellate Judge Adauto Suannes. 1. Attorney José Antonio Ivo Galli applies for a habeas corpus order, aiming at the dismissal of the criminal action moved by Metalúrgica Brasileira Ultra against Iwao Kamiichi, Yutaka Ikegami and Norio Miyaguchi, to whom the crime of art. 175 I, II and IV, (a), of Decree-Law 7.903/45 is attributed, arguing in brief that the crime of defendants consisted of using the trademark YKK for the zippers it manufactures, trademark which was regularly registered by the plaintiff. It happens, however, that the trademark YKK is registered in about 116 countries by its legitimate owner, the company Yoshida Kabushiki Kaisha, which exported those devices to Brazil for many years. On 29.12.1967 the defendants filed with the National Institute of Industrial Property an application for the registration of the said mark, which, once granted, led to registration 837,584. Because of a mistaken translation, the term slide fasteners, which refers to zippers and similar products, was registered in class 8, which concerns photo slides. Having noticed the mistake, the defendants are currently engaged in

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correcting it administratively. However, in the meantime the plaintiff, surreptitiously, registered, on 16.05.1969, under nr. 884,377, the same trademark YKK for designating slide fasteners. Alleging the lack of fair ground for the criminal action, given the doubt surrounding the right of the plaintiff, the defendants expect its dismissal. Opinion by the Prosecutor. In summary, it says that: (a) the allegation of lack of fair ground is unacceptable because of a matter of civil law, given that the plaintiff is still the owner of the trademark; … This is the report in synthesis. 2. In the analysis if this case, one must bear in mind two superior principles: a) The Law does not exist to reward malice; b) mistakes do not give rise to rights. . . . It happened that Yoshida Brasileira Indústria e Comércio, of which the defendants are partners, in attempting to register the trademark YKK for zippers, by an obvious mistake of the firm in charge of that, obtained the registration as if it concerned photographic material. Hence registration 837,584, of 19.11.74 (filed on 29.12.67). It refers to metal, cardboard and plastic frames for photo slides, an area of business to which YKK is absolutely strange. But on 16.05.69, Metalúrgica Brasileira Ultra S/A, with the obvious and inelidible purpose of appropriating the fame that the products that bear that mark certainly enjoy, and having knowledge of the blatant mistake in the classification of the product, decided to apply for the global trademark YKK as if it were its own. And it got the registration, exactly because of the mentioned mistake. One might even wonder how Ultra was informed of that mistake and who would have promised it the possibility of incorporating into its equity the reputation of a product it has never manufactured. It is certain, however, that it will never be understood how a company with that name decides to have as a trademark that term formed by two letters that do not exist in the Portuguese alphabet. What relation could there be between Metalúrgica Brasileira Ultra S/A and YKK? Obviously, none. Therefore, the registration obtained by the plaintiff was animated by a completely inmoral purpose, because a manufacturer of zippers could not ignore the existence of a worldwide known company, as Yoshida Kabushiki Kaisha is, or simply YKK. To the surprise of Law lovers, however, to the dock of defendants does not come the company that, without any scruple, benefitted from another’s mistake, waving as its own a worldwide known trademark, created so many decades ago. On the contrary, going further in its unfortunate adventure, under the cover of a stillborn acquired right, it brings a criminal action against no less than the representatives in Brazil of the legitimate YKK. And it expects the support of the Judiciary for such an adventure. For the solution of the present request of habeas corpus eventual considerations of a civil nature concerning the good or bad repercussions of the glaring and absolutely unacceptable malice of the plaintiff do not matter.

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Here the issue is that it is more than evident that the defendants have not committed any crime whatsoever. The fault is on the side of the managers of Metalúrgica Ultra who, without any scruple, are imposing on consumers, with the usual blessing of our powerless authorities, a product to whose name they have not contributed anything that could justify its use. That the plaintiff would not respect its competitor, one can understand. That it would not respect consumers, it would be blameful. But that it does not respect the Judiciary, inducing it to condone with an act of piracy, it is quite appalling. If the minimum one expects from a criminal charge is that it is provided of fumus boni juris, how could we accept that a criminal action born from such a procedure, which only formally is supported by Law, can embarrass anyone? It would lack what illustrious Luis Recaséns Siches called logos del razonable . . . And Justice Carlos Maximiliano recalled Cicero’s praise to jurisconsult Caius Aquilius Gallus, because he “always interpreted laws in a way so that reprehensible maneuvers and flaws would never benefit their authors.” . . . 3. In view of the above, defendants not having practiced any crime, the requested order is granted, so as to dismiss, definitively, the criminal action moved against them by Metalúrgica Brasileira Ultra S/A . . . 45. An important question that may be asked is whether inequitable or fraudulent conduct can have antitrust consequences in the absence of an attempt to enforce intellectual property rights. In other words, the question is whether the simple fact of abusing the administrative process of acquiring intellectual property—namely by applying for a title without good standing, such as lack of novelty—may be considered an antitrust violation. The answer lies in how courts will assess the anticompetitive effects of intellectual property rights. The European AstraZeneca court seems to have answered that question affirmatively, when it held that fraud in obtaining an extension in the term of patents fell under European competition law, notwhithstanding the fact that never has AstraZeneca threatened to sue or sued any competitor. In other words, the exclusive effects of the term extension were assumed by the European court to produce the same anticompetitive effects as putting a competitor under notice of infringement. But the Brazilian Eli Lilly court expressed an opposite view: the anticompetitive impact of a patent application is a normal business consequence, which competitors can avoid by launching invalidation actions (or declaratory of non-infringement actions, in those countries where direct invalidation actions are not possible).15

15. A recent legal opinion of the general superintendence of CADE (the Brazilian Administrative Council of Economic Defense) found sham litigation in a series of lawsuits and administrative procedures launched by Eli Lilly with the purpose of obtaining patent and exclusive marketing rights in a pharmaceutical active ingredient, in spite of the fact that never has Eli Lilly threatened to sue or sued genetic manufacturers who might be interested in manufacturing the drug (and in spite of having obtained exclusive market rights for a certain period by means of a temporary injunction issued by a Federal Appellate Judge). See Technical Note no. 241, of 19 August 2014, available at .

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Nuno Pires de Carvalho 66. AstraZeneca AB v. Commission, Case C-457/10 P (2012) Court of Justice of the European Union (First Chamber)

1. By their appeal, AstraZeneca AB and AstraZeneca plc seek to have set aside the judgment of the General Court of the European Union in Case T-321/05 AstraZeneca v Commission [2010] ECR II-2805 (‘the judgment under appeal’), whereby that court largely dismissed their action for annulment of Commission Decision C(2005) 1757 final of 15 June 2005 relating to a proceeding under Article 82 [EC] and Article 54 of the EEA Agreement (Case COMP/A.37.507/F3 – AstraZeneca) (‘the contested decision’). By that decision, the European Commission had imposed a fine of a total amount of EUR 60 million on those companies for having abused the patents system and the procedures for marketing pharmaceutical products in order to prevent or delay the arrival of competing generic medicinal products on the market and to impede parallel trade. . . . 4. The first paragraph of Article 3 of Council Directive 65/65/EEC of 26 January 1965 on the approximation of provisions laid down by law, regulation or administrative action relating to proprietary medicinal products (OJ, English Special Edition 1965-1966, p. 24), in the version applicable to the facts, provides that ‘[n]o medicinal product may be placed on the market of a Member State unless a marketing authorisation [“MA”] has been issued by the competent authorities of that Member State’. . . . 8. Council Regulation (EEC) No 1768/92 of 18 June 1992 concerning the creation of a supplementary protection certificate for medicinal products (OJ 1992 L 182, p. 1), applicable to the facts, introduced a supplementary protection certificate (‘SPC’) for medicinal products subject to a MA procedure. That certificate, which may be obtained by the holder of a national or European patent, extends the protection conferred by that patent for an additional maximum period of five years so that the holder will have the benefit of a maximum period of 15 years of exclusivity from the first MA of the medicinal product concerned in the European Union. The reason for introducing that certificate is, in particular, that the period that elapses between the filing of an application for a patent for a new medicinal product and obtaining of a MA for that product makes the period of effective protection under the patent insufficient to cover the investment put into the research. 9. Article 3 of that regulation, entitled ‘Conditions for obtaining a certificate’, provided: A certificate shall be granted if, in the Member State in which the application referred to in Article 7 is submitted and at the date of that application: (a) the product is protected by a basic patent in force; (b) a valid [MA for the product] as a medicinal product has been granted in accordance with [Directive 65/65] …, as appropriate; . . .

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11. In accordance with Article 8(1)(a)(iv) of Regulation No 1768/92, the application for a certificate must contain a request for the grant of a certificate, stating in particular the number and date of the first MA for the product, as referred to in Article 3(b) of that request and, if this authorisation is not the first MA for the product in the Community, the number and date of that authorisation. 12. According to Article 13(1) of Regulation No 1768/92, the certificate took effect at the end of the lawful term of the basic patent for a period equal to the period which elapsed between the date on which the application for a basic patent was lodged and the date of the first MA for the product in the Community, reduced by a period of five years. . . . 15. AstraZeneca AB and AstraZeneca plc belong to a pharmaceutical group (‘AZ’) which is active worldwide in the sector of the invention, development and marketing of pharmaceutical products. Its business is focused, in that field, in particular on gastrointestinal conditions. In that regard, one of the main products marketed by AZ is known as ‘Losec’, a brand name used in most European markets. This omeprazolebased medicinal product, used in the treatment of gastrointestinal conditions linked with hyperacidity and, in particular, to proactively inhibit acid secretion into the stomach, was the first on the market to act directly on the proton pump, that is to say, the specific enzyme inside the parietal cells along the stomach wall, which pumps acid into the stomach. 16. On 12 May 1999, Generics (UK) Ltd and Scandinavian Pharmaceuticals Generics AB complained to the Commission of AZ’s conduct aimed at preventing them from introducing generic versions of omeprazole on a number of markets in the European Economic Area (EEA). 17. By the contested decision, the Commission found that AstraZeneca AB and AstraZeneca plc had committed two abuses of a dominant position, thereby infringing Article 82 EC and Article 54 of the Agreement on the European Economic Area, of 2 May 1992 (‘the EEA Agreement’). 18. According to Article 1(1) of that decision, the first abuse consisted in misleading representations to patent offices in Belgium, Denmark, Germany, the Netherlands, the United Kingdom and Norway and also before the national courts in Germany and Norway. The Commission considered in that regard that those representations formed part of an overall strategy designed to keep manufacturers of generic products away from the market by obtaining or maintaining SPCs for omeprazole to which AZ was not entitled or to which it was entitled for a shorter duration. The Commission distinguished two stages in that first abuse, the first of which concerned representations made when, on 7 June 1993, instructions were sent to the patent agents through whom SPC applications were filed in seven Member States, and the second of which referred to representations subsequently made to several patent offices and before national courts. . . .

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20. In respect of those two abuses, the Commission imposed on the appellants jointly and severally a fine of EUR 46 million and on AstraZeneca AB a separate fine of EUR 14 million. . . . 61. At paragraphs 295 to 613 of the judgment under appeal, the General Court dealt with the two pleas in law relied upon by the appellants to dispute the Commission’s finding relating to the first abuse. 62. The first of those pleas, alleging certain errors of law on the Commission’s part, was examined at paragraphs 352 to 382 of the judgment under appeal. The General Court, inter alia, confirmed at paragraphs 355 and 361 of that judgment the Commission’s interpretation of Article 82 EC, according to which the submission to the public authorities of misleading information liable to lead them into error and therefore to make possible the grant of an exclusive right, such as the SPC, to which the undertaking is in actual fact not entitled, or to which it is only entitled for a shorter period, constitutes a practice falling outside the scope of competition on the merits and therefore an abuse of a dominant position. 63. The General Court added, at paragraphs 356 and 359 of the judgment under appeal, that it followed from the objective nature of the concept of abuse that the misleading nature of representations made to public authorities had to be assessed on the basis of objective factors and that proof of the deliberate nature of the conduct and of the bad faith of the undertaking in a dominant position was not required, but could none the less constitute a relevant factor. 64. The General Court upheld that plea in part, however, in so far as it alleged an error of law on the part of the Commission in its assessment of the date on which the alleged first abuse of a dominant position began in certain countries: the General Court considered, at paragraphs 370, 372 and 381 of the judgment under appeal, that that abuse began not when AZ sent instructions to patent attorneys but when it filed SPC applications with the national patent offices. . . . 69. By their third ground of appeal, the appellants take issue with the General Court for having taken a legally flawed approach to competition on the merits. The General Court was wrong, when assessing whether the appellants’ representations to the patent offices were objectively misleading, to have dismissed as irrelevant the reasonableness of their interpretation of Article 19 of Regulation No 1768/92 and their bona fides in that regard. 70. The appellants claim that the General Court misinterpreted the concept of ‘competition on the merits’ by deciding that the appellants’ non-disclosure of their interpretation of that article to the national patent offices and therefore, in particular, the fact that the reference to the first authorisation on which they relied in support of their SPC applications was not the authorisation under Directive 65/65 but the reference to the subsequent authorisation linked with the publication of prices, did not fall within the scope of such competition. A ‘lack of transparency’ cannot suffice for an abuse. In dismissing as irrelevant the fact that, at the time of submission of the

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applications, it was reasonable, given the ambiguity of Article 19 of Regulation No 1768/92, to consider that the appellants were entitled to the SPCs, the General Court wrongly promoted to the rank of an abuse the mere fact that an undertaking in a dominant position seeks a right from which it thinks it can benefit without disclosing the elements on which it bases its opinion. The General Court’s reasoning is based on the premise that the appellants were not entitled to the SPC and is therefore made with the benefit of hindsight, taking account of the clarification provided by the judgment in Case C-127/00 Hässle [2003] ECR I-14781. 71. The appellants maintain that there are compelling political and legal reasons why deliberate fraud or deceit should be a requirement for a finding of abuse in circumstances such as those of the present case. Thus, an interpretation of the concept of abuse as severe as that applied by the General Court will be likely to impede and delay applications for intellectual property rights in Europe, particularly if it is combined with the Commission’s strict approach to market definition. In support of their view, the appellants point out, by way of comparison, that in United States law only patents obtained fraudulently can be challenged under competition law, in order not to chill patent applications. 72. The EFPIA adds that, if the General Court’s interpretation of ‘competition on the merits’ is to be followed, an ‘objectively misleading’ representation in reality means an ‘objectively wrong’ representation. If that standard were to be applied, dominant undertakings would have to be infallible in their dealings with regulatory authorities. Thus, even an error that was made unintentionally and immediately rectified could give rise to liability under Article 82 EC. The EFPIA maintains, in particular, that it is legally indefensible to apply that concept to patent applications, since a number of such applications would have to be rejected each year on the ground that those applications were not objectively correct, as their objective did not satisfy the patentability criteria. ... 74. As a preliminary point, it must be noted that it is settled case-law that the concept of ‘abuse’ is an objective concept referring to the conduct of a dominant undertaking which is such as to influence the structure of a market where the degree of competition is already weakened precisely because of the presence of the undertaking concerned, and which, through recourse to methods different from those governing normal competition in products or services on the basis of the transactions of commercial operators, has the effect of hindering the maintenance of the degree of competition still existing in the market or the growth of that competition (judgments in Case 85/76 Hoffman-La Roche v Commission [1979] ECR 461, paragraph 91; Case C-62/86 AKZO v Commission [1991] ECR I-3359, paragraph 69; Case C-52/07 Kanal 5 and TV 4 [2008] ECR I-9275, paragraph 25; and Case C-52/09 TeliaSonera Sverige [2011] ECR I-527, paragraph 27). 75. It follows that Article 82 EC prohibits a dominant undertaking from eliminating a competitor and thereby strengthening its position by using methods other than those which come within the scope of competition on the merits (AKZO v Commission,

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paragraph 70, and Case C-202/07 P France Télécom v Commission [2009] ECR I-2369, paragraph 106). 76. In the light of the arguments put forward by the appellants in support of their third ground of appeal, it must be established whether the General Court misinterpreted the concept of ‘competition on the merits’ by holding that the conduct criticised in the context of the first abuse fell outside the scope of such competition. 77. In this connection, it must be observed that the General Court held, at paragraphs 306, 478 to 500 and 591 of the judgment under appeal, that there were two stages to the first abuse, of which the first consisted in notifying to the patent offices in Belgium, Denmark, Germany, Ireland, Luxembourg, the Netherlands and the United Kingdom the date of ‘March 1988’ as that of the first MA in the Community, without informing them either of the legal basis underpinning the choice of that date, namely the alternative interpretation which AZ wished to adopt of the concept of ‘MA’ for the purposes of Article 19 of Regulation No 1768/92, or of the existence of the MA issued in France on 15 April 1987, which constituted the first MA issued under Directive 65/65 (‘the technical authorisation’) in the Community. 78. It is common ground that had AZ notified to those patent offices the date of that first technical authorisation issued in France, it would have been impossible for it, on account of the transitional rule referred to in the second subparagraph of Article 19(1) of Regulation No 1768/92, to obtain a SPC for omeprazole in particular in Denmark and in Germany, the first MA in the Community having been obtained prior to 1 January 1988. 79. As the General Court observed at paragraphs 479 to 484, 492 and 509 of the judgment under appeal, it is apparent from a number of its internal memoranda that AZ, and in particular its patent department, was conscious of that fact and had in fact identified the technical authorisation issued in France as being the first MA for the purposes of Regulation No 1768/92. That department nevertheless indicated, before even having adopted its alternative interpretation of the concept of the MA, that for the purposes of the SPC applications in Denmark and in Germany, it would maintain before the patent offices that the first MA in the Community had not been issued before 1 January 1988. 80. According to that alternative interpretation, the concept of ‘MA’ for the purposes of Article 19 of Regulation No 1768/92 did not refer to the technical authorisation but to the publication of the prices, since those were, according to the appellants, necessary in certain Member States, such as France and Luxembourg, in order for the medicinal product to be actually marketed. The General Court observed, at paragraph 488 of the judgment under appeal, that the date of publication of the price as the date of the alleged effective marketing was used only for omeprazole and omeprazole sodium, while for six other products, AZ had communicated the date of the technical authorisation or that of the first publication of that authorisation, each of those dates being later than 1 January 1988.

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81. As the General Court found at paragraphs 492 and 493 of the judgment under appeal, it is common ground that both the patent offices and the patent attorneys construed that concept as referring to the technical authorisation and that, in view of the context in which those representations to the patent attorneys and patent offices were made, AZ could not reasonably be unaware that, by failing to specify the interpretation which it intended to adopt of Regulation No 1768/92 which underlay the choice of the dates provided in relation to the French Republic and the Grand Duchy of Luxembourg, the patent offices would be prompted to construe those representations as indicating that the first technical authorisation in the Community had been issued in Luxembourg in ‘March 1988’. 82. It is apparent from paragraphs 490 to 492 of the judgment under appeal that AZ nevertheless chose not to notify the patent attorneys and national patent offices of the fact that, in the instructions of 7 June 1993 given to the patent attorneys in respect of the SPC applications concerning omeprazole, the dates indicated in respect of the French Republic and the Grand Duchy of Luxembourg did not correspond to the issue of the technical authorisation, but to the alleged date of publication of the price of the medicinal product. 83. In addition, nothing in the presentation of the information communicated in connection with those instructions was such as to imply that the dates indicated in respect of those two Member States did not relate to the technical authorisations. On the contrary, the fact, first, that the dates indicated in respect of seven other countries related to the issuing of the technical authorisation, secondly, that the numbers corresponding to the French and Luxembourg technical authorisations were retained and, lastly, that, in order to meet the requirements of Article 8(1)(c) of Regulation No 1768/92, AZ referred to the Luxembourg legislation relating not to the price publication but to the technical authorisation, suggested that the dates stated in respect of the French Republic and the Grand Duchy of Luxembourg corresponded to those authorisations. 84. The General Court also observed, at paragraph 495 of the judgment under appeal, that the appellants’ claim that AZ intended to discuss with the patent offices the relevant date for the purposes of Regulation No 1768/92 is not supported by the facts and that AZ’s conduct over the long term suggests on the contrary rather that it was motivated by the intention of misleading the patent offices, as is apparent from the second stage of the first abuse. 85. As regards that second stage, it follows from paragraphs 307, 478 and 501 of the judgment under appeal that that stage included, first, misleading representations made in 1993 and 1994 before the patent offices in reply to their questions on the SPC applications filed by AZ, secondly, misleading representations made in December 1994 during the second round of SPC applications in three EEA countries, namely Austria, Finland and Norway, and, lastly, misleading representations made subsequently before other patent offices, as well as before national courts, in the context of

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proceedings brought by competing generic manufacturers with a view to invalidating the SPCs in those countries. 86. In this connection, the General Court observed, inter alia, at paragraphs 495, 505, 506, 514, 515, 523, 574, 592 and 593 of the judgment under appeal, that, following the explanations requested by the patent offices as regards the vague reference to ‘March 1988’ as the MA date in Luxembourg and except in its exchanges with the United Kingdom and Irish patent offices, AZ remained silent, first, regarding the existence of the French technical authorisation of 15 April 1987 and, secondly, as regards the interpretation of Regulation No 1768/92 which underlay the dates indicated in respect of the French Republic and the Grand Duchy of Luxembourg. 87. The failure to disclose the French technical authorisation prompted the Belgian, Luxembourg and Netherlands patent offices to consider that the date of 16 November 1987—corresponding to the issue of the technical authorisation in Luxembourg and which had been notified by AZ at the express request of those offices, or inserted, in the case of the Luxembourg patent office, by that office itself—had to be taken into account as date of the first MA in the Community. Those offices therefore granted SPCs on the basis of that latter date, while in Germany a SPC was granted on the basis of the date of 21 March 1988 after a clarification to that effect was provided by AZ. 88. As the General Court noted at paragraphs 508, 527, 530 and 594 of the judgment under appeal, AZ did not subsequently intervene in order to rectify the SPCs issued to it, even though (i) its internal documents show that it was aware of their incorrect basis and, in particular, that the date of the first MA was incorrect, and (ii) the Netherlands patent attorney had expressly suggested to it that it might so intervene. 89. The General Court observed, at paragraph 539 of that judgment, that it was apparent from such an internal document, drawn up in 1994 by the head of AZ’s patent department, that, in order to ensure that the SPCs for Losec lasted as long as possible in the various European countries, its services were arguing that the definition of MA was not clear and were trying to get the date of 21 March 1988 accepted as the relevant one, since it ensured the longest SPC term and the possibility of receiving or maintaining a SPC in Denmark and in Germany. 90. In addition, the General Court pointed out, at paragraphs 508 and 530 of that judgment, that it was apparent from other internal documents that AZ had, since 1993, evaluated the risk linked with the failure to disclose the French technical authorisation of 15 April 1987 and had taken the view that, in respect of the countries other than the Kingdom of Denmark and the Federal Republic of Germany, it would consist, in the worst cases, in the loss of the supplementary six months of protection which had been granted to it on the basis of the technical authorisation issued in Luxembourg on 16 November 1987. Thus, in the countries in relation to which the transitional provisions of Regulation No 1768/92 did not pose a problem, but in respect of which AZ had made use of the Luxembourg authorisation ‘for the sake of consistency’, it would have been possible for it, in the event of disputes relating to the SPCs, to revert to the French technical authorisation date.

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91. As the General Court found at paragraphs 595 and 596 of the judgment under appeal, even after having disclosed, following questions put by the Irish and United Kingdom patent offices, the existence of the French technical authorisation, AZ continued to make misleading representations for the purposes of obtaining SPCs on the basis of the date of 21 March 1988 before the patent offices of the EEA countries, namely in Austria, Finland and Norway. Those representations in fact prompted those patent offices to issue SPCs on the basis of that date. 92. Lastly, it follows from paragraphs 576 to 590 and 597 of the judgment under appeal that, before the German, Finnish and Norwegian courts, AZ attempted to defend the validity of the SPCs granted in those countries by making incorrect representations concerning the relevance of the date of 21 March 1988, despite possessing consistent information indicating that, even on the basis of its own interpretation of Article 19 of Regulation No 1768/92 and its ‘effective marketing theory’, that date was not the relevant date, since the true position was that it did not correspond to the date of the publication of the price in Luxembourg and marketing of Losec in that country had actually taken place prior to that date. 93. Clearly, as the General Court held at paragraphs 493, 495, 507, 598, 599, 608 and 609 of the judgment under appeal, AZ’s consistent and linear conduct, as summarised above, which was characterised by the notification to the patent offices of highly misleading representations and by a manifest lack of transparency, inter alia as regards the existence of the French technical authorisation, and by which AZ deliberately attempted to mislead the patent offices and judicial authorities in order to keep for as long as possible its monopoly on the PPI market, fell outside the scope of competition on the merits. 94. That finding is not called into question by the appellants’ argument as to the allegedly reasonable nature of their alternative interpretation of Article 19 of Regulation No 1768/92 and their good faith in this respect. 95. Even if AZ—despite the fact that it itself had taken the view, at least initially, that the technical authorisation issued in France on 15 April 1987 constituted the authorisation to which Regulation No 1768/92 refers—had ultimately considered that its alternative interpretation was reasonable and had a serious chance of being followed both by the national courts and by the Court of Justice in the event of competitors calling into question SPCs issued on the basis of the date of 21 March 1988 or 16 November 1987, the onus was on AZ to disclose to the patent offices all the relevant information and in particular the existence of that French technical authorisation in order to allow them to decide, with full knowledge of the facts, which of those authorisations they wished to accept for the purposes of issuing the SPC. 96. Thus, by making misleading representations to those patent offices, by concealing the existence of that French technical authorisation and deliberately leading them to believe that the date of 21 March 1988 corresponded to the Luxembourg technical authorisation and that that latter was the first MA in the Community, AZ knowingly

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accepted that those offices granted it SPCs which they would not have issued had they known of the existence of the French technical authorisation and which would have been shown to be unlawful in the event that the alternative interpretation proposed by AZ was not followed by the national courts or the Court of Justice. 97. It is moreover common ground that, as pointed out at paragraph 92 of the present judgment, even on the basis of its alternative interpretation, the date of 21 March 1988 notified to the patent offices was not relevant for the purposes of the issue of SPCs. That date in fact related to a list of the Grand Duchy of Luxembourg entitled ‘Ministère de la Santé—Spécialités pharmaceutiques—Liste des spécialités pharmaceutiques admises à la vente dans le Grand-Duché de Luxembourg’ (‘Ministry of Health – Proprietary medicinal products – List of proprietary medicinal products approved for sale in the Grand Duchy of Luxembourg’), and did not in fact correspond to the date of publication of the price in Luxembourg. The General Court observed in this regard, at paragraphs 497, 498 and 580 to 582 of the judgment under appeal, that that list by its appearance did not lend itself to being regarded as the publication of the price and that, furthermore, AZ’s conduct during the second stage of the abuse tended to discredit the claims regarding its good faith as to the relevance of that date. 98. Regarded in the light of the facts found by the General Court, which the appellants have expressly stated that they are not calling into question, the third ground of appeal raised by them is tantamount to an argument that where an undertaking in a dominant position considers that it can, in accordance with a legally defensible interpretation, lay claim to a right, it may use any means to obtain that right, and even have recourse to highly misleading representations with the aim of leading public authorities into error. Such an approach is manifestly not consistent with competition on the merits and the specific responsibility on such an undertaking not to prejudice, by its conduct, effective and undistorted competition within the European Union. 99. Lastly, contrary to what the EFPIA submits, the General Court did not hold that undertakings in a dominant position had to be infallible in their dealings with regulatory authorities and that each objectively wrong representation made by such an undertaking constituted an abuse of that position, even where the error was made unintentionally and immediately rectified. It is sufficient to note in this connection that, first, that example is radically different from AZ’s conduct in the present case, and that, secondly, the General Court pointed out, at paragraphs 357 and 361 of the judgment under appeal, that the assessment of whether representations made to public authorities for the purposes of improperly obtaining exclusive rights are misleading must be made in concreto and may vary according to the specific circumstances of each case. It thus cannot be inferred from that judgment that any patent application made by such an undertaking which is rejected on the ground that it does not satisfy the patentability criteria automatically gives rise to liability under Article 82 EC. 100. It follows from all of the foregoing considerations that the third ground of appeal must be rejected as unfounded.

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101. By their fourth ground of appeal, the appellants maintain that the General Court erred in law in holding that the mere fact of applying for an SPC was sufficient to constitute an abuse. By doing so, it created an ‘abuse in itself’ without considering whether competition was affected or whether the impugned conduct had a tendency to restrict competition. They take the view that competition can only be affected from the time that the exclusive right sought has been granted, that AZ’s competitors knew of that right’s existence and that that right is liable to affect the conduct of those competitors. That approach has the merit of being consistent with that followed in United States law. 102. They submit, in that regard, that the SPC applications were filed between five and six years before they entered into force and that, up to that point, AZ’s rights were protected by patents over substances and, in certain cases, also by patents over formulations. Furthermore, in Denmark the SPC application was withdrawn while in the United Kingdom the SPC was granted on the basis of the ‘correct’ date. In Germany, the SPC was revoked before the expiry of the patent which underlay it and in Norway it was revoked a few months after that expiry. Lastly, if the SPCs issued in Belgium and the Netherlands effectively conferred on AZ unwarranted protection during five and six months respectively, there is no evidence proving that that protection had the effect of restricting competition. Moreover, AZ was not in a dominant position at that time. In order to constitute an abuse, it must be possible for the effect of the conduct to be perceptible at the time when the undertaking holds such a position. . . . 105. As is apparent, inter alia, from paragraph 357 of the judgment under appeal, the General Court examined in the present case whether, in the light of the context in which the practice in question had been implemented, that practice was such as to lead the public authorities wrongly to create regulatory obstacles to competition, for example by the unlawful grant of exclusive rights to the dominant undertaking. It held in this connection that the limited discretion of public authorities or the absence of any obligation on their part to verify the accuracy or veracity of the information provided could be relevant factors to be taken into consideration for the purposes of determining whether the practice in question was liable to raise regulatory obstacles to competition. 106. Contrary to what the appellants submit, that examination by the General Court is not in any way based on the assumption that the practice in question constitutes an ‘abuse in itself’, regardless of its anti-competitive effect. On the contrary, the General Court expressly pointed out, at paragraph 377 of the judgment under appeal, that representations designed to obtain exclusive rights unlawfully constitute an abuse only if it is established that, in view of the objective context in which they are made, those representations are actually liable to lead the public authorities to grant the exclusive right applied for. 107. As the General Court found, in particular at paragraphs 591 to 598 of the judgment under appeal, that was the case here, which is indeed confirmed by the fact that AZ’s misleading representations actually enabled it to obtain SPCs either to which

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it was not entitled, as was the case in Germany, in Finland and in Norway, or to which it was entitled only for a shorter period, as was the case in Belgium, in Luxembourg, in the Netherlands and in Austria. 108. As regards, in particular, those countries where the misleading representations enabled AZ to obtain unlawful SPCs, the appellants cannot deny the anti-competitive effect of those representations on the ground that the applications for the SPCs were filed between five and six years before the entry into force of those SPCs and that, until that time, AZ’s rights were protected by lawful patents. Not only do such unlawful SPCs lead, as the General Court observed at paragraphs 362, 375 and 380 of the judgment under appeal, to a significant exclusionary effect after the expiry of the basic patents, but they are also liable to alter the structure of the market by adversely affecting potential competition even before that expiry. 109. In the light of those anti-competitive effects, the General Court was also fully entitled, at paragraph 605 of the judgment under appeal, to regard as irrelevant the fact that, in Germany, following legal proceedings brought by a manufacturer of generic products, the SPC was annulled before the expiry of the basic patent. 110. Nor, in contrast to what is submitted by the appellants, was it necessary for AZ still to have been in a dominant position after the basic patents expired, since the anti-competitive nature of its acts must be evaluated at the time when those acts were committed. Consequently, the General Court was correct to reject, at paragraphs 379 and 606 of the judgment under appeal, the argument that the additional period of supplementary protection obtained in Belgium and the Netherlands on the basis of the misleading representations extended to a period during which AZ did not hold a dominant position in those Member States. 111. So far as concerns the fact that the misleading representations did not enable AZ to obtain SPCs in Denmark and that in Ireland and the United Kingdom the SPCs were ultimately issued on the basis of the correct date, it must be stated that the General Court did not err in law in holding, at paragraphs 602 to 604 of the judgment under appeal, that that fact does not mean that AZ’s conduct in those countries was not abusive, since it is established that those representations were very likely to result in the issue of unlawful SPCs. In addition, as the Commission has pointed out, in so far as the impugned conduct forms part of an overall strategy seeking to unlawfully exclude manufacturers of generic products from the market by means of obtaining SPCs in breach of the regulatory framework which established them, the existence of an abuse is not affected by the fact that that strategy did not succeed in some countries. 112. Lastly, as regards the circumstances which, according to the appellants, must be present in order to be able to find that the misleading representations were such as to restrict competition, it is sufficient to note that in actual fact they amount to a requirement that current and certain anti-competitive effects be shown. However, it follows from the Court’s case-law that, although the practice of an undertaking in a dominant position cannot be characterised as abusive in the absence of any

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anti-competitive effect on the market, such an effect does not necessarily have to be concrete, and it is sufficient to demonstrate that there is a potential anti-competitive effect (see, to that effect, TeliaSonera Sverige, paragraph 64). . . .

[2]

Other Abuses of the Judicial and Administrative Process 67. Assessment Technologies of WI, LLC v. Wiredata, Inc., 361 F.3d 434 (7th Cir. 2004) UNITED STATES COURT OF APPEALS FOR THE SEVENTH CIRCUIT

Opinion by Posner, Circuit Judge. This case is about the attempt of a copyright owner to use copyright law to block access to data that not only are neither copyrightable nor copyrighted, but were not created or obtained by the copyright owner. The owner is trying to secrete the data in its copyrighted program—a program the existence of which reduced the likelihood that the data would be retained in a form in which they would have been readily accessible. It would be appalling if such an attempt could succeed. Assessment Technologies (AT, we’ll call it) brought suit for copyright infringement and theft of trade secrets against WIREdata, and the district court after an evidentiary hearing issued a permanent injunction on the basis of AT’s copyright claim alone, without reaching the trade secret claim. A sample database in the demo version of AT’s product—a version freely distributed for promotional purposes—reveals the entire structure of the database, thus making the trade secret claim incomprehensible to us. But we shall not make a formal ruling on the claim. It was not addressed either by the district court or by the parties in their submissions in this court, and conceivably if improbably it has more merit than we can find in it. The copyright case seeks to block WIREdata from obtaining noncopyrighted data. AT claims that the data can’t be extracted without infringement of its copyright. The copyright is of a compilation, and the general issue that the appeal presents is the right of the owner of such a copyright to prevent his customers (that is, the copyright licensees) from disclosing the compiled data even if the data are in the public domain. WIREdata, owned by Multiple Listing Services, Inc., wants to obtain, for use by real estate brokers, data regarding specific properties—address, owner’s name, the age of the property, its assessed valuation, the number and type of rooms, and so forth—from the southeastern Wisconsin municipalities in which the properties are located. The municipalities collect such data in order to assess the value of the properties for property-tax purposes. Ordinarily they’re happy to provide the data to anyone who will pay the modest cost of copying the data onto a disk. Indeed, Wisconsin’s “open records” law, Wis. Stat. § § 19.31-.39; State ex rel. Milwaukee Police Ass’n v. Jones, 237 Wis. 2d 840 (Wis. App. 2000), which is applicable to data in digital form, see id. at 195-96; Wis. Stat. § 19.32(2), requires them to furnish such data to any

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person who will pay the copying cost. However, three municipalities refused WIREdata’s request. They (or the contractors who do the actual tax assessment for them) are licensees of AT. The open-records law contains an exception for copyrighted materials, id., and these municipalities are afraid that furnishing WIREdata the requested data would violate the copyright. WIREdata has sued them in the state courts of Wisconsin in an attempt to force them to divulge the data, and those suits are pending. Alarmed by WIREdata’s suits, AT brought the present suit to stop WIREdata from making such demands of the municipalities and seeking to enforce them by litigation. The data that WIREdata wants are collected not by AT but by tax assessors hired by the municipalities. The assessors visit the property and by talking to the owner and poking around the property itself obtain the information that we mentioned in the preceding paragraph—the age of the property, the number of rooms, and so forth. AT has developed and copyrighted a computer program, called “Market Drive,” for compiling these data. The assessor types into a computer the data that he has obtained from his visit to the property or from other sources of information and then the Market Drive program, in conjunction with a Microsoft database program (Microsoft Access), automatically allocates the data to 456 fields (that is, categories of information) grouped into 34 master categories known as tables. Several types of data relating to a property, each allocated to a different field, are grouped together in a table called “Income Valuations,” others in a table called “Residential Buildings,” and so on. The data collected by the various assessors and inputted in the manner just described are stored in an electronic file, the database. The municipality’s tax officials can use various queries in Market Drive or Market Access to view the data in the file. WIREdata’s appeal gets off on the wrong foot, with the contention that Market Drive lacks sufficient originality to be copyrightable. Copyright law unlike patent law does not require substantial originality. Feist Publications, Inc. v. Rural Telephone Service Co., 499 U.S. 340, 345-48 (1991). In fact, it requires only enough originality to enable a work to be distinguished from similar works that are in the public domain, Bucklew v. Hawkins, Ash, Baptie & Co., 329 F.3d 923, 929 (7th Cir. 2003); Alfred Bell & Co. v. Catalda Fine Arts, Inc., 191 F.2d 99, 102-03 (2d Cir. 1951), since without some discernible distinction it would be impossible to determine whether a subsequent work was copying a copyrighted work or a public-domain work. This modest requirement is satisfied by Market Drive because no other real estate assessment program arranges the data collected by the assessor in these 456 fields grouped into these 34 categories, and because this structure is not so obvious or inevitable as to lack the minimal originality required, Key Publications, Inc. v. Chinatown Today Publishing Enterprises, Inc., 945 F.2d 509, 513-14 (2d Cir. 1991), as it would if the compilation simply listed the data in alphabetical or numerical order. Feist Publications, Inc. v. Rural Telephone Service Co., supra, 499 U.S. at 362-64. The obvious orderings, the lexical and the numeric, have long been in the public domain, and what is in the public domain cannot be appropriated by claiming copyright. Alternatively, if there is only one way in which to express an idea—for example, alphabetical order for the names in a phone book—then form and idea merge, and in that case since an idea cannot be copyrighted the copying of the form is not an infringement. Ets-Hokin v. Skyy Spirits, Inc., 225 F.3d 1068, 1082

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(9th Cir. 2000); Kregos v. Associated Press, 937 F.2d 700, 705-07 (2d Cir. 1991). That is not the situation here. So AT has a valid copyright; and if WIREdata said to itself, “Market Drive is a nifty way of sorting real estate data and we want the municipalities to give us their data in the form in which it is organized in the database, that is, sorted into AT’s 456 fields grouped into its 34 tables,” and the municipalities obliged, they would be infringing AT’s copyright because they are not licensed to make copies of Market Drive for distribution to others; and WIREdata would be a contributory infringer (subject to a qualification concerning the fair-use defense to copyright infringement, including contributory infringement, that we discuss later). But WIREdata doesn’t want the Market Drive compilation. It isn’t in the business of making tax assessments, which is the business for which Market Drive is designed. It only wants the raw data, the data the assessors inputted into Market Drive. Once it gets those data it will sort them in accordance with its own needs, which have to do with providing the information about properties that is useful to real estate brokers as opposed to taxing authorities. But how are the data to be extracted from the database without infringing the copyright? Or, what is not quite the same question, how can the data be separated from the tables and fields to which they are allocated by Market Drive? One possibility is to use tools in the Market Drive program itself to extract the data and place it in a separate electronic file; this can be done rapidly and easily with just a few keystrokes. But the municipalities may not have the program, because the inputting of the data, which did of course require its use, was done by assessors employed by firms to do this work as independent contractors of the municipalities. And if the municipalities do have the program, still their license from AT forbids them to disseminate the data collected by means of it—a restriction that may or may not be in violation of the state’s openrecords law, a question we come back to later. A second extraction possibility, which arises from the fact that the database is a Microsoft file accessible by Microsoft Access, is to use Access to extract the data and place it in a new file, bypassing Market Drive. But there is again the scope of the license to be considered and also whether the method of extraction is so cumbersome that it would require more effort than the open-records law requires of the agencies subject to it. It might take a programmer a couple of days to extract the data using Microsoft Access, and the municipalities might lack the time, or for that matter the programmers, to do the extraction. But that should not be a big problem, because WIREdata can hire programmers to extract the data from the municipalities’ computers at its own expense. From the standpoint of copyright law all that matters is that the process of extracting the raw data from the database does not involve copying Market Drive, or creating, as AT mysteriously asserts, a derivative work; all that is sought is raw data, data created not by AT but by the assessors, data that are in the public domain. A derivative work is a translation or other transformation of an original work and must itself contain minimum originality for the same evidentiary reason that we noted in discussing the requirement that a copyrighted work be original. Pickett v. Prince, 207 F.3d 402, 405 (7th Cir. 2000); Gracen v. Bradford Exchange, 698 F.2d 300, 304-05 (7th Cir. 1983). A work that merely copies uncopyrighted material is wholly unoriginal and the making of such a work is therefore not an infringement of copyright. The

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municipalities would not be infringing Market Drive by extracting the raw data from the databases by either method that we discussed and handing those data over to WIREdata; and since there would thus be no direct infringement, neither would there be contributory infringement by WIREdata. It would be like a Westlaw licensee’s copying the text of a federal judicial opinion that he found in the Westlaw opinion database and giving it to someone else. Westlaw’s compilation of federal judicial opinions is copyrighted and copyrightable because it involves discretionary judgments regarding selection and arrangement. But the opinions themselves are in the public domain (federal law forbids assertion of copyright in federal documents, 17 U.S.C. §105), and so Westlaw cannot prevent its licensees from copying the opinions themselves as distinct from the aspects of the database that are copyrighted. See Matthew Bender & Co. v. West Publishing Co., 158 F.3d 693 (2d Cir. 1998); Matthew Bender & Co. v. West Publishing Co., 158 F.3d 674 (2d Cir. 1998). AT would lose this copyright case even if the raw data were so entangled with Market Drive that they could not be extracted without making a copy of the program. The case would then be governed by Sega Enterprises Ltd. v. Accolade, Inc., 977 F.2d 1510, 1520-28 (9th Cir. 1992). Sega manufactured a game console, which is a specialized computer, and copyrighted the console’s operating system, including the source code. Accolade wanted to make computer games that would be compatible with Sega’s console, and to that end it bought a Sega console and through reverse engineering reconstructed the source code, from which it would learn how to design its games so that they would activate the operating system. For technical reasons, Accolade had to make a copy of the source code in order to be able to obtain this information. It didn’t want to sell the source code, produce a game-console operating system, or make any other use of the copyrighted code except to be able to sell a noninfringing product, namely a computer game. The court held that this “intermediate copying” of the operating system was a fair use, since the only effect of enjoining it would be to give Sega control over noninfringing products, namely Accolade’s games. See also Sony Computer Entertainment, Inc. v. Connectix Corp., 203 F.3d 596, 602-08 (9th Cir. 2000); Bateman v. Mnemonics, Inc., 79 F.3d 1532, 1539-40 n. 18 (11th Cir. 1996); Atari Games Corp. v. Nintendo of America, Inc., 975 F.2d 832, 842-44 (Fed. Cir. 1992). Similarly, if the only way WIREdata could obtain public-domain data about properties in southeastern Wisconsin would be by copying the data in the municipalities’ databases as embedded in Market Drive, so that it would be copying the compilation and not just the compiled data only because the data and the format in which they were organized could not be disentangled, it would be privileged to make such a copy, and likewise the municipalities. For the only purpose of the copying would be to extract noncopyrighted material, and not to go into competition with AT by selling copies of Market Drive. We emphasize this point lest AT try to circumvent our decision by reconfiguring Market Drive in such a way that the municipalities would find it difficult or impossible to furnish the raw data to requesters such as WIREdata in any format other than that prescribed by Market Drive. If AT did that with that purpose it might be guilty of copyright misuse, of which more shortly. AT argues that WIREdata doesn’t need to obtain the data in digital form because they exist in analog form, namely in the handwritten notes of the assessors, notes that

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all agree are not covered by the Market Drive copyright. But we were told at argument without contradiction that some assessors no longer make handwritten notes to copy into a computer at a later time. Instead they take their laptop to the site and type the information in directly. So WIREdata could not possibly obtain all the data it wants (all of which data are in the public domain, we emphasize) from the handwritten notes. But what is more fundamental is that since AT has no ownership or other legal interest in the data collected by the assessor, it has no legal ground for making the acquisition of that data more costly for WIREdata. AT is trying to use its copyright to sequester uncopyrightable data, presumably in the hope of extracting a license fee from WIREdata. We are mindful of pressures, reflected in bills that have been pending in Congress for years, . . . to provide legal protection to the creators of databases, as Europe has already done. . . . The creation of massive electronic databases can be extremely costly, yet if the database is readily searchable and the data themselves are not copyrightable (and we know from Feist that mere data are indeed not copyrightable) the creator may find it difficult or even impossible to recoup the expense of creating the database. Legal protection of databases as such (as distinct from programs for arranging the data, like Market Drive) cannot take the form of copyright, as the Supreme Court made clear in Feist when it held that the copyright clause of the Constitution does not authorize Congress to create copyright in mere data. But that is neither here nor there; what needs to be emphasized in this case is that the concerns . . . that actuate the legislative proposals for database protection have no relevance because AT is not the collector of the data that go into the database. All the data are collected and inputted by the assessors; it is they, not AT, that do the footwork, the heavy lifting. AT points to the terms of its license agreements with the municipalities, which though ambiguous might be interpreted to forbid the licensees to release the raw data, even without the duplication, or revelation of any copyrighted feature, of Market Drive. But AT is not suing for breach of the terms of the agreements—it can’t, since WIREdata is not a party to them. Nor is it suing for intentional interference with contract . . ., which would be the logical route for complaining about WIREdata’s inviting the municipalities that are AT’s licensees to violate the terms of their license. The licenses do nothing for AT in this case. So it is irrelevant that ProCD, Inc. v. Zeidenberg, 86 F.3d 1447, 1453-55 (7th Cir. 1996), holds that a copyright owner can by contract limit copying beyond the right that a copyright confers. See also Bowers v. Baystate Technologies, Inc., 320 F.3d 1317, 1323-26 (Fed. Cir. 2003). Like other property rights, a copyright is enforceable against persons with whom the owner has no contractual relations; so a property owner can eject a trespasser even though the trespasser had not contractually bound himself to refrain from entering the property. That is why AT is suing WIREdata for copyright infringement rather than for breach of contract. The scope of a copyright is given by federal law, but the scope of contractual protection is, at least prima facie, whatever the parties to the contract agreed to. . . . But our plaintiff did not create the database that it is seeking to sequester from WIREdata; or to be more precise, it created only an empty database, a bin that the tax assessors filled with the data. It created the compartments in the bin and the instructions for sorting the data to those compartments,

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but those were its only innovations and their protection by copyright law is complete. To try by contract or otherwise to prevent the municipalities from revealing their own data, especially when, as we have seen, the complete data are unavailable anywhere else, might constitute copyright misuse. The doctrine of misuse “prevents copyright holders from leveraging their limited monopoly to allow them control of areas outside the monopoly.” A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004, 1026-27 (9th Cir. 2001); see Alcatel USA, Inc. v. DGI Technologies, Inc., 166 F.3d 772, 792-95 (5th Cir. 1999); Practice Management Information Corp. v. American Medical Ass’n, 121 F.3d 516, 520-21 (1997), amended, 133 F.3d 1140 (9th Cir. 1998); DSC Communications Corp. v. DGI Technologies, Inc., 81 F.3d 597, 601-02 (5th Cir. 1996); Lasercomb America, Inc. v. Reynolds, 911 F.2d 970, 976-79 (4th Cir. 1990). The data in the municipalities’ tax assessment databases are beyond the scope of AT’s copyright. It is true that in Reed-Union Corp. v. Turtle Wax, Inc., 77 F.3d 909, 913 (7th Cir. 1996), we left open the question whether copyright misuse, unless it rises to the level of an antitrust violation, is a defense to infringement; our earlier decision in Saturday Evening Post Co. v. Rumbleseat Press, Inc., 816 F.2d 1191, 1200 (7th Cir. 1987), had intimated skepticism. No effort has been made by WIREdata to show that AT has market power merely by virtue of its having a copyright on one system for compiling valuation data for real estate tax assessment purposes. Cases such as Lasercomb, however, cut misuse free from antitrust, pointing out that the cognate doctrine of patent misuse is not so limited, 911 F.3d at 977-78, though a difference is that patents tend to confer greater market power on their owners than copyrights do, since patents protect ideas and copyrights, as we have noted, do not. The argument for applying copyright misuse beyond the bounds of antitrust, besides the fact that confined to antitrust the doctrine would be redundant, is that for a copyright owner to use an infringement suit to obtain property protection, here in data, that copyright law clearly does not confer, hoping to force a settlement or even achieve an outright victory over an opponent that may lack the resources or the legal sophistication to resist effectively, is an abuse of process. We need not run this hare to the ground; nor decide whether the licenses interpreted as AT would have us interpret them—as barring municipalities from disclosing noncopyrighted data—would violate the state’s open records law. . . . WIREdata is not a licensee of AT, and AT is not suing to enforce any contract it might have with WIREdata. It therefore had no cause to drag the licenses before us. But since it did, we shall not conceal our profound skepticism concerning AT’s interpretation. If accepted, it would forbid municipalities licensed by AT to share the data in their tax-assessment databases with each other even for the purpose of comparing or coordinating their assessment methods, though all the data they would be exchanging would be data that their assessors had collected and inputted into the databases. That seems an absurd result. To summarize, there are at least four possible methods by which WIREdata can obtain the data it is seeking without infringing AT’s copyright; which one is selected is for the municipality to decide in light of applicable trade-secret, open-records, and contract laws. The methods are: (1) the municipalities use Market Drive to extract the data and place it in an electronic file; (2) they use Microsoft Access to create an

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electronic file of the data; (3) they allow programmers furnished by WIREdata to use their computers to extract the data from their database—this is really just an alternative to WIREdata’s paying the municipalities’ cost of extraction, which the open-records law requires; (4) they copy the database file and give it to WIREdata to extract the data from. . . .

68. Federal Trade Commission v. Actavis, Inc., 133 S. Ct. 2223 (2013) SUPREME COURT OF THE UNITED STATES Justice Breyer delivered the opinion of the Court. Company A sues Company B for patent infringement. The two companies settle under terms that require (1) Company B, the claimed infringer, not to produce the patented product until the patent’s term expires, and (2) Company A, the patentee, to pay B many millions of dollars. Because the settlement requires the patentee to pay the alleged infringer, rather than the other way around, this kind of settlement agreement is often called a “reverse payment” settlement agreement. And the basic question here is whether such an agreement can sometimes unreasonably diminish competition in violation of the antitrust laws. See, e.g., 15 U.S.C. §1 (Sherman Act prohibition of “restraint[s] of trade or commerce”). Cf. Palmer v. BRG of Ga., Inc., 498 U.S. 46 (1990) (per curiam) (invalidating agreement not to compete). In this case, the Eleventh Circuit dismissed a Federal Trade Commission (FTC) complaint claiming that a particular reverse payment settlement agreement violated the antitrust laws. In doing so, the Circuit stated that a reverse payment settlement agreement generally is “immune from antitrust attack so long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent.” FTC v. Watson Pharms., Inc., 677 F.3d 1298, 1312 (2012). And since the alleged infringer’s promise not to enter the patentee’s market expired before the patent’s term ended, the Circuit found the agreement legal and dismissed the FTC complaint. Id., at 1315. In our view, however, reverse payment settlements such as the agreement alleged in the complaint before us can sometimes violate the antitrust laws. We consequently hold that the Eleventh Circuit should have allowed the FTC’s lawsuit to proceed. Apparently most if not all reverse payment settlement agreements arise in the context of pharmaceutical drug regulation, and specifically in the context of suits brought under statutory provisions allowing a generic drug manufacturer (seeking speedy marketing approval) to challenge the validity of a patent owned by an already-approved brand-name drug owner. . . . We consequently describe four key features of the relevant drug-regulatory framework established by the Drug Price Competition and Patent Term Restoration Act of 1984, 98 Stat. 1585, as amended. That Act is commonly known as the Hatch-Waxman Act. First, a drug manufacturer, wishing to market a new prescription drug, must submit a New Drug Application to the federal Food and Drug Administration (FDA) and undergo a long, comprehensive, and costly testing process, after which, if

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successful, the manufacturer will receive marketing approval from the FDA. See 21 U.S.C. §355(b)(1) (requiring, among other things, “full reports of investigations” into safety and effectiveness; “a full list of the articles used as components”; and a “full description” of how the drug is manufactured, processed, and packed). Second, once the FDA has approved a brand-name drug for marketing, a manufacturer of a generic drug can obtain similar marketing approval through use of abbreviated procedures. The Hatch-Waxman Act permits a generic manufacturer to file an Abbreviated New Drug Application specifying that the generic has the “same active ingredients as,” and is “biologically equivalent” to, the already-approved brand-name drug. . . . In this way the generic manufacturer can obtain approval while avoiding the “costly and time-consuming studies” needed to obtain approval “for a pioneer drug.” . . . The Hatch-Waxman process, by allowing the generic to piggy-back on the pioneer’s approval efforts, “speed[s] the introduction of low-cost generic drugs to market,” . . . thereby furthering drug competition. Third, the Hatch-Waxman Act sets forth special procedures for identifying, and resolving, related patent disputes. It requires the pioneer brand-name manufacturer to list in its New Drug Application the “number and the expiration date” of any relevant patent. See 21 U.S.C. §355(b)(1). And it requires the generic manufacturer in its Abbreviated New Drug Application to “assure the FDA” that the generic “will not infringe” the brand-name’s patents. . . . The generic can provide this assurance in one of several ways. See 21 U.S.C. §355(j)(2)(A)(vii). It can certify that the brand-name manufacturer has not listed any relevant patents. It can certify that any relevant patents have expired. It can request approval to market beginning when any still-in-force patents expire. Or, it can certify that any listed, relevant patent “is invalid or will not be infringed by the manufacture, use, or sale” of the drug described in the Abbreviated New Drug Application. See §355(j)(2)(A)(vii)(IV). Taking this last-mentioned route (called the “paragraph IV” route), automatically counts as patent infringement, see 35 U.S.C. §271(e)(2)(A) (2006 ed., Supp. V), and often “means provoking litigation.” . . . If the brand-name patentee brings an infringement suit within 45 days, the FDA then must withhold approving the generic, usually for a 30-month period, while the parties litigate patent validity (or infringement) in court. If the courts decide the matter within that period, the FDA follows that determination; if they do not, the FDA may go forward and give approval to market the generic product. See 21 U.S.C. §355(j)(5)(B)(iii). Fourth, Hatch-Waxman provides a special incentive for a generic to be the first to file an Abbreviated New Drug Application taking the paragraph IV route. That applicant will enjoy a period of 180 days of exclusivity (from the first commercial marketing of its drug). See §355(j)(5)(B)(iv) (establishing exclusivity period). During that period of exclusivity no other generic can compete with the brand-name drug. If the first-to-file generic manufacturer can overcome any patent obstacle and bring the generic to market, this 180-day period of exclusivity can prove valuable, possibly “worth several hundred million dollars.” . . . Indeed, the Generic Pharmaceutical Association said in 2006 that the “vast majority of potential profits for a generic drug manufacturer materialize during the 180-day exclusivity period.” . . . The 180-day exclusivity period, however, can belong only to the first generic to file. Should that

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first-to-file generic forfeit the exclusivity right in one of the ways specified by statute, no other generic can obtain it. See §355(j)(5)(D). In 1999, Solvay Pharmaceuticals, a respondent here, filed a New Drug Application for a brand-name drug called AndroGel. The FDA approved the application in 2000. In 2003, Solvay obtained a relevant patent and disclosed that fact to the FDA, 677 F.3d, at 1308, as Hatch-Waxman requires. See §355(c)(2) (requiring, in addition, that FDA must publish new patent information upon submission). Later the same year another respondent, Actavis, Inc. (then known as Watson Pharmaceuticals), filed an Abbreviated New Drug Application for a generic drug modeled after AndroGel. Subsequently, Paddock Laboratories, also a respondent, separately filed an Abbreviated New Drug Application for its own generic product. Both Actavis and Paddock certified under paragraph IV that Solvay’s listed patent was invalid and their drugs did not infringe it. A fourth manufacturer, Par Pharmaceutical, likewise a respondent, did not file an application of its own but joined forces with Paddock, agreeing to share the patent litigation costs in return for a share of profits if Paddock obtained approval for its generic drug. Solvay initiated paragraph IV patent litigation against Actavis and Paddock. Thirty months later the FDA approved Actavis’ first-to-file generic product, but, in 2006, the patent-litigation parties all settled. Under the terms of the settlement Actavis agreed that it would not bring its generic to market until August 31, 2015, 65 months before Solvay’s patent expired (unless someone else marketed a generic sooner). Actavis also agreed to promote AndroGel to urologists. The other generic manufacturers made roughly similar promises. And Solvay agreed to pay millions of dollars to each generic—$12 million in total to Paddock; $60 million in total to Par; and an estimated $19-$30 million annually, for nine years, to Actavis. . . . The companies described these payments as compensation for other services the generics promised to perform, but the FTC contends the other services had little value. According to the FTC the true point of the payments was to compensate the generics for agreeing not to compete against AndroGel until 2015. . . . On January 29, 2009, the FTC filed this lawsuit against all the settling parties, namely, Solvay, Actavis, Paddock, and Par. The FTC’s complaint (as since amended) alleged that respondents violated §5 of the Federal Trade Commission Act, 15 U.S.C. §45, by unlawfully agreeing “to share in Solvay’s monopoly profits, abandon their patent challenges, and refrain from launching their low-cost generic products to compete with AndroGel for nine years.” . . . See generally FTC v. Indiana Federation of Dentists, 476 U.S. 447, 454 (1986) (Section 5 “encompass[es] . . . practices that violate the Sherman Act and the other antitrust laws”). The District Court held that these allegations did not set forth an antitrust law violation. In re Androgel Antitrust Litigation (No. II), 687 F. Supp. 2d 1371, 1379 (ND Ga. 2010). It accordingly dismissed the FTC’s complaint. The FTC appealed. The Court of Appeals for the Eleventh Circuit affirmed the District Court. It wrote that “absent sham litigation or fraud in obtaining the patent, a reverse payment settlement is immune from antitrust attack so long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent.” 677 F.3d, at 1312. The court recognized that “antitrust laws typically prohibit agreements where one

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company pays a potential competitor not to enter the market.” Id., at 1307 (citing Valley Drug Co. v. Geneva Pharmaceuticals, Inc., 344 F.3d 1294, 1304 (CA11 2003)). See also Palmer, 498 U.S., at 50 (agreement to divide territorial markets held “unlawful on its face”). But, the court found that “reverse payment settlements of patent litigation presen[t] atypical cases because one of the parties owns a patent.” 677 F.3d, at 1307 (internal quotation marks and second alteration omitted). Patent holders have a “lawful right to exclude others from the market,” ibid. (internal quotation marks omitted); thus a patent “conveys the right to cripple competition.” Id., at 1310 (internal quotation marks omitted). The court recognized that, if the parties to this sort of case do not settle, a court might declare the patent invalid. Id., at 1305. But, in light of the public policy favoring settlement of disputes (among other considerations) it held that the courts could not require the parties to continue to litigate in order to avoid antitrust liability. Id., at 1313-1314. . . . Solvay’s patent, if valid and infringed, might have permitted it to charge drug prices sufficient to recoup the reverse settlement payments it agreed to make to its potential generic competitors. And we are willing to take this fact as evidence that the agreement’s “anticompetitive effects fall within the scope of the exclusionary potential of the patent.” 677 F.3d, at 1312. But we do not agree that that fact, or characterization, can immunize the agreement from antitrust attack. For one thing, to refer, as the Circuit referred, simply to what the holder of a valid patent could do does not by itself answer the antitrust question. The patent here may or may not be valid, and may or may not be infringed. “[A] valid patent excludes all except its owner from the use of the protected process or product,” United States v. Line Material Co., 333 U.S. 287, 308, 68 S. Ct. 550, 92 L. Ed. 701 (1948) (emphasis added). And that exclusion may permit the patent owner to charge a higher-than-competitive price for the patented product. But an invalidated patent carries with it no such right. And even a valid patent confers no right to exclude products or processes that do not actually infringe. The paragraph IV litigation in this case put the patent’s validity at issue, as well as its actual preclusive scope. The parties’ settlement ended that litigation. The FTC alleges that in substance, the plaintiff agreed to pay the defendants many millions of dollars to stay out of its market, even though the defendants did not have any claim that the plaintiff was liable to them for damages. That form of settlement is unusual. And, for reasons discussed in Part II-B, infra, there is reason for concern that settlements taking this form tend to have significant adverse effects on competition. Given these factors, it would be incongruous to determine antitrust legality by measuring the settlement’s anticompetitive effects solely against patent law policy, rather than by measuring them against procompetitive antitrust policies as well. And indeed, contrary to the Circuit’s view that the only pertinent question is whether “the settlement agreement . . . fall[s] within” the legitimate “scope” of the patent’s “exclusionary potential,” 677 F.3d, at 1309, 1312, this Court has indicated that patent and antitrust policies are both relevant in determining the “scope of the patent monopoly”—and consequently antitrust law immunity—that is conferred by a patent. Thus, the Court in Line Material explained that “the improper use of [a patent] monopoly,” is “invalid” under the antitrust laws and resolved the antitrust question in

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that case by seeking an accommodation “between the lawful restraint on trade of the patent monopoly and the illegal restraint prohibited broadly by the Sherman Act.” 333 U.S., at 310. To strike that balance, the Court asked questions such as whether “the patent statute specifically gives a right” to restrain competition in the manner challenged; and whether “competition is impeded to a greater degree” by the restraint at issue than other restraints previously approved as reasonable. Id., at 311. See also United States v. United States Gypsum Co., 333 U.S. 364, 390-391 (1948) (courts must “balance the privileges of [the patent holder] and its licensees under the patent grants with the prohibitions of the Sherman Act against combinations and attempts to monopolize”); Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172, 174 (1965) (“[E]nforcement of a patent procured by fraud” may violate the Sherman Act). In short, rather than measure the length or amount of a restriction solely against the length of the patent’s term or its earning potential, as the Court of Appeals apparently did here, this Court answered the antitrust question by considering traditional antitrust factors such as likely anticompetitive effects, redeeming virtues, market power, and potentially offsetting legal considerations present in the circumstances, such as here those related to patents. . . . Whether a particular restraint lies “beyond the limits of the patent monopoly” is a conclusion that flows from that analysis and not, as The Chief Justice suggests, its starting point. Post, at ___, ___, 186 L. Ed. 2d, at 366, 369 (dissenting opinion). For another thing, this Court’s precedents make clear that patent-related settlement agreements can sometimes violate the antitrust laws. In United States v. Singer Mfg. Co., 374 U.S. 174 (1963), for example, two sewing machine companies possessed competing patent claims; a third company sought a patent under circumstances where doing so might lead to the disclosure of information that would invalidate the other two firms’ patents. All three firms settled their patent-related disagreements while assigning the broadest claims to the firm best able to enforce the patent against yet other potential competitors. Id., at 190-192. The Court did not examine whether, on the assumption that all three patents were valid, patent law would have allowed the patents’ holders to do the same. Rather, emphasizing that the Sherman Act “imposes strict limitations on the concerted activities in which patent owners may lawfully engage,” id., at 197, it held that the agreements, although settling patent disputes, violated the antitrust laws. Id., at 195, 197. And that, in important part, was because “the public interest in granting patent monopolies” exists only to the extent that “the public is given a novel and useful invention” in “consideration for its grant.” Id., at 199 (White, J., concurring). See also United States v. New Wrinkle, Inc., 342 U.S. 371, 378 (1952) (applying antitrust scrutiny to patent settlement); Standard Oil Co. (Indiana) v. United States, 283 U.S. 163 (1931) (same). Similarly, both within the settlement context and without, the Court has struck down overly restrictive patent licensing agreements—irrespective of whether those agreements produced supra-patent-permitted revenues. We concede that in United States v. General Elec. Co., 272 U.S. 476, 489 (1926), the Court permitted a single patentee to grant to a single licensee a license containing a minimum resale price requirement. But in Line Material, supra, at 308, the Court held that the antitrust laws forbid a group of patentees, each owning one or more patents, to cross-license each

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other, and, in doing so, to insist that each licensee maintain retail prices set collectively by the patent holders. The Court was willing to presume that the single-patentee practice approved in General Electric was a “reasonable restraint” that “accords with the patent monopoly granted by the patent law,” 333 U.S., at 312, but declined to extend that conclusion to multiple-patentee agreements: “As the Sherman Act prohibits agreements to fix prices, any arrangement between patentees runs afoul of that prohibition and is outside the patent monopoly.” Ibid. In New Wrinkle, 342 U.S., at 378, the Court held roughly the same, this time in respect to a similar arrangement in settlement of a litigation between two patentees, each of which contended that its own patent gave it the exclusive right to control production. That one or the other company (we may presume) was right about its patent did not lead the Court to confer antitrust immunity. Far from it, the agreement was found to violate the Sherman Act. Id., at 380. Finally in Standard Oil Co. (Indiana), the Court upheld cross-licensing agreements among patentees that settled actual and impending patent litigation, 283 U.S., at 168, which agreements set royalty rates to be charged third parties for a license to practice all the patents at issue (and which divided resulting revenues). But, in doing so, Justice Brandeis, writing for the Court, warned that such an arrangement would have violated the Sherman Act had the patent holders thereby “dominate[d]” the industry and “curtail[ed] the manufacture and supply of an unpatented product.” Id., at 174. These cases do not simply ask whether a hypothetically valid patent’s holder would be able to charge, e.g., the high prices that the challenged patent-related term allowed. Rather, they seek to accommodate patent and antitrust policies, finding challenged terms and conditions unlawful unless patent law policy offsets the antitrust law policy strongly favoring competition. . . . Finally, the Hatch-Waxman Act itself does not embody a statutory policy that supports the Eleventh Circuit’s view. Rather, the general procompetitive thrust of the statute, its specific provisions facilitating challenges to a patent’s validity, . . . and its later-added provisions requiring parties to a patent dispute triggered by a paragraph IV filing to report settlement terms to the FTC and the Antitrust Division of the Department of Justice, all suggest the contrary. See §§1112-1113, 117 Stat. 2461-2462. Those interested in legislative history may also wish to examine the statements of individual Members of Congress condemning reverse payment settlements in advance of the 2003 amendments. See, e.g., 148 Cong. Rec. 14437 (2002) (remarks of Sen. Hatch) (“It was and is very clear that the [Hatch-Waxman Act] was not designed to allow deals between brand and generic companies to delay competition”); 146 Cong. Rec. 18774 (2000) (remarks of Rep. Waxman) (introducing bill to deter companies from “strik[ing] collusive agreements to trade multimillion dollar payoffs by the brand company for delays in the introduction of lower cost, generic alternatives”). The Eleventh Circuit’s conclusion finds some degree of support in a general legal policy favoring the settlement of disputes. 677 F.3d, at 1313-1314. See also ScheringPlough Corp. v. FTC, 402 F.3d 1056, 1074-1075 (2005) (same); In re Tamoxifen Citrate, 466 F.3d, at 202 (noting public’s “strong interest in settlement” of complex and expensive cases). The Circuit’s related underlying practical concern consists of its fear that antitrust scrutiny of a reverse payment agreement would require the parties to litigate the validity of the patent in order to demonstrate what would have happened to

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competition in the absence of the settlement. Any such litigation will prove time consuming, complex, and expensive. The antitrust game, the Circuit may believe, would not be worth that litigation candle. We recognize the value of settlements and the patent litigation problem. But we nonetheless conclude that this patent-related factor should not determine the result here. Rather, five sets of considerations lead us to conclude that the FTC should have been given the opportunity to prove its antitrust claim. First, the specific restraint at issue has the “potential for genuine adverse effects on competition.” Indiana Federation of Dentists, 476 U.S., at 460-461 . . . The payment in effect amounts to a purchase by the patentee of the exclusive right to sell its product, a right it already claims but would lose if the patent litigation were to continue and the patent were held invalid or not infringed by the generic product. Suppose, for example, that the exclusive right to sell produces $50 million in supracompetitive profits per year for the patentee. And suppose further that the patent has 10 more years to run. Continued litigation, if it results in patent invalidation or a finding of noninfringement, could cost the patentee $500 million in lost revenues, a sum that then would flow in large part to consumers in the form of lower prices. We concede that settlement on terms permitting the patent challenger to enter the market before the patent expires would also bring about competition, again to the consumer’s benefit. But settlement on the terms said by the FTC to be at issue here—payment in return for staying out of the market—simply keeps prices at patentee-set levels, potentially producing the full patent-related $500 million monopoly return while dividing that return between the challenged patentee and the patent challenger. The patentee and the challenger gain; the consumer loses. Indeed, there are indications that patentees sometimes pay a generic challenger a sum even larger than what the generic would gain in profits if it won the paragraph IV litigation and entered the market. . . . The rationale behind a payment of this size cannot in every case be supported by traditional settlement considerations. The payment may instead provide strong evidence that the patentee seeks to induce the generic challenger to abandon its claim with a share of its monopoly profits that would otherwise be lost in the competitive market. But, one might ask, as a practical matter would the parties be able to enter into such an anticompetitive agreement? Would not a high reverse payment signal to other potential challengers that the patentee lacks confidence in its patent, thereby provoking additional challenges, perhaps too many for the patentee to “buy off?” Two special features of Hatch-Waxman mean that the answer to this question is “not necessarily so.” First, under Hatch-Waxman only the first challenger gains the special advantage of 180 days of an exclusive right to sell a generic version of the brand-name product. . . . And as noted, that right has proved valuable—indeed, it can be worth several hundred million dollars. . . . Subsequent challengers cannot secure that exclusivity period, and thus stand to win significantly less than the first if they bring a successful paragraph IV challenge. That is, if subsequent litigation results in invalidation of the patent, or a ruling that the patent is not infringed, that litigation victory will free not just the challenger to compete, but all other potential competitors too (once they obtain FDA approval). The potential reward available to a subsequent challenger being

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significantly less, the patentee’s payment to the initial challenger (in return for not pressing the patent challenge) will not necessarily provoke subsequent challenges. Second, a generic that files a paragraph IV after learning that the first filer has settled will (if sued by the brand-name) have to wait out a stay period of (roughly) 30 months before the FDA may approve its application, just as the first filer did. See 21 U.S.C. §355(j)(5)(B)(iii). These features together mean that a reverse payment settlement with the first filer (or, as in this case, all of the initial filers) “removes from consideration the most motivated challenger, and the one closest to introducing competition.” . . . The dissent may doubt these provisions matter, post, at ___ - ___, 186 L. Ed. 2d, at 373-374, but scholars in the field tell us that “where only one party owns a patent, it is virtually unheard of outside of pharmaceuticals for that party to pay an accused infringer to settle the lawsuit.” . . . It may well be that Hatch-Waxman’s unique regulatory framework, including the special advantage that the 180-day exclusivity period gives to first filers, does much to explain why in this context, but not others, the patentee’s ordinary incentives to resist paying off challengers (i.e., the fear of provoking myriad other challengers) appear to be more frequently overcome. . . . Second, these anticompetitive consequences will at least sometimes prove unjustified. . . . As the FTC admits, offsetting or redeeming virtues are sometimes present. . . . The reverse payment, for example, may amount to no more than a rough approximation of the litigation expenses saved through the settlement. That payment may reflect compensation for other services that the generic has promised to perform—such as distributing the patented item or helping to develop a market for that item. There may be other justifications. Where a reverse payment reflects traditional settlement considerations, such as avoided litigation costs or fair value for services, there is not the same concern that a patentee is using its monopoly profits to avoid the risk of patent invalidation or a finding of noninfringement. In such cases, the parties may have provided for a reverse payment without having sought or brought about the anticompetitive consequences we mentioned above. But that possibility does not justify dismissing the FTC’s complaint. An antitrust defendant may show in the antitrust proceeding that legitimate justifications are present, thereby explaining the presence of the challenged term and showing the lawfulness of that term under the rule of reason. See, e.g., Indiana Federation of Dentists, supra, at 459 . . . Third, where a reverse payment threatens to work unjustified anticompetitive harm, the patentee likely possesses the power to bring that harm about in practice. . . . At least, the “size of the payment from a branded drug manufacturer to a prospective generic is itself a strong indicator of power”—namely, the power to charge prices higher than the competitive level. . . . An important patent itself helps to assure such power. Neither is a firm without that power likely to pay “large sums” to induce “others to stay out of its market.” Ibid. In any event, the Commission has referred to studies showing that reverse payment agreements are associated with the presence of higherthan-competitive profits—a strong indication of market power. . . . Fourth, an antitrust action is likely to prove more feasible administratively than the Eleventh Circuit believed. The Circuit’s holding does avoid the need to litigate the patent’s validity (and also, any question of infringement). But to do so, it throws the baby out with the bath water, and there is no need to take that drastic step. That is

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because it is normally not necessary to litigate patent validity to answer the antitrust question (unless, perhaps, to determine whether the patent litigation is a sham, see 677 F.3d, at 1312). An unexplained large reverse payment itself would normally suggest that the patentee has serious doubts about the patent’s survival. And that fact, in turn, suggests that the payment’s objective is to maintain supracompetitive prices to be shared among the patentee and the challenger rather than face what might have been a competitive market—the very anticompetitive consequence that underlies the claim of antitrust unlawfulness. The owner of a particularly valuable patent might contend, of course, that even a small risk of invalidity justifies a large payment. But, be that as it may, the payment (if otherwise unexplained) likely seeks to prevent the risk of competition. And, as we have said, that consequence constitutes the relevant anticompetitive harm. In a word, the size of the unexplained reverse payment can provide a workable surrogate for a patent’s weakness, all without forcing a court to conduct a detailed exploration of the validity of the patent itself. . . . Fifth, the fact that a large, unjustified reverse payment risks antitrust liability does not prevent litigating parties from settling their lawsuit. They may, as in other industries, settle in other ways, for example, by allowing the generic manufacturer to enter the patentee’s market prior to the patent’s expiration, without the patentee paying the challenger to stay out prior to that point. Although the parties may have reasons to prefer settlements that include reverse payments, the relevant antitrust question is: What are those reasons? If the basic reason is a desire to maintain and to share patent-generated monopoly profits, then, in the absence of some other justification, the antitrust laws are likely to forbid the arrangement. In sum, a reverse payment, where large and unjustified, can bring with it the risk of significant anticompetitive effects; one who makes such a payment may be unable to explain and to justify it; such a firm or individual may well possess market power derived from the patent; a court, by examining the size of the payment, may well be able to assess its likely anticompetitive effects along with its potential justifications without litigating the validity of the patent; and parties may well find ways to settle patent disputes without the use of reverse payments. In our view, these considerations, taken together, outweigh the single strong consideration—the desirability of settlements—that led the Eleventh Circuit to provide near-automatic antitrust immunity to reverse payment settlements. The FTC urges us to hold that reverse payment settlement agreements are presumptively unlawful and that courts reviewing such agreements should proceed via a “quick look” approach, rather than applying a “rule of reason.” . . . That is because the likelihood of a reverse payment bringing about anticompetitive effects depends upon its size, its scale in relation to the payor’s anticipated future litigation costs, its independence from other services for which it might represent payment, and the lack of any other convincing justification. The existence and degree of any anticompetitive consequence may also vary as among industries. These complexities lead us to conclude that the FTC must prove its case as in other rule-of-reason cases. To say this is not to require the courts to insist, contrary to what we have said, that the Commission need litigate the patent’s validity, empirically demonstrate the

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virtues or vices of the patent system, present every possible supporting fact or refute every possible pro-defense theory. . . .

§2.04 [A]

REMEDIES Injunctions

46. Even though it is frequently cited as a groundbreaking opinion, actually the eBay opinion follows a long line of consistent United States Supreme Court’s opinions that reject the grant of injunctions when the public interest does not recommend them. See, e.g., the Mercoid opinion (citing various precedents) (see case no. 40). This is the doctrine of equity, which determines that, in assessing the convenience of granting injunctions—provisional and final likewise—courts of equity must weigh the private interests of the parties against the general public interest. The doctrine of equity has been transposed to art. 41.2 of the TRIPS Agreement (“procedures concerning the enforcement of intellectual property rights shall be fair and equitable.”)

69. eBay Inc. v. Mercexchange, LLC, 547 U.S. 388 (2006) SUPREME COURT OF THE UNITED STATES Justice Thomas delivered the opinion of the Court. Ordinarily, a federal court considering whether to award permanent injunctive relief to a prevailing plaintiff applies the four-factor test historically employed by courts of equity. Petitioners eBay Inc. and Half.com, Inc., argue that this traditional test applies to disputes arising under the Patent Act. We agree and, accordingly, vacate the judgment of the Court of Appeals. Petitioner eBay operates a popular Internet Web site that allows private sellers to list goods they wish to sell, either through an auction or at a fixed price. Petitioner Half.com, now a wholly owned subsidiary of eBay, operates a similar Web site. Respondent MercExchange, L. L. C., holds a number of patents, including a business method patent for an electronic market designed to facilitate the sale of goods between private individuals by establishing a central authority to promote trust among participants. See U.S. Patent No. 5,845,265. MercExchange sought to license its patent to eBay and Half.com, as it had previously done with other companies, but the parties failed to reach an agreement. MercExchange subsequently filed a patent infringement suit against eBay and Half.com in the United States District Court for the Eastern District of Virginia. A jury found that MercExchange’s patent was valid, that eBay and Half.com had infringed that patent, and that an award of damages was appropriate.

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Following the jury verdict, the District Court denied MercExchange’s motion for permanent injunctive relief. 275 F. Supp. 2d 695 (2003). The Court of Appeals for the Federal Circuit reversed, applying its “general rule that courts will issue permanent injunctions against patent infringement absent exceptional circumstances.” 401 F.3d 1323, 1339 (2005). We granted certiorari to determine the appropriateness of this general rule. 546 U.S. 1029 (2005). According to well-established principles of equity, a plaintiff seeking a permanent injunction must satisfy a four-factor test before a court may grant such relief. A plaintiff must demonstrate: (1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction. See, e.g., Weinberger v. Romero-Barcelo, 456 U.S. 305, 311-313 (1982); Amoco Production Co. v. Gambell, 480 U.S. 531, 542 (1987). The decision to grant or deny permanent injunctive relief is an act of equitable discretion by the district court, reviewable on appeal for abuse of discretion. See, e.g., Romero-Barcelo, 456 U.S., at 320. These familiar principles apply with equal force to disputes arising under the Patent Act. As this Court has long recognized, “a major departure from the long tradition of equity practice should not be lightly implied.” Ibid.; see also Amoco, supra, at 542. Nothing in the Patent Act indicates that Congress intended such a departure. To the contrary, the Patent Act expressly provides that injunctions “may” issue “in accordance with the principles of equity.” 35 U.S.C. § 283. To be sure, the Patent Act also declares that “patents shall have the attributes of personal property,” § 261, including “the right to exclude others from making, using, offering for sale, or selling the invention,” §154(a)(1). According to the Court of Appeals, this statutory right to exclude alone justifies its general rule in favor of permanent injunctive relief. 401 F.3d, at 1338. But the creation of a right is distinct from the provision of remedies for violations of that right. Indeed, the Patent Act itself indicates that patents shall have the attributes of personal property “[s]ubject to the provisions of this title,” 35 U.S.C. § 261, including, presumably, the provision that injunctive relief “may” issue only “in accordance with the principles of equity,” § 283. This approach is consistent with our treatment of injunctions under the Copyright Act. Like a patent owner, a copyright holder possesses “the right to exclude others from using his property.” Fox Film Corp. v. Doyal, 286 U.S. 123, 127 (1932); see also id., at 127-128 (“A copyright, like a patent, is at once the equivalent given by the public for benefits bestowed by the genius and meditations and skill of individuals and the incentive to further efforts for the same important objects” (internal quotation marks omitted)). Like the Patent Act, the Copyright Act provides that courts “may” grant injunctive relief “on such terms as it may deem reasonable to prevent or restrain infringement of a copyright.” 17 U.S.C. § 502(a). And as in our decision today, this Court has consistently rejected invitations to replace traditional equitable considerations with a rule that an injunction automatically follows a determination that a

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copyright has been infringed. See, e.g., New York Times Co. v. Tasini, 533 U.S. 483, 505 (2001) (citing Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 578, n. 10 (1994)); Dun v. Lumbermen’s Credit Assn., 209 U.S. 20, 23-24 (1908). Neither the District Court nor the Court of Appeals below fairly applied these traditional equitable principles in deciding respondent’s motion for a permanent injunction. Although the District Court recited the traditional four-factor test, 275 F. Supp. 2d, at 711, it appeared to adopt certain expansive principles suggesting that injunctive relief could not issue in a broad swath of cases. Most notably, it concluded that a “plaintiff’s willingness to license its patents” and “its lack of commercial activity in practicing the patents” would be sufficient to establish that the patent holder would not suffer irreparable harm if an injunction did not issue. Id., at 712. But traditional equitable principles do not permit such broad classifications. For example, some patent holders, such as university researchers or self-made inventors, might reasonably prefer to license their patents, rather than undertake efforts to secure the financing necessary to bring their works to market themselves. Such patent holders may be able to satisfy the traditional four-factor test, and we see no basis for categorically denying them the opportunity to do so. To the extent that the District Court adopted such a categorical rule, then, its analysis cannot be squared with the principles of equity adopted by Congress. The court’s categorical rule is also in tension with Continental Paper Bag Co. v. Eastern Paper Bag Co., 210 U.S. 405, 422-430 (1908), which rejected the contention that a court of equity has no jurisdiction to grant injunctive relief to a patent holder who has unreasonably declined to use the patent. In reversing the District Court, the Court of Appeals departed in the opposite direction from the four-factor test. The court articulated a “general rule,” unique to patent disputes, “that a permanent injunction will issue once infringement and validity have been adjudged.” 401 F.3d, at 1338. The court further indicated that injunctions should be denied only in the “unusual” case, under “exceptional circumstances” and “in rare instances . . . to protect the public interest.” Id., at 1338-1339. Just as the District Court erred in its categorical denial of injunctive relief, the Court of Appeals erred in its categorical grant of such relief. Cf. Roche Prods. v. Bolar Pharmaceutical Co., 733 F.2d 858, 865 (CAFed 1984) (recognizing the “considerable discretion” district courts have “in determining whether the facts of a situation require it to issue an injunction”). Because we conclude that neither court below correctly applied the traditional four-factor framework that governs the award of injunctive relief, we vacate the judgment of the Court of Appeals, so that the District Court may apply that framework in the first instance. In doing so, we take no position on whether permanent injunctive relief should or should not issue in this particular case, or indeed in any number of other disputes arising under the Patent Act. We hold only that the decision whether to grant or deny injunctive relief rests within the equitable discretion of the district courts, and that such discretion must be exercised consistent with traditional principles of equity, in patent disputes no less than in other cases governed by such standards. . . .

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Compulsory Licenses 70. United States v. Glaxo Group Ltd., 410 U.S. 52 (1973) SUPREME COURT OF THE UNITED STATES

Mr. Justice White delivered the opinion of the Court. . . . We are asked to decide whether the Government may challenge the validity of patents involved in illegal restraints of trade, when the defendants do not rely upon the patents in defense of their conduct, and whether the District Court erred in refusing certain relief requested by the Government. Appellees, Imperial Chemical Industries Ltd. (ICI) and Glaxo Group Ltd. (Glaxo), are British drug companies engaged in the manufacture and sale of griseofulvin. Griseofulvin is an antibiotic compound that may be cut with inert ingredients and administered orally in the form of capsules or tablets to humans or animals for the treatment of external fungus infections. There is no substitute for dosage-form griseofulvin in combating certain infections. Griseofulvin itself is unpatented and unpatentable. ICI owns various patents on the dosage form of the drug. Glaxo owns various patents on a method for manufacturing the drug in bulk form, as well as a patent on the finely ground, “microsize” dosage form of the drug. On April 26, 1960, ICI and Glaxo entered into a formal agreement pooling their griseofulvin patents. At the time of the execution of the agreement, ICI held patents on the dosage form of the drug, and Glaxo held bulk-form manufacturing patents. Pursuant to the agreement, ICI acquired the right to manufacture bulk-form griseofulvin under Glaxo’s patents, to sell bulk-form griseofulvin, and to sublicense under Glaxo’s patents. Glaxo was authorized to manufacture dosage-form griseofulvin and to sublicense under ICI’s patents. As part of the agreement, ICI undertook “not to sell and to use its best endeavors to prevent its subsidiaries and associates from selling any griseofulvin in bulk to any independent third party without Glaxo’s express consent in writing.” Subsequent to the pooling of the griseofulvin patents, ICI granted a sublicense to American Home Products Corp. (AMHO), ICI’s exclusive distributor in the United States. ICI agreed to sell bulk-form griseofulvin to AMHO. AMHO was authorized to process the bulk form into dosage form and to sell the drug in that form. With respect to bulk sales the agreement stated: “You [AMHO] will not, without first obtaining our [ICI’s] consent, resell, or redeliver in bulk supplies of griseofulvin.” Glaxo had previously entered into similar sublicensing agreements with two United States companies—Schering Corp. (Schering) and Johnson & Johnson (J & J). The agreements contained a covenant on the part of the licensees “not to sell or to permit its Affiliates to sell any griseofulvin in bulk to any independent third party without Glaxo’s express consent in writing.” On March 4, 1968, the United States filed a civil antitrust suit against ICI and Glaxo, pursuant to §4 of the Sherman Act, 15 U.S.C. §4, to restrain alleged violations of § 1of the Act, 26 Stat. 209, as amended, 15 U. S. C. §1. The Government charged that

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the restrictions on the sale and resale of bulk-form griseofulvin, contained in the 1960 ICI-Glaxo agreement and the various sublicensing agreements, were unreasonable restraints of trade. The Government also challenged the validity of ICI’s dosage-form patent. . . . The District Court, citing this Court’s decision in United States v. Arnold, Schwinn & Co., 388 U.S. 365 (1967), held that the bulk-sales restrictions contained in the ICI-AMHO agreement were per se violations of §1 of the Sherman Act. 302 F.Supp. 1 (DC 1969). Because ICI had filed an affidavit disclaiming any desire to rely on its patent in defense of the antitrust claims, the District Court struck the claims of patent invalidity from the Government’s complaint, ruling that the Government could not challenge ICI’s patent when it was not relied upon as a defense to the antitrust claims. The District Court also denied the Government’s motion to amend its complaint to allege the invalidity of Glaxo’s patent on “microsize” griseofulvin. Subsequently, in separate, unreported orders, the bulk-sales restrictions in the Glaxo-J & J, the Glaxo-Schering, and the Glaxo-ICI agreements were found to be per se violations of §1. The court enjoined future use of the bulk-sales restrictions, but refused the Government’s request to order mandatory, nondiscriminatory sales of the bulk form of the drug and reasonable-royalty licensing of the ICI and Glaxo patents as part of the relief. 328 F.Supp. 709 (DC 1971). . . . The major issue before us is whether the District Court erred in ruling that the United States could challenge the validity of a patent in the course of prosecuting an antitrust action only when the patent is relied on as a defense, which was not the case here. We agree with the United States that this was an unduly narrow view of the controlling cases. United States v. Bell Telephone Co., 167 U.S. 224 (1897), acknowledged prior decisions permitting the United States to sue to set aside a patent for fraud or deceit associated with its issuance, but held that the federal courts should not entertain suits by the Government “to set aside a patent for an invention on the mere ground of error of judgment on the part of the patent officials,” at least where the United States “has no proprietary or pecuniary [interest] in the setting aside of the patent [and] is not seeking to discharge its obligations to the public . . . .” 167 U.S., at 269, 265. Subsequently, United States v. United States Gypsum Co., 333 U.S. 364 (1948), referred to Bell Telephone as holding that the United States was “without standing to bring a suit in equity to cancel a patent on the ground of invalidity,” id., at 387, but went on to declare that, to vindicate the public interest in enjoining violations of the Sherman Act, the United States is entitled to attack the validity of patents relied upon to justify anticompetitive conduct otherwise violative of the law. The Court noted that, because of the public interest in free competition, it had repeatedly held that the private licensee-plaintiff in an antitrust suit may attack the validity of the patent under which he is licensed even though he has agreed not to do so in his license. The authorities for this proposition were Sola Electric Co. v. Jefferson Electric Co., 317 U.S. 173 (1942); Edward Katzinger Co. v. Chicago Metallic Mfg. Co., 329 U.S. 394 (1947); and MacGregor v. Westinghouse Electric & Mfg. Co., 329 U.S. 402 (1947). The essence of those cases is best revealed in Katzinger where the Court held that, although a patent licensee (under the then-controlling law) was normally foreclosed from questioning the validity of a

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patent he is privileged to use, the bar is removed when he alleges conduct by the patentee that would be illegal under the antitrust laws, absent the patent. The licensee was free to challenge the patent in these circumstances because the “federal courts must, in the public interest, keep the way open for the challenge of patents which are utilized for price-fixing . . . .” Id., at 399. Katzinger and Gypsum were much in the tradition of Pope Mfg. Co. v. Gormully, 144 U.S. 224, 234 (1892): “It is as important to the public that competition should not be repressed by worthless patents, as that the patentee of a really valuable invention should be protected in his monopoly . . . ,” a view most recently echoed in Lear, Inc. v. Adkins, 395 U.S. 653, 670 (1969). We think that the principle of these cases is sufficient authority for permitting the Government to raise and litigate the validity of the ICI-Glaxo patents in this antitrust case. According to the record, appellees had issued licenses under their patents that unreasonably restrained trade by prohibiting the licensees from selling or reselling bulk-form griseofulvin and had included in the pooling agreement a covenant to impose such restrictions on licensees. These charges were sustained, the court concluding that the covenant and the patent license provisions were per se restraints of trade in the griseofulvin product market. The District Court was then faced with the Government’s attack on the pertinent patents as well as its demand for mandatory sales and reasonable-royalty licensing, the latter being well-established forms of relief when necessary to an effective remedy, particularly where patents have provided the leverage for or have contributed to the antitrust violation adjudicated. See for example, Besser Mfg. Co. v. United States, 343 U.S. 444 (1952); United States v. United States Gypsum Co., 340 U.S. 76 (1950); International Salt Co. v. United States, 332 U.S. 392 (1947); Hartford-Empire Co. v. United States, 323 U.S. 386 (1945). Appellees opposed mandatory sales and compulsory licensing, asserting that the Government would “deny defendants an essential ingredient of their rights under the patent system,” and that there was no warrant for “such a drastic forfeiture of their rights.” In this context, where the court would necessarily be dealing with the future enforceability of the patents, we think it would have been appropriate, if it appeared that the Government’s claims for further relief were substantial, for the court to have also entertained the Government’s challenge to the validity of those patents. In arriving at this conclusion, we do not recognize unlimited authority in the Government to attack a patent by basing an antitrust claim on the simple assertion that the patent is invalid. Cf. Walker Process Equipment v. Food Machinery & Chemical Corp., 382 U.S. 172 (1965). Nor do we invest the Attorney General with a roving commission to question the validity of any patent lurking in the background of an antitrust case. But the district courts have jurisdiction to entertain and decide antitrust suits brought by the Government and, where a violation is found, to fashion effective relief. This often involves a substantial question as to whether it is necessary to limit the rights normally vested in the owners of patents, which in itself can be a complex and difficult issue. The litigation would usually proceed on the assumption that valid patents are involved, but if this basic assumption is itself challenged, we perceive no good reason, either in terms of the patent system or of judicial administration, for refusing to hear and decide it.

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The District Court, therefore, erred in striking the allegations of the Government’s complaint dealing with the patent validity issue and in refusing to permit the Government to amend its complaint with respect to this issue. On remand, the District Court should consider the validity of the ICI dosage-form patent and the Glaxo microsize patent. The question remains whether the Government’s case for additional relief was sufficient to provide the appropriate predicate for a consideration of its challenge to the validity of these patents. For this purpose, as we have said, its case need not be conclusive, but only substantial enough to warrant the court’s undertaking what could be a large inquiry, one which could easily obviate other questions of remedy if the patent is found invalid and which, if the patent is not invalidated, would lend substance to a defendant’s claim that a valid patent should not be limited, absent the necessity to provide effective relief for an antitrust violation to which the patent has contributed. Here, we think not only that the United States presented a substantial case for additional relief, but that it was sufficiently convincing that the District Court, wholly aside from the question of patent validity, should have ruled favorably on the demand for mandatory sales and compulsory licensing. In the first place, it is clear from the evidence that the ICI dosage-form patent, along with other ICI and Glaxo patents, gave the appellees the economic leverage with which to insist upon and enforce the bulk-sales restrictions imposed on the licensees. Glaxo apparently considered the bulk-sales restriction to be a prerequisite to the granting of a sublicense, for it rejected a draft of the ICI-AMHO agreement because, among other things, it would have permitted AMHO to sell griseofulvin in bulk form. There are indications, also, that Glaxo refused a sublicense to others than Schering and J & J because of fears that the companies would sell in bulk form or pressure Glaxo to allow such sales. The source of the patent-pooling agreement pursuant to which such licenses were permitted and which contained the bulk-sales restriction was simple: Glaxo needed the ICI dosage-form patent to assure its licensees the right to use the patent and sell in dosage form. Pooling permitted ICI to engage in bulk manufacture, and, in exchange, ICI imposed the bulk-sales restrictions upon its licensees. There can be little question that the patents involved here were intimately associated with and contributed to effectuating the conduct that the District Court held to be a per se restraint of trade in griseofulvin. Secondly, we think that ICI and Glaxo should have been required to sell bulk-form griseofulvin on reasonable and nondiscriminatory terms and to grant patent licenses at reasonable-royalty rates to all bona fide applicants in order to “pry open to competition” the griseofulvin market that “has been closed by defendants’ illegal restraints.” International Salt Co., 332 U.S., at 401. The United States griseofulvin market consists of three wholesalers, all licensees of appellees, that account for nearly 100% of United States sales totaling approximately eight million dollars. Glaxo and ICI have never sold in bulk to others than the licensees and have prohibited bulk sales and resales by the licensees. In practice, the licensees have not manufactured griseofulvin under the bulk-form patents, preferring instead to purchase in bulk form from ICI and Glaxo. The licensees sell the drug in dosage and microsize form to retail outlets at virtually identical prices. The effect of appellees’

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refusal to sell in bulk and prohibition of such sales by the licensees has been that bulk griseofulvin has not been available to any but appellees’ three licensees and that these three are the only sources of dosage-form griseofulvin in the United States. There is little reason to think that the appellees or their licensees, now that the bulk-sales restrictions have been declared illegal, will begin selling in bulk. It is in their economic self-interest to maintain control of the bulk form of the drug in order to keep the dosage-form, wholesale market competition-free. Bulk sales would create new competition among wholesalers, by enabling other companies to convert the bulk drug into dosage and microsize forms and sell to retail outlets, and would presumably lead to price reductions as the result of normal competitive forces. There is, in fact, substantial evidence in the record to the effect that other drug companies would not only have entered the market, had they been able to make bulk purchases, but also would have charged substantially lower wholesale prices for the dosage and microsize forms of the drug. Only by requiring the appellees to sell bulk-form griseofulvin on nondiscriminatory terms to all bona fide applicants will the dosage-form, wholesale market become competitive. Relief in the form of compulsory sales may not, however, alone insure a competitive market. Glaxo and ICI could choose to discontinue bulk-form manufacturing or the sale of griseofulvin in bulk form. The patent licensees might then begin to practice the bulk-form manufacturing patents pursuant to the patent licenses to fill their needs for the bulk drug. The licensees, of course, are not parties to this action, and a mandatory-sales order would not affect them. They would not be required to make the economically less advantageous bulk sales. The bulk form of the drug would be controlled by the licensees, and the appellees, because they would be required under the Government’s proposed relief to sell to all applicants only so long as they sell to any United States purchasers, could easily avoid the mandatory-sales requirement. Unless other American firms are licensed to manufacture griseofulvin, competition in the United States market will depend entirely upon appellees’ willingness to continue to supply their present licensees with the bulk form of the drug. This Court has repeatedly recognized that “the framing of decrees should take place in the District rather than in Appellate Courts” and has generally followed the principle that district courts “are invested with large discretion to model their judgments to fit the exigencies of the particular case.” International Salt Co., supra, at 400-401; accord, Ford Motor Co. v. United States, 405 U.S. 562, 573 (1972). The Court has not, however, treated that power as one of discretion, subject only to reversal for gross abuse, but has recognized “an obligation to intervene in this most significant phase of the case” when necessary to assure that the relief will be effective. United States v. United States Gypsum Co., 340 U.S., at 89. Accordingly, we have ordered the affirmative relief that the District Court refused to implement. See, e. g., United States v. United States Gypsum Co. The purpose of relief in an antitrust case is “so far as practicable, [to] cure the ill effects of the illegal conduct, and assure the public freedom from its continuance.” Id., at 88. Mandatory selling on specified terms and compulsory patent licensing at reasonable charges are recognized antitrust remedies. See, e. g., Besser Mfg. Co. v. United States, 343 U.S. 444 (1952); International Salt Co. v. United

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States, 332 U.S. 392 (1947); Hartford- Empire Co. v. United States, 323 U.S. 386 (1945). The District Court should have ordered those remedies in this case. . . .

[C]

Exhaustion

47. In some jurisdictions, exhaustion is used to circumscribe the scope of exclusive intellectual property rights. But in the European Union exhaustion is mainly asserted as a mechanism of market integration. Exhaustion, therefore, is a mechanism that puts boundaries (either in terms of scope or of territory) on the rights to be exercised by intellectual property owners. As such, it is not an antitrust remedy. However, at least one country has established in its national industrial property laws that (international) exhaustion may be declared by the competent administrative authority and by courts as a remedy against anticompetitive abuses. The country in question is the Sultanate of Oman and the statute is the Industrial Property Act of 2006.16 In Univis Lens, however, the United States Supreme Court confirmed a holding of exhaustion in a case involving antitrust. Such holding was not a sanction or a remedy, but it worked as if it were.

71. United States v. Univis Lens Co., 316 U.S. 241 (1942) SUPREME COURT OF THE UNITED STATES Mr. Chief Justice Stone delivered the opinion of the Court. These cases come here on direct appeal and cross appeal from a judgment of the District Court granting in part and denying in part the Government’s prayer for an injunction restraining violations of §§1 and 3 of the Sherman Act, 15 U. S. C. §§1, 3, which make unlawful any contract, combination or conspiracy in restraint of trade or commerce among the states. The principal questions for decision are: First: Whether the system established and maintained by the Univis Corporation, appellee and cross appellant, for licensing the manufacture and sale of patented multifocal eyeglass lenses is excluded by the patent monopoly from the operation of the Sherman Act. Second: Whether if not so excluded the resale price provisions of the licensing system are within the prohibition of the Sherman Act and not exempted from it by the provisions of the Miller-Tydings Act amendment of §1 of the Sherman Act, 50 Stat. 693. Appellee, Univis Lens Company, was the owner of a number of patents and two trademarks relating to multifocal lenses. In 1931 it organized appellee, Univis Corporation. . . . Upon the organization of the Corporation, the Lens Company transferred to it all its interest in the patents and trademarks presently involved, and the Corporation

16. See WIPO, Interface between Exhaustion of Intellectual Property Rights and Competition Law, CDIP/8/INF/5 Rev., of April 17, 2012, available at .

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then proceeded to set up and has since maintained the licensing system which the Government now assails. The relevant features of the system are as follows: The Corporation licenses the Lens Company to manufacture lens blanks and to sell them to designated licensees of the Corporation, upon the Lens Company’s payment to the Corporation of an agreed royalty of 50 cents a pair. The lens blanks are rough opaque pieces of glass of suitable size, design and composition for use, when ground and polished, as multifocal lenses in eyeglasses. Each blank is composed of two or more pieces of glass of different refractive power, of such size, shape, and composition and so disposed that when fused together in the blank it is said to conform to the specifications and claims of some one of the Corporation’s patents. The Corporation also issues three classes of licenses—licenses to wholesalers, to finishing retailers and to prescription retailers. The licenses to wholesalers authorize the licensees to purchase the blanks from the Lens Company, to finish them by grinding and polishing, and to sell them to prescription licensees only at prices fixed by the Corporation licensor. In finishing the lenses so as to make them an effective aid to vision of the prospective wearer, to whom the prescription retailer sells, it is necessary for the wholesaler, by grinding the blanks, to conform their curvatures to the prescription supplied by the retailer with his order. By the terms of the license the wholesalers are required to keep full accounts of all sales, showing the sales prices of lenses and the names of the purchasers, and to make them available to representatives of the Corporation. The licenses to finishing retailers—who purchase the blanks from the Lens Company, grind and polish them and adjust the lenses, in frames or supports, to the eyes of the consumers—contain similar provisions. The retailers are licensed to purchase the blanks of the Lens Company and to sell them to their customers at prices prescribed by the Corporation licensor. Both the licenses to wholesalers and to finishing retailers require the licensee to notify the Corporation “of any violation on the part of any jobbers or other licensees of the agreements respectively made by them with the Corporation, and to assist the Corporation in all possible ways in securing evidence against, and enforcing its agreements with such jobbers and licensees.” The licenses to prescription retailers, who are without facilities for grinding and finishing the lenses, but who prescribe and adjust glasses for their customers, are signed both by the Corporation and a licensor wholesaler, and grant to the retailer a “franchise to prescribe and fit Univis lenses,” in return for which the prescription retailer agrees to sell finished lenses only to consumers and only at prices prescribed by the Corporation. All the licenses to wholesalers and retailers recite the Corporation’s ownership of the lens patents and purport to confer on the licensee the privilege of selling the patented invention in the manner and to the extent stated. No royalties are exacted of any of the licensees other than the 50 cents collected by the Corporation for each pair of blanks sold by the Lens Company. The rewards of the corporate appellees for the exploitation of the patents and the patented lenses are derived wholly from the sales by the Lens Company of the blanks, from the proceeds of which the 50 cent royalty is paid.

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The prices prescribed and maintained under the licensing system are: $ 3.25 a pair for the blanks sold by the Lens Company to wholesalers, and $ 4 a pair for those sold to finishing retailers; $ 7 a pair for finished lenses sold by wholesalers; $ 16 a pair for white, and $ 20 for tinted, lenses sold to consumers by prescription and finishing retailers. The Corporation pursues the policy of issuing licenses to “qualified licensees” who, it is said, are required to maintain “high standards of practice” and to be skilled in the performance of the services which they undertake to render. According to the Corporation’s instructions to its field representatives, “price cutters” are not eligible as prescription retailer licensees. Inquiry is made to ascertain whether prospective licensees advertise prices, and whether they are considered in their communities to be price cutters. The Corporation cancels licenses principally because of the failure of licensees to adhere to the price fixing provisions but also because they advertise prices or the acceptance of installment payments, or for other forms of advertising objectionable to it; for selling Univis lenses to customers other than those designated by the Corporation; for not giving a certain percentage of the licensees’ multifocal lens business to Univis; because the licensee is located in a drug, department or jewelry store, or because the licensee engaged in price cutting in the sale of the products of other manufacturers. For a time the Corporation licensed approximately 20 per cent of the retailers in a locality. It now licenses a larger percentage but not more than 50 per cent. There are approximately 330 wholesaler licensees, 325 finishing retailer licensees and 6,500 prescription retailer licensees located in various states of the Union, including New York and the District of Columbia. The Corporation, by its representatives, solicits licenses and negotiates with licensees in the towns and cities where they conduct their business, including the Southern District of New York. The Lens Company, whose annual sales volume is approximately $ 1,000,000, ships blanks in interstate commerce from its factory in Ohio to wholesalers and finishing licensees in the various places where they are located, including the Southern District, where its representatives visit licensees for the purpose of instructing them in finishing lens blanks and for promoting sales of Univis lenses. . . . Of the sixteen patents owned by the Corporation, three are unrelated to the issues of the present case; five are for methods of producing lenses utilized by the Lens Company in manufacturing blanks and do not concern any method or process employed by the licensees who finish the lens blanks. Each of the remaining eight patents relates to the shape, size, composition and disposition of the pieces of glass of different refractive power in the blanks into which they are fused. The District Court found, 41 F.Supp. 258, that the claims of each of these eight patents are for a finished lens and that consequently the wholesalers and finishing retailers, in grinding and polishing each lens, practice in part the patent, in conformity to which the Lens Company has manufactured the blanks which it supplies. The court thought that without the granted license the final step in finishing the lens would infringe the patent and concluded that for this reason the Corporation could condition its licenses upon the maintenance by the licensee of the prescribed retail price. See United States v. General Electric Co., 272 U.S. 476. But it held that the prescription

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retailer licenses are unlawful because their restrictions upon the resale of the finished product are not within the patent monopoly and are proscribed by the Sherman Act. . . . As appellees concede, the invention of only a single lens patent is utilized in making each blank and finishing it as a lens. We therefore put to one side questions which might arise if the finisher of a particular lens blank utilized the invention of some patent other than the patent which was practiced in part by the manufacture of the blank. And we assume for present purposes, without deciding, that the patent is not fully practiced until the finishing licensee has ground and polished the blank so that it will serve its purpose as a lens. But merely because the licensee takes the final step in the manufacture of the patented product, by doing work on the blank which he has purchased from the patentee’s licensee, it does not follow that the patentee can control the price at which the finished lens is sold. Notwithstanding the assumption which we have made as to the scope of the patent, each blank, as appellees insist, embodies essential features of the patented device and is without utility until it is ground and polished as the finished lens of the patent. We may assume also, as appellees contend, that sale of the blanks by an unlicensed manufacturer to an unlicensed finisher for their completion would constitute contributory infringement by the seller. Leeds & Catlin Co. v. Victor Talking Machine Co., 213 U.S. 325, 332-33; cf. Carbice Corp. v. American Patents Corp., 283 U.S. 27, 34. But in any case it is plain that where the sale of the blank is by the patentee or his licensee—here the Lens Company—to a finisher, the only use to which it could be put and the only object of the sale is to enable the latter to grind and polish it for use as a lens by the prospective wearer. An incident to the purchase of any article, whether patented or unpatented, is the right to use and sell it, and upon familiar principles the authorized sale of an article which is capable of use only in practicing the patent is a relinquishment of the patent monopoly with respect to the article sold. Leitch Mfg. Co. v. Barber Co., 302 U.S. 458, 460-61; B. B. Chemical Co. v. Ellis, 314 U.S. 495. Sale of a lens blank by the patentee or by his licensee is thus in itself both a complete transfer of ownership of the blank, which is within the protection of the patent law, and a license to practice the final stage of the patent procedure. In the present case the entire consideration and compensation for both is the purchase price paid by the finishing licensee to the Lens Company. We have no question here of what other stipulations, for royalties or otherwise, might have been exacted as a part of the entire transaction, which do not seek to control the disposition of the patented article after the sale. The question is whether the patentee or his licensee, no longer aided by the patent, may lawfully exercise such control. The declared purpose of the patent law is to promote the progress of science and the useful arts by granting to the inventor a limited monopoly, the exercise of which will enable him to secure the financial rewards for his invention. Constitution of the United States, Art. I, §8, Cl. 8; 35 U. S. C. §§31, 40. The full extent of the monopoly is the patentee’s “exclusive right to make, use, and vend the invention or discovery.” The patentee may surrender his monopoly in whole by the sale of his patent or in part by the sale of an article embodying the invention. His monopoly remains so long as he

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retains the ownership of the patented article. But sale of it exhausts the monopoly in that article and the patentee may not thereafter, by virtue of his patent, control the use or disposition of the article. Bloomer v. McQuewan, 14 How. 539, 549-50; Adams v. Burke, 17 Wall. 453; Hobbie v. Jennison, 149 U.S. 355. Hence the patentee cannot control the resale price of patented articles which he has sold, either by resort to an infringement suit, or, consistently with the Sherman Act (unless the Miller-Tydings Act applies), by stipulating for price maintenance by his vendees. Bauer & Cie v. O’Donnell, 229 U.S. 1; Boston Store v. American Graphophone Co., 246 U.S. 8; Straus v. Victor Talking Machine Co., 243 U.S. 490; Ethyl Gasoline Corp. v. United States, 309 U.S. 436, 456-57, and cases cited. We think that all the considerations which support these results lead to the conclusion that where one has sold an uncompleted article which, because it embodies essential features of his patented invention, is within the protection of his patent, and has destined the article to be finished by the purchaser in conformity to the patent, he has sold his invention so far as it is or may be embodied in that particular article. The reward he has demanded and received is for the article and the invention which it embodies and which his vendee is to practice upon it. He has thus parted with his right to assert the patent monopoly with respect to it and is no longer free to control the price at which it may be sold either in its unfinished or finished form. No one would doubt that if the patentee’s licensee had sold the blanks to a wholesaler or finishing retailer, without more, the purchaser would not infringe by grinding and selling them. The added stipulation by the patentee fixing resale prices derives no support from the patent and must stand on the same footing under the Sherman Act as like stipulations with respect to unpatented commodities. Ethyl Gasoline Corp. v. United States, supra. Our decisions have uniformly recognized that the purpose of the patent law is fulfilled with respect to any particular article when the patentee has received his reward for the use of his invention by the sale of the article, and that once that purpose is realized the patent law affords no basis for restraining the use and enjoyment of the thing sold. Adams v. Burke, supra, 456; Keeler v. Standard Folding Bed Co., 157 U.S. 659; Motion Picture Co. v. Universal Film Co., 243 U.S. 502; and see cases collected in General Pictures Co. v. Electric Co., 305 U.S. 124, 128, n. 1.In construing and applying the patent law so as to give effect to the public policy which limits the granted monopoly strictly to the terms of the statutory grant, Morton Salt Co. v. Suppiger Co., 314 U.S. 488, the particular form or method by which the monopoly is sought to be extended is immaterial. The first vending of any article manufactured under a patent puts the article beyond the reach of the monopoly which that patent confers. Whether the licensee sells the patented article in its completed form or sells it before completion for the purpose of enabling the buyer to finish and sell it, he has equally parted with the article, and made it the vehicle for transferring to the buyer ownership of the invention with respect to that article. To that extent he has parted with his patent monopoly in either case, and has received in the purchase price every benefit of that monopoly which the patent law secures to him. If he were permitted to control the price at which it could be sold by others he would extend his monopoly quite as much in the one case as in the other, and he would extend it beyond the fair meaning of the patent statutes and the construction which has hitherto been given to them.

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There is thus no occasion for our reconsideration, as the Government asks, of United States v. General Electric Co., supra, on which appellees rely. The Court in that case was at pains to point out that a patentee who manufactures the product protected by the patent and fails to retain his ownership in it cannot control the price at which it is sold by his distributors (272 U.S. at 489). Accordingly, neither the Lens Company nor the Corporation, by virtue of the patents, could after the sale of the lens blank exercise any further control over the article sold. The price fixing features of appellees’ licensing system, which are not within the protection of the patent law, violate the Sherman Act save only as the fair trade agreements may bring them within the Miller-Tydings Act. Agreements for price maintenance of articles moving in interstate commerce are, without more, unreasonable restraints within the meaning of the Sherman Act because they eliminate competition, United States v. Trenton Potteries Co., 273 U.S. 392; United States v. Socony-Vacuum Co., 310 U.S. 150, and restrictions imposed by the seller upon resale prices of articles moving in interstate commerce were, until the enactment of the Miller-Tydings Act, 50 Stat. 693, consistently held to be violations of the Sherman Act. Ethyl Gasoline Co. v. United States, supra, 457, and cases cited. The Miller-Tydings Act provides that nothing in the Sherman Act “shall render illegal, contracts or agreements prescribing minimum prices for the resale of a commodity which bears, or the label or container of which bears, the trade mark, brand, or name of the producer or distributor of such commodity and which is in free and open competition with commodities of the same general class produced or distributed by others . . . whenever such agreements are lawful where the resale is made. The contracts entered into by the Lens Company with the licensees of the Corporation stipulate for the maintenance of the prices which are prescribed by the licensing system. Appellees assert, and we assume for present purposes, that the blanks which the Lens Company sells and the finished lenses are marked by appellees’ trademark as required by the statute. In the contracts the Lens Company is designated as the manufacturer of “eye glass lenses” which are distributed and sold under the trademark of the manufacturer. But the Lens Company manufactures the blanks and not the finished lenses to which the resale prices apply. It is therefore not the manufacturer of the “commodity” which the licensees sell, and the licensees are not engaged in the “resale” of the same commodity they buy. We find nothing in the language of the Miller-Tydings Act, or in its legislative history, to indicate that its provisions were to be so applied to products manufactured in successive stages by different processors that the first would be free to control the price of his successors. The prescribed prices are thus not within the Miller-Tydings exception to the Sherman Act. Appellees stress the features of their licensing system by which it is said they protect the public interest and their own good will by the selection as licensees of those who are specially skilled and competent to render the service which they undertake. But if we assume that such restrictions might otherwise be valid, cf. Fashion Guild v. Trade Commission, 312 U.S. 457, 467, these features are so interwoven with and identified with the price restrictions which are the core of the licensing system that the

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case is an appropriate one for the suppression of the entire licensing scheme even though some of its features, independently established, might have been used for lawful purposes. Ethyl Gasoline Corp. v. United States, supra, 461. The injunction of the District Court will therefore be continued, and extended so as to suppress all the license contracts and the maintenance of the licensing system which appellees have established, other than the Corporation’s license to the Lens Company. . . .

[D]

Forfeiture 48. The Glaxo opinion (see case no. 70) admitted that the government, in dealing with the anticompetitive abuse of patent rights, may seek its invalidation where it sees that the patent fails to meet the patentability requirements. In Hartford, however, the same Court held that patents may not be forfeited on grounds of having been used in support of antitrust violation. But in Vitamin Technologists the Ninth Circuit, in a dictum, implicitly accepted that the court may order the forfeiture of a valid patent that is used in an abusive manner. The Ninth Circuit said that the matter had never been discussed by the Supreme Court, and it was correct, because the Hartford and the Vitamin Technologists opinions are contemporary. And still, in Crescent Amusement, an opinion that preceded Hartford and Vitamin Technologists by one year, although not addressing forfeiture directly, implies that injunctions may not be enough to remedy antitrust violations. 49. The TRIPS Agreement has left this matter unsettled. In 1996 a debate took place in the TRIPS Council as regards the possibility of forfeiting patents for grounds other than failure to meet the patentability requirements, with the United States (supported by several other delegations) and India expressing opposite views.17

72. Vitamin Technologists, Inc. v. Wisconsin Alumni Research Foundation, 146 F.2d 941 (9th Cir. 1945) UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT Opinion by Denman, Circuit Judge. Appellee Wisconsin Alumni Research Foundation brought its complaint below alleging that appellant Vitamin Technologists, Inc., and H. F. B. Roessler, one of appellant’s employees, were making an infringing use of a process of producing vitamin D by activating ergosterol and yeast, claimed to be organic substances of dietary value, with the ultra violet rays of the spectrum, produced by a mercury vapor lamp, a use of the rays claimed to be in violation of one or another of three patents, Nos. 1,680,818, 1,871,136 and 2,057,399. Their filing dates are, respectively, June 30, 1924, December 27, 1926, and May 14, 1932.The patents were granted August 14, 1928, August 9, 1932, and October 13, 1936.

17. See Nuno Pires de Carvalho, The TRIPS Regime of Patents and Test Data (4th ed., Wolters Kluwer, Alphen aan den Rijn, 2014), 477-481.

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These patents were secured by Dr. Steenbock of the faculty of the University of Wisconsin and assigned to appellee. They are hereafter referred to as the first, second and third patents in the order of their dates of patenting. The second patent is claimed to be an extension in part of the first patent and the third patent such a continuation of the second. Infringements of product claims of the patents were also alleged. Appellant answered claiming unclean hands, laches, invalidity of the claims on their face, and anticipation. The district court found the challenged claims valid and adjudged infringements by appellant both as to the process and its products and the court’s interlocutory judgment ordered a perpetual injunction. This appeal followed. . . . The application for the first patent specifies the claimed discovery of a new process of producing vitamin D in such dietary substances by exposing them to the ultra violet rays of the spectrum. The process is of great value to mammalian animals, including human beings, and to poultry. Its contribution to the cure or amelioration of rickets is admitted by all the parties and proved by the testimony. Many plant and animal foods of man and other animals contain no vitamin D, or less than is necessary in the diet composed of them, properly to support the bone forming functions of the body. Mammals whose food has this deficiency suffer from rickets. Many such foods, however, contain constituents called pro-vitamin D which when exposed to the ultra violet rays of the spectrum develop through their radiation the vitamin D in quantities sufficient to increase the body’s bone metabolism. This pro-vitamin, called a lipoid, is contained as a part of the fat-like material of some animal substances. Similarly in green vegetable material and in the oil of the meat of the coconut and certain other vegetable oils there exist such lipoids containing the pro-vitamin of vitamin D. In the ancient process of soap making from fatty materials there is an unsaponifiable part in which the pro-vitamin is mainly, if not entirely, contained. . . . Several of the infringements found by the district court consist of appellant’s use of the patent’s claimed process of projecting ultra violet rays produced by a quartz mercury vapor lamp to irradiate and create vitamin D in ergosterol. Ergosterol is a concentrated extract of unsaponifiable lipoids, derived from animal and vegetable food substances. Other infringements held are in so activating such lipoids in yeast. The district court held on sufficient evidence that both ergosterol and yeast are “organic substances of dietary value,” as that phrase is used in claim 1 of the first patent. The possession and sale of the products of so processing ergosterol and yeast were also held to infringe. Appellee contends that all the claims obtain support from the commercial success of the monopoly granted. It describes the great number of children suffering from malformation of their bodies due to the defective bone metabolism. The record contains pathetic pictures of such malformations and statistics of the large numbers of such unfortunates. Other maturer sufferers are described, all proving the great numbers of afflicted who, ex necessitate if they are to use such a boon to humanity, have been customers of the licensees of appellee. From the appellee’s business manager it appears that it was largely from need of the poor that the business was supported. . . .

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Appellee has shown its receipts from its licenses to December 31, 1939, to be $7,478,558, of which Dr. Steenbock received or was allocated $760,000. Under its vigorous business management the profits gradually increased and in the last five years of the period the amount of income from its licenses averaged $990,000 per year. The larger payments of the afflicted to the licensees are not shown. Part of the income is used for advertising to expand the business and profits and part of the remainder for research in natural science of an undisclosed character by the University of Wisconsin, a state of powerful vested interests in dairy enterprises, to which no profits from the declined oleomargarine irradiation afford support. An undisclosed part of Dr. Steenbock’s share is used in scientific research. He states that other moneys he had received from the appellee are its payments to him for services to the Foundation after the transfer of the patents. We agree that it has been shown that the monopoly on this aid or cure of the rachitic has been a commercial success which well warrants the consideration of the court. Apart from its legal implications, the large financial returns from such a profit-controlled monopoly barrier between the great numbers of the afflicted and their potent remedy is an interesting episode in the history of the law of patents. . . . However, we do not agree that such commercial success overcomes either the unclean hands and laches or the invalidity of the first two patents, later discussed. It is now well established that a patentee may not put his property in the patent to a use contra to the public interest. The grant of a patent is the grant of a special privilege “to promote the Progress of Science and useful Arts.” Const. Art. I, §8. However, as stated in Mercoid Corp. v. Mid-Continent Inv. Co., 320 U.S. 661, 665, it is not the private use but “. . . the public interest which is dominant in the patent system. Pennock v. Dialogue, 2 Pet. 1; Kendall v. Winsor, 21 How. 322, 329; Adams v. Burke, 17 Wall. 453; Motion-Picture Co. v. Universal Film Co., supra, 243 U.S. pp. 510-511; Morton Salt Co. v. G. S. Suppiger Co., 314 U.S. 488, 493; United States v. Masonite Corp., 316 U.S. 265. . . . The patent is a privilege. But it is a privilege which is conditioned by a public purpose. . . .” The record contains several of the license agreements of the Wiscosin corporation which appellant claims have extended the monopoly of the patent over material not covered by the patent as in United States v. Masonite Co. and Mercoid Corp. v. Mid-Continent Co., supra. In the latter case the relief of injunction was refused a patentee because the owner of the patent, the Mid-Continent Co., required its licensee to pay royalties on an unpatented article which was an element in the patented article, the court saying (320 U.S. page 670): Respondents ask the equity court for an injunction against infringement by petitioner of the patent in question and for an accounting. Should such a decree be entered, the Court would be placing its imprimatur on a scheme which involves a misuse of the patent privilege and a violation of the antitrust laws. It would aid in the consummation of a conspiracy to expand a patent beyond its legitimate scope. But patentees and licensees cannot secure aid from the court to bring such an event to pass, ‘unless it is in accordance with policy to grant that help.’ Beasley v. Texas & Pacific R. Co., 191 U.S. 492, 497. And the determination of that policy is not ‘at the mercy’ of the parties (Id. 191 U.S. page 498) nor dependent on the usual rules

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governing the settlement of private litigation. ‘Courts of equity may, and frequently do, go much farther both to give and withhold relief in furtherance of the public interest than they are accustomed to go when only private interests are involved.’ Virginian R. Co. v. System Federation, 300 U.S. 515, 552. ‘Where an important public interest would be prejudiced,’ the reasons for denying injunctive relief ‘may be compelling.’ City of Harrisonville v. U.S. Dickey Clay Mfg. Co., 289 U.S. 334, 338. And see United States v. Morgan, 307 U.S. 183. That is the principle which has led this Court in the past to withhold aid from a patentee in suits for either direct or indirect infringement where the patent was being misused. Morton Salt Co. v. G.S. Suppiger Co., supra, 314 U.S. page 492.

In a license agreement of August 8, 1928, between the Fleischmann Company and the Wisconsin corporation, the following provision appears: The Foundation grants the Company . . . the following rights and licenses . . . C. The exclusive right and license to make and the exclusive right and license to sell, but only to other licensees of the Foundation, yeast and yeast products, as defined in Paragraphs A and B above, but unactivated, for use as a source of antirachitically activatable unsaponifiable lipoids for antirachitic activation . . .”

This contract was assigned to Standard Brands, and many times modified. It does not appear that this provision has ever been changed. Here is a clear violation of the principle established in the Mercoid Corp. and Masonite cases, supra. Cf. Carbice Corp. v. American Patents Corp., 283 U.S. 27, 31; Leitch Manufacturing Co. v. Barber Co., 302 U.S. 458, 463; Motion Picture Patents Co. v. Universal Film Co., 243 U.S. 502. The court also notes, sua sponte, as a tribunal concerned that equitable processes not be used contra to the public interest, a matter in which the court is not “at the mercy” of the parties, that in a subsequent agreement with Standard Brands it was agreed that the licensee should not incorporate its activated yeast products into oleomargarine. The specific words are that Standard Brands “shall not use or sell such activated yeast products for incorporation in the following products viz. margarine . . .” A similar provision so excepting margarine appears in a license to one Kovacs, “except with the written consent of the licensor.” These provisions of the licenses are relevant to Dr. Steenbock’s testimony, supra, that none of the licensees had irradiated or fortified oleomargarine under the licenses because “the Wisconsin corporation is unsympathetic with those developments.” This raises the question, not argued, whether the effect on the public health of refusing to the users of oleomargarine, the butter of the poor, the right to have such a food irradiated by the patented process is against the public interest. As seen, the general business manager of the Wisconsin corporation testified that it is the poor people suffering with rickets who constitute the principal market for appellees monopolized processes and products. The evidence and appellees’ briefs are replete with well verified statements of the great boon to humanity of Dr. Steenbock’s scientific discoveries for the prevention and cure of rickets. The truth of such statements make the stronger the contention that it is a public offense to withhold such processes from any of the principal foods of the rachitic poor, or, indeed, from those of any such sufferers.

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So important is oleomargarine in the diet of certain European countries that, Dr. Steenbock states, it is required by law to be fortified with vitamin D. . . . We judicially notice the legislation in Wisconsin and other states of large vested interests in dairying imposing heavy restrictions upon the competition of oleomargarine with butter. Various devices are used such as taxation of oleomargarine itself, on its sale, in license fees of its vendors and the like penalties for violation of the restrictions. We take it, however, that such restrictive legislation does not require us to disregard its value as a food, so attractive and so satisfying to the human palate. Indeed, in these days of war restricted diet, oleomargarine has become the butter of the well-to-do and the rich. The successful activation of oleomargarine and its fortification by irradiated material are described in the first patent and covered by its claim 1. Such irradiation of oleomargarine or its fortification by irradiated material is made a subjectmatter of the second, a continuation in part, patent. That patent specifies that the first patent’s “claims are included herein for subject-matter originally disclosed in the application here mentioned.” It is also covered by the product claim of the second patent. It is thus seen that none but the licensees of this Wisconsin corporation or the corporation itself may either irradiate vitamin D into oleomargarine or fortify it with vitamin D by compounding it with an extract so irradiated and it appears that none of these is permitted so to do. Suppression of the use of the property in a patent has often been held the right of the holder of the patent monopoly, but the question has not been raised in connection with the public interest in restoring the health of the afflicted. An early case, reviewing many others, on the question of suppressing the use of a patent against the public interest is Continental Paper Bag Co. v. Eastern Paper Bag Co., 210 U.S. 405. There it is held that the suppression of the use of a patent for paper bags was not against the public interest, but the Court’s opinion, 210 U.S. at page 430, concludes with this statement: . . . Whether, however, a case cannot arise where, regarding the situation of the parties in view of the public interest, a court of equity might be justified in withholding relief by injunction, we do not decide.

In the last decade, in the many cases cited above and in others, the relief of a court of equity has been denied because of the conduct of the patentee with reference to his monopoly property, against the public interest. We know of no case in the Supreme Court since the Paper Bag case, supra, which has considered the patentee’s refusal to license the use of its patent to protect the health of great numbers of the public such as are here shown to be suffering with rickets. It is strongly arguable that such a suppression of the patent’s use is vastly more against the public interest than its use for a mere control of prices as in United States v. Masonite Corp., supra, or the tieing of unpatented with patented material in Mercoid Corp. v. MidContinent Co., supra. Appellant claims that the Wisconsin corporation is shown to have unclean hands, by selecting as typical two of the many license agreements in the record—those with the Commander Larrabee Company and with Kovacs. Appellant claims with regard to these (a) that they control resale prices and (b) that they control the potency of vitamin

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D in the products of vitamin D processing under claim 5 of the second patent, stated infra. While recognizing the duty of the court, sua sponte, to protect the public interest, regardless of the contentions of the parties, this also falls within the functions of the Attorney General. United States v. Masonite Corp., supra. The matters above considered are suggested to him. In this we follow the practice pursued where a public offense appears to have been disclosed, for instance, perjury in a civil or criminal proceeding. Since our consideration of the record convinces us that the patents are invalid, we have concluded that equity will best be served by disposing of the case on that ground. . . .

73. Hartford-Empire Co. v. United States, 323 U.S. 386 (1945) SUPREME COURT OF THE UNITED STATES Mr. Justice Roberts delivered the opinion of the Court. These are appeals from a decree awarding an injunction against violations of §§1 and 2 of the Sherman Act, as amended, and §3 of the Clayton Act. Two questions are presented. Were violations proved? If so, are the provisions of the decree right? The complaint named as defendants 12 corporations and 101 individuals associated with them as officers or directors. It was dismissed as to 3 corporations and 40 individuals. The corporations are the leaders in automatic glassmaking machinery and in the glassware industry. The charge is that all the defendants agreed, conspired, and combined to monopolize, and did monopolize and restrain interstate and foreign commerce by acquiring patents covering the manufacture of glassmaking machinery, and by excluding others from a fair opportunity freely to engage in commerce in such machinery and in the manufacture and distribution of glass products. The gravamen of the case is that the defendants have cooperated in obtaining and licensing patents covering glassmaking machinery, have limited and restricted the use of the patented machinery by a network of agreements, and have maintained prices for unpatented glassware. . . . In granting licenses under the pooled patents Hartford always reserved the rights within Corning’s field. Further, it not only limited its licensees to certain portions of the container field but, in many instances, limited the amount of glassware which might be produced by the licensee and, in numerous instances, as a result of conferences with Owens, Hazel, Thatcher and Ball, refused licenses to prevent overstocking the glassware market and to “stabilize” the prices at which such ware was sold. In the automatic manufacture of glassware, other machines are used in connection with the feeders. These are known as forming machines, stackers, and lehrs. The purpose of Hartford and Owens, participated in by the other three large manufacturers mentioned, was that there should be gathered into the pool patents covering and monopolizing these adjunct machines so that automatic glass manufacture, without consent of the parties to the pool, would become difficult if not impossible.

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Several forming machines not covered by Hartford patents were on the market. Without going into detail, it is sufficient to say that, by purchases of patents and manufacturing plants, and by an agreement with Hartford’s principal competitor, Lynch Manufacturing Company, the field was divided between Hartford and Lynch under restrictions which gave Hartford control. In the upshot it became impossible to use Hartford feeders with any other forming machine than one licensed by Hartford or used by its consent, and, as respects stackers and lehrs, Hartford attained a similar dominant status. . . . In summary, the situation brought about in the glass industry, and existing in 1938, was this: Hartford, with the technical and financial aid of others in the conspiracy, had acquired, by issue to it or assignment from the owners, more than 600 patents. These, with over 100 Corning controlled patents, over 60 Owens patents, over 70 Hazel patents, and some 12 Lynch patents, had been, by crosslicensing agreements, merged into a pool which effectually controlled the industry. This control was exercised to allot production in Corning’s field to Corning, and that in restricted classes within the general container field to Owens, Hazel, Thatcher, Ball, and such other smaller manufacturers as the group agreed should be licensed. The result was that 94% of the glass containers manufactured in this country on feeders and formers were made on machinery licensed under the pooled patents. The District Court found that invention of glassmaking machinery had been discouraged, that competition in the manufacture and sale or licensing of such machinery had been suppressed, and that the system of restricted licensing had been employed to suppress competition in the manufacture of unpatented glassware and to maintain prices of the manufactured product. The findings are full and adequate and are supported by evidence, much of it contemporary writings of corporate defendants or their officers and agents. In 1938 the Temporary National Economic Committee investigated the glassmaking industry. Many of the facts disclosed in this record were developed. Subsequently this suit was brought and, in pretrial conferences, the Government stated its view as to the terms of agreements and the practices it deemed illegal. The principal corporate appellants had made some alterations in their arrangements and, after institution of suit—and on occasions up to submission of the case on the proofs—made further modifications on their own responsibility, and without concurrence of the appellee or the judge, in an effort to remedy alleged illegal conditions. As a consequence, when the case stood for decision, the situation was as follows: The restrictions in the 1935 agreement between Hartford and Owens were removed, the exclusive provision, and the exclusions of the manufacture of certain glassware embodied in the 1935 agreements between Owens and Hazel were waived by Owens. Ball had surrendered its residual exclusive right for fruit jars and released a claim against Hartford thereunder for $ 425,000 in consideration of Hartford surrendering its option to acquire any Ball feeder inventions. Hartford withdrew the exclusive features of all its licenses of glass machinery. Hartford retained dominance of the gob feeder field. Owens, although its basic patent had expired, continued, by virtue of improvement patents, to dominate the suction field. Owens, Lynch, and Hartford were the leaders, if not altogether dominant in the forming machine field.

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In July 1939 the Association changed the nature of its statistical reports which the court found were in reality assignments of quotas, and professed to have abandoned a voluntary exchange of statistical data which had previously taken place at committee or general meetings. It then adopted a form of statistical statement eliminating all forecasts and confined its reports to past performances of the members. We affirm the District Court’s findings and conclusions that the corporate appellants combined in violation of the Sherman Act, that Hartford and Lynch contracted in violation of the Clayton Act, and that the individual appellants with exceptions to be noted participated in the violations in their capacities as officers and directors of the corporations. . . . Little need be said concerning the legal principles which vindicate the District Court’s findings and conclusions as to the corporate appellants and the individual appellants who as officers or directors participated in the corporate acts which forwarded the objects of the conspiracy. As was said in Standard Sanitary Mfg. Co. v. United States, 226 U.S. 20, 49: Rights conferred by patents are indeed very definite and extensive, but they do not give any more than other rights an universal license against positive prohibitions. The Sherman law is a limitation of rights, rights which may be pushed to evil consequences and therefore restrained.

The difference between legitimate use and prohibited abuse of the restrictions incident to the ownership of patents by the pooling of them is discussed in Standard Oil Co. v. United States, 283 U.S. 163. Application of the tests there announced sustains the District Court’s decision. It is clear that, by cooperative arrangements and binding agreements, the appellant corporations, over a period of years, regulated and suppressed competition in the use of glassmaking machinery and employed their joint patent position to allocate fields of manufacture and to maintain prices of unpatented glassware. The explanations offered by the appellants are unconvincing. It is said, on behalf of Hartford, that its business, in its inception, was lawful and within the patent laws; and that, in order to protect its legitimate interests as holder of patents for automatic glass machinery, it was justified in buying up and fencing off improvement patents, the grant of which, while leaving the fundamental inventions untouched, would hamper their use unless tribute were paid to the owners of the so-called improvements which, of themselves, had only a nuisance value. The explanation fails to account for the offensive and defensive alliance of patent owners with its concomitant stifling of initiative, invention, and competition. Nor can Owens’ contention prevail that it long ago abandoned any cooperation with the other corporate defendants and has been free of any trammel to unrestricted competition either in the machinery or glass field. Owens remained active in the association. It remained dominant in the suction field. It continued in close touch with Hartford and with other large manufacturers of glassware who were parties to the conspiracy. The District Court was justified in finding that the mere cancellation of the written word was not enough, in the light of subsequent conduct, to acquit Owens of further participation in the conspiracy.

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Individual appellants, except Collins, Fulton, Fisher, and Dilworth, who were officers or directors of corporate appellants each did one or more acts, such as negotiating, voting for, or executing agreements which constituted steps in the progress of the conspiracy. To this extent they participated in violations of the statutes. Some were more active and played a more responsible role than others. The Government sought the dissolution of Hartford. The court, however, decided that a continuance of certain of Hartford’s activities would be of advantage to the glass industry and denied, for the time being, that form of relief. The court was of opinion, however, that the long series of transactions and the persistent manifestations of a purpose to violate the antitrust statutes required the entry of a decree which would preclude the resumption of unlawful practices. It was faced, therefore, with the difficult problem of awarding an injunction which would insure the desired end without imposing punishments or other sanctions for past misconduct, a problem especially difficult in view of the status and relationship of the parties. At the trial the Government stated that in this suit it was not attacking the validity of any patent or claiming any patent had been awarded an improper priority. At the time of the District Court’s decision, Hartford had reduced the royalties of all its licensees to its then schedule of standard royalties so that all stood on an equal basis so far as license fees were concerned. Government counsel did not assert, or attempt to prove, that these royalties were not reasonable in amount. Owens, as respects suction invention licenses, had removed all restrictive clauses; Hartford had done the same with respect to all its glass machinery licenses and so had Hartford and Lynch with respect to forming machine licenses. At the moment, therefore, no licensee was restricted either as to kind or quantity of glassware it might manufacture by use of the patented machines, and no patent owner was restricted by formal agreement as to the use or licensing of its patents. Just before the trial, Hartford conveyed three patents to Corning and complaint was made of this transaction. Corning paid a substantial sum for the transfer, evidently to prevent Hartford’s obstructing Corning’s free and untrammeled use of its own patents. Two of the assigned patents have expired and Corning professes its willingness to dedicate the third to the public. The association had ceased to allot quotas amongst the glass manufacturers or to furnish advance information or make recommendations to its members. The licensing system of Hartford remained that of leasing machinery built for it embodying the patented inventions. Rentals consisted of standard royalties on production. Under this system Hartford rendered a service in the repair, maintenance, and protection of the machines, which is valuable, if not essential, to the users. This was the status with which the court had to deal. The applicable principles are not doubtful. The Sherman Act provides criminal penalties for its violation, and authorizes the recovery of a penal sum in addition to damages in a civil suit by one injured by violation. It also authorizes an injunction to prevent continuing violations by those acting contrary to its proscriptions. The present suit is in the last named category and we may not impose penalties in the guise of preventing future violations. This is not to say that a decree need deal only with the exact type of acts found to have been committed or that the court should not, in framing

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its decree, resolve all doubts in favor of the Government, or may not prohibit acts which in another setting would be unobjectionable. But, even so, the court may not create, as to the defendants, new duties, prescription of which is the function of Congress, or place the defendants, for the future, “in a different class than other people,” as the Government has suggested. The decree must not be “so vague as to put the whole conduct of the defendants’ business at the peril of a summons for contempt”; enjoin “all possible breaches of the law”; or cause the defendants hereafter not “to be under the protection of the law of the land.” With these principles in mind we proceed to examine the terms of the decree entered. No reference will be made to paragraphs as to which the appellants do not object if any decree is to be entered, nor to those concerning which we think objection is not well founded. . . . Since the provisions of paragraphs 21 to 24 [of the District Court’s decree] inclusive, in effect confiscate considerable portions of the appellants’ property, we think they go beyond what is required to dissolve the combination and prevent future combinations of like character. It is to be borne in mind that the Government has not, in this litigation, attacked the validity of any patent or the priority ascribed to any by the Patent Office, nor has it attacked, as excessive or unreasonable, the standard royalties heretofore exacted by Hartford. Hartford has reduced all of its royalties to a uniform scale and has waived and abolished and agreed to waive and abolish all restrictions and limitations in its outstanding leases so that every licensee shall be at liberty to use the machinery for the manufacture of any kind or quantity of glassware comprehended within the decree. Moreover, if licenses or assignments by any one of the corporate defendants to any other still contain any offensive provision, such provision can, by appropriate injunction, be cancelled, so that the owner of each patent will have unrestricted freedom to use and to license, and every licensee equally with every other will be free of restriction as to the use of the leased or licensed machinery, method or process, or the articles manufactured thereon or thereunder. It is suggested that there is not confiscation since Hartford might, with the later consent of the court, sell its patents. Under the decree as entered below nothing can be obtained by Hartford for the use of its patents and we cannot speculate as to what might be the ultimate adjustments made by the trial court in the decree. If, as suggested, some of Hartford’s patents were improperly obtained, or if some of them were awarded a priority to which the invention was not entitled, avenues are open to the Government to raise these questions and to have the patents cancelled. But if, as we must assume on this record, a defendant owns valid patents, it is difficult to say that, however much in the past such defendant has abused the rights thereby conferred, it must now dedicate them to the public. That a patent is property, protected against appropriation both by individuals and by government, has long been settled. In recognition of this quality of a patent the courts, in enjoining violations of the Sherman Act arising from the use of patent licenses, agreements, and leases, have abstained from action which amounted to a forfeiture of the patents. The Government urges that such forfeiture is justified by our recent decisions in Morton Salt Co. v. G. S. Suppiger Co., 314 U.S. 488, and B. B. Chemical Co. v. Ellis, 314 U.S. 495. But those cases merely apply the doctrine that, so long as the patent owner is

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using his patent in violation of the antitrust laws, he cannot restrain infringement of it by others. We were not there concerned with the problem whether, when a violation of the antitrust laws was to be restrained and discontinued, the court could, as part of the relief, forfeit the patents of those who had been guilty of the violation. Lower federal courts have rightly refused to extend the doctrine of those cases to antitrust decrees by inserting forfeiture provisions. Legislative history is also enlightening upon this point. Repeatedly since 1908 legislation has been proposed in Congress to give the courts power to cancel a patent which has been used as an instrument to violate antitrust laws. Congress has not adopted such legislation. The temporary National Economic Committee recommended imposition of such a penalty for violation of antitrust laws. But its recommendation was not adopted by Congress. The Government suggests that certain earlier decisions under the Sherman Act, by analogy, support these portions of the decree. The cases cited, however, do not sustain the suggestion. In all of them the court refrained from ordering compulsory dealing with the assets of the defendant without compensation and, in most of them, the decrees merely called for rearrangement of ownership, not for its destruction. Under paragraph 24 (b) a defendant hereafter acquiring a patent cannot set the price for its use by others, elect to use it himself and refuse to license it, or to retain it and neither use nor license it. These are options patent owners have always enjoyed. Congress was asked as early as 1877, and frequently since, to adopt a system of compulsory licensing of patents. It has failed to enact these proposals into law. It has also rejected the proposal that a patentee found guilty of violation of the antitrust laws should be compelled, as a penalty, to license all his future inventions at reasonable royalties. The Temporary National Economic Committee recommended congressional adoption of such a system, but Congress took no action to that end. Paragraph 24 (a) of the decree should be modified to permit the reservation of reasonable royalties and its provisions should be restricted to feeders, formers, stackers and lehrs and patents covering these or improvements of them, or methods or processes used in connection with them. Paragraph 24 (b) should be limited in respect of future applications and resulting patents or patents hereafter acquired by assignment, to those covering feeders, formers, stackers and lehrs, or parts thereof or improvements thereon, and methods and processes involved in their construction and operation. For example, if Ball or Thatcher should procure a patent on a bottle-capping machine or for a composition of glass, there is no reason to compel a license to Hartford or Hazel or anyone else. Other paragraphs of the decree preclude a misuse of the patent in violation of the antitrust laws. . . . Paragraph 52 deals with the problem of suppressed or unworked patents. Much is said in the opinion below, and in the briefs, about the practice of the appellants in applying for patents to “block off” or “fence in” competing inventions. In the cooperative effort of certain of the appellants to obtain dominance in the field of patented glassmaking machinery, many patents were applied for to prevent others from obtaining patents on improvements which might, to some extent, limit the return in the way of royalty on original or fundamental inventions. The decree should restrain

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agreements and combinations with this object. But it is another matter to restrain every defendant, for the indefinite future, from attempting to patent improvements of machines or processes previously patented and then owned by such defendant. This paragraph is, in our judgment, too broad. In effect it prohibits several of the corporate defendants from applying for patents covering their own inventions in the art of glassmaking. For reasons elsewhere elaborated it cannot be sustained. It should be limited as we have suggested that paragraphs 24 (b) and 29 be limited. In addition, it enjoins every defendant from applying for a patent “with the intention of not making commercial use of the invention within four years” from issue of the patent and makes the failure commercially to use the invention prima facie proof of the absence (sic) of such intention. This provision is also legislative rather than remedial. Unless we are to overturn settled principles the paragraph in question must be eliminated. A patent owner is not in the position of a quasi-trustee for the public or under any obligation to see that the public acquires the free right to use the invention. He has no obligation either to use it or to grant its use to others. If he discloses the invention in his application so that it will come into the public domain at the end of the 17-year period of exclusive right he has fulfilled the only obligation imposed by the statute. This has been settled doctrine since at least 1896. Congress has repeatedly been asked, and has refused, to change the statutory policy by imposing a forfeiture or by a provision for compulsory licensing if the patent is not used within a specified time. The governing rule is quoted in Chapman v. Wintroath, 252 U.S. 126, at 137: A party seeking a right under the patent statutes may avail himself of all their provisions, and the courts may not deny him the benefit of a single one. These are questions not of natural but of purely statutory right. Congress, instead of fixing seventeen, had the power to fix thirty years as the life of a patent. No court can disregard any statutory provisions in respect to these matters on the ground that in its judgment they are unwise or prejudicial to the interests of the public. United States v. American Bell Telephone Co., 167 U.S. 224, 247.

74. United States v. Crescent Amusement Co., 323 U.S. 173 (1944) SUPREME COURT OF THE UNITED STATES Mr. Justice Douglas delivered the opinion of the Court. The United States brought this civil suit against nine affiliated companies (whom we will call the exhibitors) operating motion picture theatres in some 70 small towns in Alabama, Arkansas, Kentucky, Mississippi, and Tennessee; against certain officers of these companies; and against eight major distributors of motion picture films, charging them with a conspiracy unreasonably to restrain interstate trade and commerce in motion-picture films and to monopolize the exhibition of films in this area in violation of §1 and §2 of the Sherman Act. 26 Stat. 209, 15 U. S. C. §§1, 2. . . . Of the other three the Court found that only one had violated the Sherman Act. The court also

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found that seven of the exhibitors and three of the individual defendants had violated the Sherman Act substantially as charged. It entered a decree against them. . . . . . . In the five-year period ended in August 1939 when this bill was filed the exhibitors experienced a rather rapid growth—in the number of towns where their theatres were operated; in the number of towns where they operated without competition; in their earnings and surplus. The United States claims that that growth was the product of restraints of trade in violation of §1 of the Sherman Act and of monopolistic practices in violation of §2. The District Court found that each of the seven exhibitors had violated the Sherman Act by: A. Creating and maintaining an unreasonable monopoly of the business of operating theatres in the towns of Tennessee, Northern Alabama, and Central and Western Kentucky, in which each has theatres. B. Combining its closed towns with its competitive situations in licensing films for the purpose and with the effect of compelling the major distributors to license films on a non-competitive basis in competitive situations and to discriminate against its independent competitors in licensing films. C. Coercing or attempting to coerce independent operators into selling out to it, or to abandon plans to compete with it by predatory practices.

The court found that these violations were effected (a) by combining with each other and with certain major distributors in making franchises, i.e. term contracts for the licensing of films, with the purpose and effect of maintaining their theatre monopolies and preventing independents from competing with them; (b) by combining with each other for the purpose of dividing the territory in which theatres might be operated by any of them; (c) by combining with each other for the purpose and with the effect of eliminating, suppressing, and preventing independents from competing in the territory in which each operated; and (d) by combining with each other and with certain major distributors in licensing films for the purpose and with the effect of maintaining their theatre monopolies and preventing independents from competing with them. Three of the individual defendants were found to have participated actively in these violations. ... The crux of the government’s case was the use of the buying power of the combination for the purpose of eliminating competition with the exhibitors and acquiring a monopoly in the areas in question. There was ample evidence that the combination used its buying power for the purpose either of restricting the ability of its competitors to license films or of eliminating competition by acquiring the competitor’s property or otherwise. For example, the defendants would insist that a distributor give them monopoly rights in towns where they had competition or else defendants would not give the distributor any business in the closed towns where they had no competition. The competitor not being able to renew his contract for films would frequently go out of business or come to terms and sell out to the combination with an agreement not to compete for a term of years. The mere threat would at times be sufficient and cause the competitor to sell out to the combination “because his mule was scared.” In that way some of the affiliates were born. In summarizing various deals of this character the District Court said, “Each of these agreements not to compete with Crescent or its

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affiliates in other towns extended far beyond the protection of the business being sold, and demonstrated a clear intention to monopolize theatre operation wherever they or their affiliates secured a foothold.” The same type of warfare was waged with franchise contracts with certain major distributors covering a term of years. These gave the defendants important exclusive film-licensing agreements. Their details varied. But generally they gave the defendant exhibitors the right to first-run exhibition of all feature pictures which they chose to select in their designated towns. Clearances over the same or nearby towns were provided, i.e. a time lag was established between the showing by the defendant exhibitors and a subsequent showing by others. The opportunity of competitors to obtain feature pictures for subsequent runs was further curtailed by repeat provisions which gave the defendant exhibitors the option of showing the pictures in their theatres a second time. In reviewing one of these franchise agreements the District Court concluded, “The repeat-run clause in the franchise was completely effective in preventing the sale of a second-run of any Paramount features to any opposition theatre.” . . . The Court has quite consistently recognized in this type of Sherman Act case that the government should not be confined to an injunction against further violations. Dissolution of the combination will be ordered where the creation of the combination is itself the violation. . . . Those who violate the Act may not reap the benefits of their violations and avoid an undoing of their unlawful project on the plea of hardship or inconvenience. That principle is adequate here to justify divestiture of all interest in some of the affiliates since their acquisition was part of the fruits of the conspiracy. But the relief need not, and under these facts should not, be so restricted. The fact that the companies were affiliated induced joint action and agreement. Common control was one of the instruments in bringing about unity of purpose and unity of action and in making the conspiracy effective. If that affiliation continues, there will be tempting opportunity for these exhibitors to continue to act in combination against the independents. The proclivity in the past to use that affiliation for an unlawful end warrants effective assurance that no such opportunity will be available in the future. Hence we do not think the District Court abused its discretion in failing to limit the relief to an injunction against future violations. There is no reason why the protection of the public interest should depend solely on that somewhat cumbersome procedure when another effective one is available. . . .

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INTELLECTUAL PROPERTY IN SECTORS OF SPECIAL PUBLIC INTEREST

50. In certain fields of special interest public policies impose constraints on the acquisition and use of intellectual property rights. In doing that, policies have an impact on how competitors resort to intellectual property to protect differences in products and services. As said in the Introduction, market regulation distorts intellectual property and therefore it changes the way intellectual property buttresses the competitive process. In JT International, the discussion is a bit different: for the sake of public health, the constraints are not created as far as acquisition and use of trademark rights are concerned, but about the use of the trademarks themselves. This matter, as of the time of this writing, has been referred by a few tobacco exporting countries to a WTO Panel. The AstraZeneca opinion is a good illustration of how regulation intervenes in the management of private rights: in order to facilitate the entry of generic pharmaceuticals, the owner of market authorizations for a certain drug was prohibited to cancel the registrations.1 And in Glenwood, the court reiterated the duty of “greater care” as regards the distinctiveness of trademarks, so as to avoid confusions that might harm the health of consumers.

1. The same issue has already been raised as regards Monsanto’s possible deregistration of its “Round Up Ready” seeds corresponding to the technology covered by its main patent (expired in 2014). See Nuno Pires de Carvalho, The Theorem of the Social Value of Inventions and the Happiness Machine Patent Syndrome, 2010, available at .

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75. JT International SA v Commonwealth of Australia [2012] HCA 43 (2012) HIGH COURT OF AUSTRALIA 1. French CJ. The Tobacco Plain Packaging Act 2011 (Cth) (“the TPP Act”) imposes significant restrictions upon the colour, shape and finish of retail packaging for tobacco products. It prohibits the use of trade marks on such packaging, other than as permitted by the TPP Act, which allows the use of a brand, business or company name for the relevant tobacco product. Pre-existing regulatory requirements for health messages and graphic warnings remain in place and include, under a recent Information Standard, a requirement for the inclusion of the Quitline logo of the Victorian Anti-Cancer Council and a telephone number for the Quitline service. 2. In two proceedings which were heard by this Court in April this year, the plaintiffs, tobacco companies JT International SA (“JTI”) and members of the British America Tobacco Group (“BAT”) argued that, subject to a reading down provision, the TPP Act effected an acquisition of their intellectual property rights and goodwill on other than just terms, contrary to s 51(xxxi) of the Constitution. 3. On 15 August 2012 the Court made orders reflecting the rejection of the plaintiffs’ contentions, by majority, on the basis that there had been no acquisition of the plaintiffs’ property within the meaning of s 51(xxxi) of the Constitution. I publish my reasons for joining in those orders. 4. The TPP Act regulates the retail packaging and appearance of tobacco products. The Act is superimposed upon pre-existing regulatory requirements for health warnings and safety and information standards applied to tobacco products and their packaging. Its stated objectives include the improvement of public health by discouraging people from taking up smoking, encouraging people to give up smoking, discouraging people from relapsing if they have given it up, and reducing people’s exposure to smoke from tobacco products. 5. Substantive requirements for the physical features, colours and finish of retail packaging are imposed by ss 18 and 19 of the TPP Act and by the Tobacco Plain Packaging Regulations 2011 (Cth) (“the TPP Regulations”) made under that Act. Embellishments on cigarette packs and cartons are proscribed. Packs and cartons are to be rectangular, have only a matt finish, and bear on their surfaces the colour prescribed by the TPP Regulations. Absent regulation, the colour of the package must be a drab dark brown. The use of trade marks on retail packaging of tobacco products is prohibited other than as permitted by s 20(3) which provides: The following may appear on the retail packaging of tobacco products: (a) the brand, business or company name for the tobacco products, and any variant name for the tobacco products; (b) the relevant legislative requirements; (c) any other trade mark or mark permitted by the regulations.

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Section 26 imposes a similar conditional prohibition on the use of trade marks on tobacco products. The term “relevant legislative requirement” in s 20(3)(b) includes a health warning required by the Trade Practices (Consumer Product Information Standards) (Tobacco) Regulations 2004 (Cth) (“the TPCPI Regulations”) or a safety or information standard made or declared under the Competition and Consumer Act 2010 (Cth) (“the CCA”). 6. Brand, business, company and variant names for tobacco products which appear on retail packaging must comply with the TPP Regulations. They must not obscure any “relevant legislative requirement” or appear other than once on any of the front, top and bottom outer surfaces of the pack. . . . 8. The registrability of trade marks and designs whose use is subject to constraints imposed by the TPP Act and the TPP Regulations is not to be prejudiced by those constraints. Neither the TPP Act nor the TPP Regulations deprive a trade mark of registrability for non-use, or because the use of the trade mark in relation to tobacco products would be contrary to law. Neither the TPP Act nor the circumstance that a person cannot use a trade mark in relation to the retail packaging of tobacco products or on tobacco products is a circumstance making it reasonable or appropriate to refuse or revoke registration of the trade mark, to revoke acceptance of an application for registration, or to register the trade mark subject to conditions or limitations. There is a somewhat less elaborate protection for registered designs under the Designs Act 2003 (Cth). 9. It is an object of the TPP Act to give effect to obligations that Australia has as a party to the Convention on Tobacco Control. . . . 17. By a writ of summons and statement of claim filed in this Court on 15 December 2011 naming the Commonwealth of Australia as defendant, JTI sought a declaration, relying upon s 15 of the TPP Act, that the TPP Act does not apply and has no operation in its application to trade marks and get-up used on tobacco products sold by JTI. In the alternative, JTI sought a declaration that the TPP Act is invalid in its application to the trade marks and the get-up. 18. It was not in dispute that JTI is the registered owner or exclusive licensee of registered trade marks which it is entitled to use in the retail packaging and appearance of the Camel brand of cigarettes and the Old Holborn brand of handrolling tobacco (“the tobacco products”) currently sold in Australia. JTI said that, until the commencement of ss 17-27A and ss 30-48 of the TPP Act, it would have the right to determine the appearance of these tobacco products and the form and appearance of at least 70 per cent of the front and at least 10 per cent of the back of the packaging of the tobacco products. 19. JTI alleged that its tobacco products used distinctive trade dress and get-up, including arrangements of words, colours, designs, logos, lettering and markings which distinguish them from other tobacco products. It claimed to have rights of use of this “Get-up” capable of being enforced by an action for passing off or for misleading or deceptive conduct.

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20. JTI asserted that its rights in the trade marks and their get-up are “property” for the purposes of s 51(xxxi) of the Constitution. It claimed that the provisions of the TPP Act constituted an acquisition of its property otherwise than on just terms and, but for s 15, would be wholly invalid and of no effect. . . . 24. BAT commenced proceedings against the Commonwealth by a writ of summons issued out of this Court on 1 December 2011. They claimed a declaration that the TPP Act would not apply to their tobacco products and packaging and, alternatively, a declaration that the TPP Act is invalid. . . . 26. BAT alleged that the provisions of the TPP Act would, but for the operation of s 15 of that Act result in an acquisition of BAT’s property comprising the trade marks, the copyright works, the get-up, the licensing goodwill, the design, the patents, the packaging rights, the packaging goodwill and the intellectual property licence rights otherwise than on just terms. It thereby alleged that, by reason of s 15, the provisions of the TPP Act do not apply to and have no operation with respect to BAT’s tobacco products and packaging of tobacco products. In the alternative, BAT asserted that the TPP Act is invalid as conferring legislative power on the judicial branch of government by reason of the fact that the extent to which conduct is rendered criminal by the TPP Act is determined by the extent to which s 51(xxxi) of the Constitution would, but for s 15 of the TPP Act, be engaged. It further alleged that the TPP Act is invalid because it does not provide for a rule of conduct or a declaration as to power, right or duty and also because its purported enactment thereby did not involve an exercise of the power to make “laws” conferred by the Constitution upon the Commonwealth Parliament. . . . 41. Section 51(xxxi) embodies a constitutional guarantee of just terms “and is to be given the liberal construction appropriate to such a constitutional provision.” Broad constructions of “property” and “acquisition” were linked by Dixon J in the Bank Nationalisation case. Section 51(xxxi) was said to extend to “innominate and anomalous interests” and to include “the assumption and indefinite continuance of exclusive possession and control for the purpose of the Commonwealth of any subject of property.” There is, however, an important distinction between a taking of property and its acquisition. 42. Taking involves deprivation of property seen from the perspective of its owner. Acquisition involves receipt of something seen from the perspective of the acquirer. Acquisition is therefore not made out by mere extinguishment of rights. In an observation quoted and approved by the majority in Australian Tape Manufacturers Association Ltd v The Commonwealth, Mason J said in the Tasmanian Dam case: To bring the constitutional provision into play it is not enough that legislation adversely affects or terminates a pre-existing right that an owner enjoys in relation to his property; there must be an acquisition whereby the Commonwealth or another acquires an interest in property, however slight or insubstantial it may be.

Importantly, the interest or benefit accruing to the Commonwealth or another person must be proprietary in character. On no view can it be said that the Commonwealth as

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a polity or by any authority or instrumentality, has acquired any benefit of a proprietary character by reason of the operation of the TPP Act on the plaintiffs’ property rights. In this respect I agree with the reasons of Gummow J and the reasons of Hayne and Bell JJ. 43. It may also be observed that the negative character of the plaintiffs’ property rights leaves something of a logical gap between the restrictions on their enjoyment and the accrual of any benefit to the Commonwealth or any other person. Unlike the Newcrest case, there is no expansion in rights, interests, or benefits accruing to the Commonwealth that corresponds to or bears any relationship to the restrictions imposed on the use of the plaintiffs’ intellectual property rights. The fact that the restrictions and prohibitions imposed by the TPP Act create the “space” for the application of Commonwealth regulatory requirements as to the textual and graphical content of tobacco product packages does not constitute such an accrual. Rather, it reflects a serious judgment that the public purposes to be advanced and the public benefits to be derived from the regulatory scheme outweigh those public purposes and public benefits which underpin the statutory intellectual property rights and the common law rights enjoyed by the plaintiffs. The scheme does that without effecting an acquisition. 44. In summary, the TPP Act is part of a legislative scheme which places controls on the way in which tobacco products can be marketed. While the imposition of those controls may be said to constitute a taking in the sense that the plaintiffs’ enjoyment of their intellectual property rights and related rights is restricted, the corresponding imposition of controls on the packaging and presentation of tobacco products does not involve the accrual of a benefit of a proprietary character to the Commonwealth which would constitute an acquisition. That conclusion is fatal to the case of both JTI and BAT. . . . 46. Gummow J. These cases in the original jurisdiction of the Court present challenges by the plaintiffs to the validity of the Tobacco Plain Packaging Act 2011 (Cth) (“the Packaging Act”). The plaintiffs invoke the restraint upon legislative power found in s 51(xxxi) of the Constitution. For the reasons which follow the challenges should fail and I joined in the orders pronounced on 15 August 2012. . . . 68. The issues which are presented in these cases respecting the “taking” and “acquisition” of proprietary interests are to be approached with an appreciation that trade mark legislation, in general, does not confer a “statutory monopoly” in any crude sense. Rather, the legislation represents an accommodation between the interests of traders, in the use of trade marks in developing the goodwill of their businesses and turning this to account by licensing arrangements, and the interests of consumers, in recognising trade marks as a badge of origin of goods or services and avoiding deception or confusion as to that origin. . . . 101. For the reasons which follow, there is sufficient impairment, at least of the statutory intellectual property of the plaintiffs, to amount to a “taking”, but there is no acquisition of any property. The result is the plaintiffs’ cases for invalidity fail. . . .

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137. As noted above, the TMA, like other trade mark legislation, does not confer on registered owners or authorised users a liberty to use registered trade marks free from restraints found in other statutes. Nevertheless, the power of exclusion which is conferred by the TMA, the Patents Act, the Copyright Act and the Designs Act does carry with it the right to relax that exclusivity in favour of licensees and assignees of the intellectual property in question, who on their part undertake obligations to the licensor or assignor. Those rights of the intellectual property owner may properly be regarded as proprietary in nature for the purposes of s 51(xxxi) of the Constitution. 138. The rights mentioned in respect of registered trade marks are in substance, if not in form, denuded of their value and thus of their utility by the imposition of the regime under the Packaging Act. Section 28 of the Packaging Act goes to some lengths to preserve registrations against attack under the TMA by reason of non-use necessitated for compliance with the Packaging Act. Nevertheless, whilst the registration, like the weekly tenancy of Mr Dalziel, may remain, it is impaired in the manner just described. 139. In Mattel Inc v 3894207 Canada Inc Binnie J said that registered trade marks operated “as a kind of shortcut to get consumers to where they want to go, and in that way perform a key function in a market economy”. The system established by the Packaging Act is designed to give the opposite effect to trade mark use, namely by encouraging consumers to turn away from tobacco products even if that otherwise is where they would “want to go”. This is achieved by the contraction of device trade marks to the bare brand name and the required appearance of brand names, including those separately registered as word marks, in small print against a background of unattractive colour. A licensee or assignee, at peril otherwise of contravening the offence provisions in Ch 3 of the Packaging Act, would be enabled to exercise a licence or enjoy the assignment only in this constrained manner. The result is that while the trade marks remain on the face of the register, their value and utility for assignment and licensing is very substantially impaired. 140. The situation is even more drastic as regards the BAT Copyrights, the BAT Patent and the BAT Design at stake in the BAT Matter. Use of the artistic works on retail packaging of tobacco products is denied by the operation of s 20(3) of the Packaging Act. Use of the BAT Design would conflict with s 18(1) of the Packaging Act and exploitation of the BAT Patent would conflict with reg 2.1.1(2) of the Packaging Regulations. 141. The circumstances just described are sufficient to render the operation of the Packaging Act a “taking” of these items of intellectual property. 142. The situation respecting goodwill associated with the get-up of the packaging of tobacco products requires further consideration. This is because, unlike the statutory species of intellectual property just described, the common law restricts the exploitation of goodwill by its assignment. At common law the goodwill would be assignable only in conjunction with the goodwill of the business in respect of which the get-up was used. The underlying reason for the common law taking this attitude to assignments of goodwill is the loss of distinctiveness leading to the likelihood of deception of

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consumers as to the origin of goods. This reasoning may also apply to licensing of common law marks. 143. It is unnecessary to pursue further the question of whether the rights adhering to common law goodwill do not extend to rights of assignment or licensing and thereby deny subject matter for any deprivation by the Packaging Act sufficient to engage s 51(xxxi). This is because, in any event, there has been no acquisition of any interests of a proprietary nature by the Commonwealth or any other party by reason of the regime established by the Packaging Act. 144. In the Tasmanian Dam Case, Mason J said of the federal legislation there under challenge: In terms of its potential for use, the property is sterilized, in much the same way as a park which is dedicated to public purposes or vested in trustees for public purposes, subject, of course, to such use or development as may attract the consent of the Minister. In this sense, the property is ‘dedicated’ or devoted to uses, ie, protection and conservation which, by virtue of Australia’s adoption of the Convention and the legislation, have become purposes of the Commonwealth. However, what is important in the present context is that neither the Commonwealth nor anyone else acquires by virtue of the legislation a proprietary interest of any kind in the property. The power of the Minister to refuse consent under the section is merely a power of veto. He cannot positively authorize the doing of acts on the property. As the State remains in all respects the owner the consent of the Minister does not overcome or override an absence of consent by the State in its capacity as owner.

Brennan J concluded: Unless proprietary rights are acquired, par (xxxi) is immaterial to the validity of the impugned Commonwealth measures. Though the Act conferred a power upon the Minister to consent to the doing of acts which were otherwise prohibited on or in relation to land, that power was not a proprietary right.

These statements exemplify the application of the established doctrine of the Court respecting s 51(xxxi). 145. The objects of the Packaging Act stated in par (a) of s 3(1) include the improvement in public health by discouraging people from using tobacco products and from relapsing if they have stopped such use, and by reducing exposure to smoke from tobacco products. Parliament desires to contribute to achievement of those objects by regulating the retail packaging and appearance of tobacco products to reduce their appeal to consumers, increasing the effectiveness of health warnings thereon and reducing the ability of retail packaging to mislead consumers about the harmful effects of using tobacco products (s 3(2)). 146. Another object stated in s 3(1) is the giving of effect to certain obligations upon Australia as a party to the WHO Framework Convention on Tobacco Control, done at Geneva on 21 May 2003[192] (“the Convention”).

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147. JTI submits (i) there can be an “acquisition” within s 51(xxxi) which is not proprietary in nature and (ii) the pursuit of the legislative purposes in s 3 of the Packaging Act confers the requisite advantage upon the Commonwealth to satisfy the requirement of an “acquisition”. Proposition (i) should be rejected as inconsistent with the authorities discussed above. As to (ii), pursuit of the legislative objectives stated in s 3 of the Packaging Act does not yield a benefit or advantage to the Commonwealth which is proprietary in nature. 148. No doubt the implementation in municipal law of a treaty obligation of sufficient specificity may be a “purpose in respect of which the Parliament has power to may make laws” within the meaning of s 51(xxxi). However, the reasoning and outcome in the Tasmanian Dam Case indicates, as is apparent from the passage in the reasons of Mason J set out above, that the mere discharge by the Commonwealth of a treaty obligation itself is insufficient to provide an “acquisition” by the Commonwealth. JTI also points to the benefit to the Commonwealth in expected reduction in public expenditure on health care. But, as the Northern Territory correctly emphasised in its submissions, the realisation of such an expectation is conjectural. So also is any suggested enhancement of goodwill attached to the Quitline logo already appearing in the health warnings on the packaging of the plaintiffs’ products. These outcomes would depend upon a complex interaction of regulatory, social and market forces comparable to that interaction considered and rejected as insufficient in Bienke v Minister for Primary Industries and Energy. . . . 149. In its submissions Philip Morris contended that it was sufficient that there has been obtained no more than some identifiable benefit or advantage, which, while not of a proprietary character, is at least a benefit or advantage “relating to the ownership or use of property’ (emphasis added). . . . Philip Morris then submitted that the Packaging Act conferred such a benefit on the Commonwealth because the statutory regime “controlled” the exploitation of the trade marks on the packaging even though the Commonwealth itself did not exploit the trade marks; it was sufficient that the control related to the use of the trade marks. Counsel for the plaintiffs in the BAT Matter submitted to similar effect. 150. However, as Hayne and Bell JJ explain in passages in their reasons with which I agree, to characterise as “control” by “the Commonwealth” compliance with federal law which prescribes what can and cannot appear on the retail packaging of tobacco products diverts attention from a fundamental question presented by s 51(xxxi) of the Constitution. Compliance with the federal law does not create a relationship between “the Commonwealth” and the packaging which is proprietary in nature. . . . 155. In oral submissions the Commonwealth placed at the forefront of its arguments first that no “property” had been “taken” and, secondly, that in any event there had been no “acquisition” of “property”. The upshot is that the Commonwealth should succeed on the second of these grounds. 156. That makes it unnecessary to rule upon two further and related submissions by the Commonwealth. The first is that there is no contextual, structural or historical

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reason to treat every transfer of property as an acquisition to which s 51(xxxi) applies where the transfer is “incidental to regulation in the public interest”. The second proposition is that s 51(xxxi) has no operation where the acquisition of property without compensation “is no more than a necessary consequence or incident of a restriction on a commercial trading activity … reasonably necessary to prevent or reduce harm caused by that trading activity to members of the public or public health”. 157. These submissions bring to mind remarks by Brandeis J in his dissenting reasons in Pennsylvania Coal Company v Mahon [204]: Every restriction upon the use of property imposed in the exercise of the police power deprives the owner of some right theretofore enjoyed, and is, in that sense, an abridgment by the State of rights in property without making compensation. But restriction imposed to protect the public health, safety or morals from dangers threatened is not a taking. . . .

161. Hayne and Bell JJ. The facts and circumstances which give rise to these two proceedings and the relevant provisions of the Tobacco Plain Packaging Act 2011 (Cth) (“the TPP Act”) are set out in the reasons of other members of the Court and need not be repeated. We agree that orders should be made in these matters in the form proposed by Gummow J. . . . 163. The TPP Act seeks to reduce the sales of tobacco products. It prohibits the use of the intellectual property (copyright, designs, patents and trade marks) that the tobacco companies would otherwise use to help sell their products. The tobacco companies say that, if the TPP Act operates according to its terms, it will reduce their sales and that their businesses will therefore be less valuable. They also say that the TPP Act will adversely affect the value of their intellectual property, which could have been turned to account by assignment or licence. Doing so after the TPP Act comes into force will bring, if anything, a very greatly reduced price. 164. The tobacco companies’ central complaint in these proceedings is that the TPP Act prohibits them from using their intellectual property in or on their retail packaging in the way in which they have used it, and would wish to continue to use it, to promote the sale of their products. They say that it follows that the TPP Act will take their property. On the face of it, that proposition seems hard to deny, but its accuracy need not be examined. It need not be examined because the relevant constitutional question is whether there has been an acquisition of property, not whether there has been a taking. Even assuming that the TPP Act effects a “taking”, these reasons will show that there is no acquisition. . . . 180. The tobacco companies’ submissions direct attention to the relationship between the Commonwealth, as the putative acquirer, and the object, in these cases the tangible object, in which it is said that the Commonwealth has obtained a proprietary interest. It is therefore necessary to examine in more detail how it was said that the Commonwealth gained the “use” of, or “control” over, the packaging in which tobacco products are sold.

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181. Though variously expressed, the tobacco companies submitted that the TPP Act gives the Commonwealth the use of, or control over, tobacco packaging because the Commonwealth or the TPP Act (the submissions did not clearly identify which) required certain things to be done or not done on the packaging. But the requirements of the TPP Act are no different in kind from any legislation that requires labels that warn against the use or misuse of a product, or tell the reader who to call or what to do if there has been a dangerous use of a product. Legislation that requires warning labels to be placed on products, even warning labels as extensive as those required by the TPP Act, effects no acquisition of property. 182. When the seller or the maker of a product puts a warning on the packaging, the seller or maker cannot “exploit” that part of the packaging by putting something else where the warning appears. And as the tobacco companies pointed out, the TPP Act greatly restricts, even eliminates, their ability to use their packaging as they would wish. In the terms the tobacco companies used, they cannot exploit their packaging. But contrary to the central proposition that underpinned these arguments, no-one other than the tobacco company that is making or selling the product obtains any use of or control over the packaging. The tobacco companies use the packaging to sell the product; they own the packaging; they decide what the packaging will look like. Of course their choice about appearance is determined by the need to obey the law. But no-one other than the tobacco company makes the decision to sell and to sell in accordance with law. 183. By prescribing what can and cannot appear on retail packaging the TPP Act affects that packaging and those who produce and sell the tobacco products. But to characterise this effect as “control” diverts attention from the fundamental question: does the TPP Act give the Commonwealth a legal interest in the packaging or create a legal relation between the Commonwealth and the packaging that the law describes as “property”? Compliance with the TPP Act creates no proprietary interest. 184. The submissions about “use” of, or “control” over, retail packaging to disseminate or promote the Commonwealth’s health “message” recognised that what will appear on retail packaging of tobacco products will convey information (a “message”) to those who see the packaging. But the submissions then assumed (wrongly) that the author or sponsor of that “message” can be personified as “the Commonwealth”. It cannot. . . . 187. Whatever the sense in which the tobacco companies intended to use the term, “the Commonwealth” has no message which is conveyed by whatever appears on retail packaging that conforms to the requirements of the TPP Act. The packaging takes the form and bears the information required by the TPP Act. It is the legislation which requires that to be so. 188. The TPP Act neither permits nor requires the Commonwealth to use the packaging as advertising space. The Commonwealth makes no public announcement promoting or advertising anything. The packaging will convey messages to those who see it warning against using, or continuing to use, the product contained within the

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packaging. Statutory requirements for warning labels on goods will presumably always be intended to achieve some benefit: usually the avoidance of or reduction in harm. But the benefit or advantage that results from the tobacco companies complying with the TPP Act is not proprietary. The Commonwealth acquires no property as a result of their compliance with the TPP Act. 189. The TPP Act is not a law by which the Commonwealth acquires any “interest in property, however slight or insubstantial it may be”. The TPP Act is not a law with respect to the acquisition of property. It is therefore not necessary to consider the Commonwealth’s attempt to articulate a principle which would set legislation effecting an acquisition of property otherwise than on just terms beyond the reach of s 51(xxxi) on the ground that the legislation is a reasonable regulation of some activity for the greater good of society. The arguments advanced by the tobacco companies are answered by the logically anterior conclusion that the TPP Act effects no acquisition of property. . . . 192. Heydon J. There is no doubt that a law which affects subsisting exclusive intellectual property rights can attract s 51(xxxi) of the Constitution. The issue is whether the laws impugned in these proceedings affect rights of that kind in a manner which does attract s 51(xxxi). The rights in question are intellectual property rights and rights over chattels, namely cigarette packets and cigarettes. The rights are owned by certain tobacco companies (“the proprietors”). . . . 236. The Commonwealth submitted that the TPP Act did provide “just terms” in the form of “fair dealing” as between the “tobacco companies and the Australian nation representing the Australian community put at risk by their products.” Even assuming the correctness of the numerous “constitutional facts” on which the Commonwealth relied in relation to smoking, this submission must be rejected. The Commonwealth put its submission as follows: For the Australian nation representing the Australian community to be required to compensate tobacco companies for the loss resulting from no longer being able to continue in the harmful use of their property goes beyond the requirements of any reasonable notion of fairness. That conclusion is reinforced by the profound incongruity involved in the provision of compensation to those who would benefit from continuing to engage in the harmful trading activity that would continue to be permitted but for the TPP Act.

In assessing the submission, it must be remembered that the legislation does not criminalise the sale of tobacco products. The parties accepted that tobacco products cause harm. It is more controversial whether reducing the use of intellectual property on the packaging of tobacco products will reduce that harm. Even accepting that it will, the submission must fail. Most expropriating legislation is designed in good faith to strike a balance between competing social interests with a view to solving particular problems. It is revolutionary to suggest that the Commonwealth is relieved of its obligation to provide just terms in the form of compensation merely because the legislation under which it acquires property is fair in the sense assumed by the submission. The primary authority on which the Commonwealth relied was directed

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not to substitutes for compensation, but to criteria relevant to the calculation of compensation. In Georgiadis v Australian and Overseas Telecommunications Corporation, Brennan J said: In determining the issue of just terms, the Court does not attempt a balancing of the interests of the dispossessed owner against the interests of the community at large. The purpose of the guarantee of just terms is to ensure that the owners of property compulsorily acquired by government presumably in the interests of the community at large are not required to sacrifice their property for less than its worth. Unless it be shown that what is gained is full compensation for what is lost, the terms cannot be found to be just.

That passage has been approved by Gleeson CJ. It is the furtherance of the public interest which moves the legislature to enact legislation acquiring property, thereby creating the occasion for an inquiry into whether “just terms” have been provided. But the furtherance of the public interest is not a reason to deny just compensation to the property owner. To hold otherwise is significantly to weaken the effectiveness of s 51(xxxi) as a constitutional guarantee. The Commonwealth’s submission must therefore be rejected. . . . 238. In 1979, in Trade Practices Commission v Tooth & Co Ltd, Mason J said: We were invited by the Solicitor-General to hold that a law whose effect is to provide for the acquisition of property is not a law with respect to the acquisition of property when it also happens to be a regulatory law which prohibits and penalizes obnoxious or undesirable trade practices by corporations. The argument accompanying this invitation was rather elusive.

Mason J rejected the argument. It did not prevail. Yet it was repeated in these cases in relation to “obnoxious or undesirable” tobacco advertising practices. 239. In 1993, in Georgiadis v Australian and Overseas Telecommunications Corporation, another Solicitor-General submitted that the expression “just terms” is an expression which “extends to what is fair, taking into account the interests of the community.” That submission did not prevail either. It was specifically rejected by Brennan J[276]. Yet it was repeated in these cases. 240. These are just minor examples of a common characteristic of s 51(xxxi) litigation—that the Commonwealth repeats arguments it has advanced in earlier cases over many years, despite their failure, and often their repeated failure. 241. After a “great” constitutional case, the tumult and the shouting dies. The captains and the kings depart. Or at least the captains do; the Queen in Parliament remains forever. Solicitors-General go. New Solicitors-General come. This world is transitory. But some things never change. The flame of the Commonwealth’s hatred for that beneficial constitutional guarantee, s 51(xxxi), may flicker, but it will not die. That is why it is eternally important to ensure that that flame does not start a destructive blaze. . . .

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244. Crennan J. The issues in these two proceedings, the relevant facts, and the relevant provisions of the Tobacco Plain Packaging Act 2011 (Cth) (“the Packaging Act”) and the Tobacco Plain Packaging Regulations 2011 (Cth) (“the Regulations”) can be found in other reasons, obviating the need to set out those matters except as necessary to inform these reasons. The plaintiffs challenge the Packaging Act principally on the basis that its operation will effect an acquisition of their property otherwise than on just terms, contrary to s 51(xxxi) of the Constitution. It will be determined in these reasons that their respective challenges fail. I agree with the orders on the demurrer and with the answers to the reserved questions proposed by Gummow J. Accordingly, I joined in the orders pronounced on 15 August 2012. . . . 295. The restrictions in the Packaging Act may reduce the volume of the plaintiffs’ sales of tobacco products in retail trade, the value of associated goodwill in the trade marks and associated businesses, and the value of rights to assign or license such marks. However, s 51(xxxi) is not directed to preserving the value of a commercial business or the value of an item of property. 296. Given the nature of the plaintiffs’ pre-existing rights to use their property for advertising or promotional purposes, restricting or extinguishing those rights, with a possible consequential diminution in the value of the property or the associated businesses, did not constitute a taking amounting to an indirect acquisition. . . . 306. For the reasons set out above, the Packaging Act restrictions, which effectively prohibit the plaintiffs from using their property for advertising or promotional purposes, while severe from a commercial viewpoint, do not operate so as to effect an acquisition of any proprietary right or interest by the Commonwealth, or by the owner of the Quitline services or trade mark. . . . 308. Kieffel J. . . . 316. Many kinds of products have been subjected to regulation in order to prevent or reduce the likelihood of harm. The labelling required for medicines and poisonous substances comes immediately to mind. Labelling is also required for certain foods, to both protect and promote public health. 317. It may be thought that the pursuit of a purpose such as the prevention of harm or the protection of health is inherently unlikely to involve an acquisition of property, but objects should not be confused with the methods employed to attain them. A question that arises in cases concerning s 51(xxxi) which involve regulatory restrictions having severe effects is whether something more than the attainment of statutory objects results to the Commonwealth or another person as a result of the restrictions imposed. Answering this question necessitates an understanding of the impugned restrictions, viewed in the legislative framework in which they operate. 318. In recent decades, there has been a progressive restriction of the promotion of tobacco products, which, although remaining legal to sell and use, have been recognised as seriously harmful to the health of those using them. The Commonwealth and the plaintiffs are agreed that one consequence of the level of restriction of advertising

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of tobacco products has been that the packaging of these products has become the main means of their promotion. . . . 328. The use of a brand, business or company name for tobacco products or any variant name is strictly regulated. It may only appear on the front, top and bottom outer surfaces of a cigarette pack, much of which, as has been explained, must be covered by the statements, graphics and messages specified in the 2004 and 2011 Information Standards. Any brand, business or company name on the front outer surface of a cigarette pack must be in the centre of the space remaining on that surface, beneath the “health warning”, and appear horizontally below and in the same orientation as the health warning. On any other face the brand, business or company name must appear horizontally and in the centre of the outer surface of the pack. Any variant name must appear horizontally and immediately below and in the same orientation as the brand, business or company name. Further, any brand, business, company or variant name must conform to requirements as to size, font and colour. Packets are not permitted to have any decorative ridges, embossing, or other irregularities of shape or texture or other embellishments. Packets must be made of rigid cardboard of rectangular shape with 90 degree angles. Their outer surfaces must be a drab colour. 329. In summary, the Packaging Act prohibits the use of any trade mark or other distinctive feature on packaging and permits only a brand, business, company or variant name to be used to distinguish one tobacco product from another, and then only in small type on an inconspicuous background. The requirements of the 2004 and 2011 Information Standards are thereby reinforced in aid of the object of the Packaging Act, namely to actively dissuade persons from purchasing tobacco products. . . . 356. The plaintiffs’ arguments as to the effects upon the use of their property or the conduct of their businesses do not identify what is said to accrue to the Commonwealth or another. It may be accepted that some or much of the value of their intellectual property has been lost in Australia. A trade mark that cannot lawfully be used in connection with the goods to which it is relevant is unlikely to be readily assignable. The restriction on the use of the marks is likely to have effects upon the custom drawn to their businesses and upon their profits. 357. However, the mere restriction on a right of property or even its extinction does not necessarily mean that a proprietary right has been acquired by another. The loss of trade or business does not spell acquisition. Although the protection afforded by s 51(xxxi) to the owner of property is wide, it is a protection directed to proprietary interests and not to the commercial position of traders. . . . 371. The objects of the Packaging Act include the improvement of public health by discouraging persons from using tobacco products. The Packaging Act seeks to achieve that object by further reducing the attractiveness of the packaging of the products and the recall of brand name and other distinctive marks. Whether that object will be largely achieved cannot presently be known. 372. The Packaging Act and the Packaging Regulations, in conjunction with the 2004 and 2011 Information Standards, may be a rare form of regulation of the packaging of

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a harmful product, in that they require those distributing a product to place warnings on the product’s packaging which might dissuade persons from using the product at all. However, the plaintiffs did not seek to argue that the measures were not appropriate to achieve the statutory objectives or disproportionate to them, or that the legislation was enacted for purposes other than those relating to public health. In the end result, their argument was only that the possible achievement of the statutory objectives of the Packaging Act was sufficient to amount to an acquisition for the purposes of s 51(xxxi). It is possible that there be a statutory objective of acquiring property, as there was in the Bank Nationalisation Case, but there is no such purpose evident in the present case. The central statutory object of the Packaging Act is to dissuade persons from using tobacco products. If that object were to be effective, the plaintiffs’ businesses may be harmed, but the Commonwealth does not thereby acquire something in the nature of property itself. . . .

76. AstraZeneca AB v. Commission, In Case C-457/10 P, 2012 Court of Justice of the European Union (First Chamber) [For an introduction to the facts and issues of this case, see case no. 66.] 19. Under Article 1(2) of the contested decision, the second abuse consisted in the submission of requests for deregistration of the MAs for Losec capsules in Denmark, Sweden and Norway, combined with the withdrawal of Losec capsules from the market and the launch of Losec MUPS tablets (‘Multiple Unit Pellet System’; a system of tablets with multiple microgranules) in those three countries. In the Commission’s submission, those steps were taken in order to ensure that the abridged registration route provided for in point 8(a)(iii) of the third paragraph of Article 4 of Directive 65/65 would not be available to producers of generic omeprazole and they also had the consequence that parallel importers were likely to lose their parallel import licences. It took issue, in particular, with the appellants’ strategic implementation of the regulatory framework in order to artificially protect from competition products that were no longer protected by a patent and for which the period of data exclusivity had expired. . . . 20. In respect of those two abuses, the Commission imposed on the appellants jointly and severally a fine of EUR 46 million and on AstraZeneca AB a separate fine of EUR 14 million. . . . 115. In its assessment of the first of those pleas, alleging errors in law, the General Court first observed, at paragraphs 666 to 669 of that judgment, that, after the expiry of a period of exclusivity of six or ten years which starts to run from the grant of the first MA, Directive 65/65 no longer confers on the owner of an original medicinal product the exclusive right to make use of the results of the pharmacological and toxicological tests and clinical trials placed in the file. On the contrary, it allows that information to be taken into account by the national authorities for the purposes of granting MAs for

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essentially similar products under the abridged procedure provided for in point 8(a)(iii) of the third paragraph of Article 4 of that directive. That choice by the legislature results from the balancing of, on the one hand, the interests of the innovative undertakings with, on the other hand, those of the manufacturers of essentially similar products and the interest in avoiding the repetition of tests on humans or animals where not necessary. 116. The General Court pointed out that the Court of Justice, in its judgment in Case C-223/01 AstraZeneca [2003] ECR I-11809, paragraphs 49 to 54, nevertheless considered that the interest of safeguarding public health required, in order for an application for MA of a generic medicinal product to be dealt with by way of the abridged procedure provided for in that provision, that the reference MA still be in force in the Member State concerned at the date when that application is lodged, and therefore precluded the use of that abridged procedure after the withdrawal of the reference MA. 117. The General Court inferred, at paragraph 670 of the judgment under appeal, that the deregistration of the MA of the original medicinal product had the effect of preventing the applicant for a MA in respect of an essentially similar medicinal product from being exempted, pursuant to point 8(a)(iii) of the third paragraph of Article 4 of Directive 65/65, from having to carry out pharmacological and toxicological tests and clinical trials for the purposes of demonstrating the harmlessness and efficacy of the product in question. Thus, in this case, although the legislation no longer conferred on AZ the exclusive right to make use of the results of those tests and trials, the strict public health protection requirements which informed the Court of Justice’s interpretation of Directive 65/65 enabled it to prevent or make more difficult, by the deregistration of its MAs, the acquisition, by way of the abridged procedure, of MAs for essentially similar medicinal products, to which the manufacturers of generic products were none the less entitled. 118. The General Court found, at paragraphs 675 and 676 of the judgment under appeal, that such conduct, which was designed to prevent manufacturers of generic products from making use of their right to benefit from the results of those tests and trials, was not based in any way on the legitimate protection of an investment which came within the scope of competition on the merits. It observed, inter alia, that it was apparent that AZ’s deregistration of the MAs was only such as to prevent applicants for MA in respect of essentially similar medicinal products from being able to make use of the abridged procedure and thus to obstruct or delay the market entry of generic products. It stated that such deregistration might also be such as to prevent parallel imports. It added, at paragraph 677 of that judgment, that the fact that AZ was entitled to request the withdrawal of those authorisations in no way caused that conduct to escape the prohibition laid down in Article 82 EC. 119. At paragraphs 678 to 684 of the judgment under appeal the General Court then rejected the argument that the compatibility with Article 82 EC of the impugned conduct had to be assessed according to the criteria set out in the case-law on ‘essential facilities’. Lastly, at paragraphs 685 to 694 of that judgment, it rejected the appellants’ argument, put forward for the first time during the procedure before that Court, that in

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this case the pharmacovigilance obligations to which AZ was subject in Denmark, Sweden and Norway constituted an objective ground of justification of the applications for deregistration of the MAs in those countries. 120. The second plea, relating to the second abuse, whereby the appellants called in question the Commission’s assessment of the facts surrounding the impugned conduct and the conclusions which the Commission drew from those facts, was examined at paragraphs 757 to 865 of the judgment under appeal. 121. At paragraphs 806 to 812 of that judgment, the General Court held that the deregistration of the Losec capsule MAs did not constitute conduct coming within the scope of competition on the merits. It was held that, on the other hand, AZ could not be criticised for having launched Losec MUPS or for having withdrawn Losec capsules from the market, as those acts, unlike the deregistration of MAs, were not capable of delaying or preventing the introduction of generic products and parallel imports. 122. At paragraphs 824 to 863 of the judgment under appeal the General Court considered whether the Commission had shown to the requisite legal standard that, in view of the objective context in which the impugned conduct was implemented, that conduct was capable of restricting competition by preventing or delaying the introduction of generic products and parallel imports. 123. As regards, in the first place, the introduction of generic products, it was held at paragraph 828 of that judgment that the deregistration of the MAs had made the abridged procedure unavailable and was therefore such as to delay the grant of authorisations for the marketing of generic products in Denmark, Sweden and Norway. In that regard, the General Court held at paragraphs 829 to 835 of that judgment that the appellants’ assertion that AZ’s competitors would have been able to obtain MAs by means of alternative procedures, which were longer and more costly, did not suffice to render the deregistration of those MAs non-abusive since that deregistration had the sole aim of excluding from the market, at least temporarily, competing manufacturers of generic products. 124. As regards, in the second place, parallel imports, the General Court held, at paragraphs 838 to 863 of the judgment under appeal, that, although the Commission had demonstrated that, in Sweden, the deregistration of the MA for Losec capsules was capable of excluding parallel imports of those products, it had not so demonstrated in the case of the Kingdom of Denmark or the Kingdom of Norway. The General Court therefore upheld that plea in part in so far as it related to a restriction of parallel imports in those two countries and rejected it for the remainder. . . . 129. As a preliminary point it must be stated that, as the General Court observed at paragraph 804 of the judgment under appeal, the preparation by an undertaking, even in a dominant position, of a strategy whose object it is to minimise the erosion of its sales and to enable it to deal with competition from generic products is legitimate and is part of the normal competitive process, provided that the conduct envisaged does not depart from practices coming within the scope of competition on the merits, which is such as to benefit consumers.

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130. However, contrary to what the appellants submit, conduct like that impugned in the context of the second abuse—consisting in the deregistration, without objective justification and after the expiry of the exclusive right to make use of the results of the pharmacological and toxicological tests and clinical trials granted by Directive 65/65, of the MAs for Losec capsules in Denmark, Sweden and Norway, by which AZ intended, as the General Court held at paragraph 814 of the judgment under appeal, to hinder the introduction of generic products and parallel imports—does not come within the scope of competition on the merits. 131. In this connection, it must in particular be stated that, as the General Court observed at paragraph 675 of that judgment, after the expiry of the period of exclusivity referred to above, conduct designed, inter alia, to prevent manufacturers of generic products from making use of their right to benefit from those results was not based in any way on the legitimate protection of an investment which came within the scope of competition on the merits, precisely because, under Directive 65/65, AZ no longer had the exclusive right to make use of those results. 132. Furthermore, the General Court was correct to hold, at paragraph 677 of that judgment, that the fact, relied on by the appellants, that under Directive 65/65 AZ was entitled to request the withdrawal of its MAs for Losec capsules in no way causes that conduct to escape the prohibition laid down in Article 82 EC. As that court pointed out, the illegality of abusive conduct under Article 82 EC is unrelated to its compliance or non-compliance with other legal rules and, in the majority of cases, abuses of dominant positions consist of behaviour which is otherwise lawful under branches of law other than competition law. 133. Moreover, as the Advocate General observes in point 78 of his Opinion, the primary purpose of Directive 65/65 is to safeguard public health while eliminating disparities between certain national provisions which hinder trade in medicinal products within the Union, and it therefore does not, as claimed by the appellants, pursue the same objectives as Article 82 EC in such a way that the application of the latter is no longer required for the purposes of ensuring effective and undistorted competition within the internal market. 134. It is important to point out, in this context, that an undertaking which holds a dominant position has a special responsibility in that latter regard (see Case C-202/07 P France Télécom v Commission [2009] ECR I-2369, paragraph 105) and that, as the General Court held at paragraphs 672 and 817 of the judgment under appeal, it cannot therefore use regulatory procedures in such a way as to prevent or make more difficult the entry of competitors on the market, in the absence of grounds relating to the defence of the legitimate interests of an undertaking engaged in competition on the merits or in the absence of objective justification. 135. As regards the appellants’ argument that maintaining an MA would impose onerous pharmacovigilance obligations on it, it must be noted that such obligations may in fact constitute an objective justification for the deregistration of a MA.

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136. However, as the General Court observed at paragraphs 686 and 688 of the judgment under appeal, that argument was raised for the first time at the stage of the proceedings before that Court and the burden arising from those obligations was never mentioned in AZ’s internal documents relating to its commercial strategy, which casts doubt on the fact that the deregistration of the MAs was due in this case to those obligations. 137. The General Court, moreover, found at paragraph 689 of that judgment that, in so far as AZ had not requested the deregistration of its MAs in Germany, Spain, France, Italy, the Netherlands and Austria, the appellants had failed to demonstrate that the additional burden on AZ, had it not deregistered its MAs in Denmark, Sweden and Norway, would have been so significant that it would have constituted an objective ground of justification. 138. In the light of that finding by the General Court, based on a detailed analysis, at paragraphs 690 to 693 of that judgment, of AZ’s pharmacovigilance obligations in relation to its MAs in those latter countries, which has not been called into question by the appellants, it must be concluded that the argument derived from such obligations has no factual basis. . . . 148. . . . The situation which characterises the second abuse is not in any way comparable to a compulsory licence or to the situation which gave rise to the judgment in IMS Health, relied upon by the appellants, which concerned the refusal by an undertaking in a dominant position, which was the owner of an intellectual property right in a ‘brick structure’, to grant its competitors a licence for the use of that structure. 149. In fact, the possibility provided for in Directive 65/65 of deregistering a MA is not equivalent to a property right. Consequently, the fact that, in the light of its special responsibility, an undertaking in a dominant position cannot make use of such a possibility in such a way as to prevent or render more difficult the entry of competitors on the market, unless it can, as an undertaking engaged in competition on the merits, rely on grounds relating to the defence of its legitimate interests or on objective justifications, does not constitute either an ‘effective expropriation’ of such a right or an obligation to grant a licence, but a straightforward restriction of the options available under European Union law. 150. The fact that the exercise of such options by an undertaking in a dominant position is limited or made subject to conditions in order to ensure that competition already weakened by the presence of that undertaking is not subsequently undermined is in no way an exceptional case and does not justify a derogation from Article 82 EC, unlike a situation in which the unfettered exercise of an exclusive right awarded for the realisation of an investment or creation is limited. 151. As regards the appellants’ argument that AZ still held exclusive rights over the clinical data in the file which were still confidential, that argument fails to have regard to the fact that, as the General Court observed at paragraph 681 of the judgment under appeal, Directive 65/65 in any event created a limitation to those alleged rights by establishing, in point 8(a)(iii) of the third paragraph of Article 4 thereof, an abridged

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procedure which, after the expiry of a period of exclusivity of six or ten years, allows the national authorities to rely on that data and the manufacturers of essentially similar medicinal products to benefit from its existence for the purposes of being granted a MA. The General Court was therefore fully entitled to find, at paragraphs 670, 674, 680 and 830 of the judgment under appeal, that Directive 65/65 no longer gave AZ the exclusive right to make use of the results of the pharmocological and toxicological tests and clinical trials included in the file. 152. Moreover, in so far as the national authorities do not disclose that data to applicants in the context of the abridged procedure, the finding of the second abuse, as the Commission points out, does not result in competitors being granted access to the clinical data and does not prejudice its confidentiality. 153. The General Court therefore did not commit any error of law in rejecting, at paragraphs 678 to 684 of the judgment under appeal, the appellants’ argument that the compatibility with Article 82 EC of the conduct impugned in the context of the second abuse should be assessed in accordance with the criteria applied, inter alia, in IMS Health, or in holding, at paragraphs 824 and 826 of the judgment under appeal, that, for the purposes of characterising that conduct as an abuse of a dominant position, it is sufficient to demonstrate that it is such as to restrict competition and, in particular, to constitute an impediment to generic products entering the market and to parallel imports. 154. The General Court was also fully entitled, in ascertaining whether the Commission had actually proved this in respect of generic products, to hold, at paragraphs 829 to 835 of the judgment under appeal, that the fact that the regulatory framework offers alternative means, which are longer and more costly, to obtain a MA did not prevent the conduct of an undertaking in a dominant position from being abusive where that conduct, considered objectively, has the sole purpose of rendering the abridged procedure provided for by the legislator in point 8(a)(iii) of the third paragraph of Article 4 of Directive 65/65 unavailable and therefore of excluding the producers of generic products from the market for as long as possible and of increasing the costs incurred by them in overcoming barriers to entry to the market, thereby delaying the significant competitive pressure exerted by those products. 155. Furthermore, as regards parallel imports in Sweden, it is common ground that, as the General Court observed at paragraphs 862 and 863 of the judgment under appeal, the deregistration of the MA for Losec capsules actually had the effect of impeding parallel imports, as the Swedish pharmaceutical products agency withdrew the parallel import licences with effect on 1 January 1999 and 30 June 1999 respectively, being of the view that those licences could only be granted where there were valid MAs. It is moreover apparent, inter alia from paragraph 814 of the judgment under appeal and the documents referred to there, that that consequence was envisaged and even intended by AZ. The mere fact that the Court held, in Paranova Läkemedel and Others and Paranova, a number of years later, that withdrawal of MAs for reasons other than the protection of public health does not justify the automatic cessation of authorisation of parallel imports where the protection of public health can be guaranteed by

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alternative means, such as collaboration with the national authorities of other Member States, does not alter the fact that the withdrawal of the MAs was, at the time when the application for that withdrawal was lodged, such as to impede parallel imports. . . . 188. Lastly, contrary to what the EFPIA submits, the taking into account of intellectual property rights for the purposes of finding that an undertaking has a dominant position does not mean that companies introducing innovative products on the market should refrain from acquiring a comprehensive portfolio of intellectual property rights or from enforcing those rights. It is sufficient to point out in that regard that a dominant position is not prohibited, only its abuse, and a finding that an undertaking has such a position is not in itself a criticism of the undertaking concerned (see, to that effect, Joined Cases C-395/96 P and C-396/96 P Compagnie maritime belge transports and Others v Commission [2000] ECR I-1365, paragraph 37, and TeliaSonera Sverige, paragraph 24). . . .

77. Glenwood Labs., Inc. v. Am. Home Prods. Corp., 455 F.2d 1384 (C.C.P.A. 1972) United States Court of Customs and Patent Appeals Opinion by Lane, Judge. This is an appeal from the decision of the Trademark Trial and Appeal Board, 161 USPQ 826 (1969) (report of result only), sustaining an opposition to the registration of MYOCHOLINE a medicinal preparation for treatment of dysphagia, abdominal distention, gastric retention, and urinary retention, filed by appellee, the owner of the prior registration of MYSOLINE for an anti-convulsant drug, on the ground that MYOCHOLINE so resembles MYSOLINE “as to be likely, when applied to the goods of the applicant, to cause confusion, or to cause mistake, or to deceive.” Lanham Act, §2(d), 15 USC 1052(d). We affirm. Appellant’s MYOCHOLINE is a pharmaceutical dispensed on prescription in tablet form through the normal drug channels. It was marketed in 1964 and advertised in medical journals, at professional conventions and by direct mail. Opposer’s MYSOLINE is also dispensed only on a prescription basis and may be procured in tablet form as well as in liquid suspension. Sales of MYSOLINE during the period 1957 through 1966 were found by the board to exceed $17,000,000, and advertising expenditures during the same time period surpassed $1,000,000. Opposer’s drug is a suppressant of convulsions and is indicated for treatment of epilepsy, petit and grand mal, and other psychomotor defects. Appellant’s drug is contraindicated for use by those afflicted with the disorders for which MYSOLINE is prescribed. Appellant asserts that there is no likelihood of confusion, that the marks are dissimilar in structure, and that when broken down into its constituent parts, each mark can be seen to be suggestive of the nature of the product it identifies. MYSOLINE is a three-syllable word whereas MYOCHOLINE is composed of four syllables. The marks are different in the middle syllables—“O-CHOL” as contrasted with “SOL”.

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These differences are asserted to be significant as well as audibly and visually distinguishing. Appellant states that “CHOL” connotes the product as a choline derivative thereby indicating the chemical origin of the drug. On the other hand, “SOL” must, it is urged, suggest “solace”—the relaxing quality of opposer’s anticonvulsant. According to appellant, “MY” and “MYO” mean muscle, while “INE” means “characterized by,” and a number of third-party registrations of marks applied to drugs which utilize these word segments were introduced to show the etymology of the two marks here in issue. It would follow, according to appellant, that MYOCHOLINE suggests a medicine for treatment of a muscle disorder characterized by derivation from a choline compound whereas MYSOLINE would indicate a drug characterized by affording solace and relaxation to an affected muscle. It appears to us that appellant’s analysis of opposer’s mark yields a definition which would be equally applicable to the drug identified by MYOCHOLINE. We regard appellant’s approach as too myopic. It is the entirety of each mark as applied to the respective drug which must be considered. Although appellant does contend that the segment of the public which would have the responsibility of distinguishing between the drugs identified by these marks, i.e., physicians and pharmacists, is a discriminating class; nevertheless, we must still look to the whole of the marks, and we are satisfied that even within this class of persons there is a likelihood of confusion. . . . The fact that confusion as to prescription drugs could produce harm in contrast to confusion with respect to nonmedicinal products was an additional consideration of the board as is evident from that portion of the opinion in which the board stated: The products of the parties are medicinals and applicant’s product is contraindicated for the disease for which opposer’s product is indicated. It is apparent that confusion or mistake in filling a prescription for either product could produce harmful effects. Under such circumstances, it is necessary, for obvious reasons, to avoid confusion or mistake in the dispensing of the pharmaceuticals. . . .

The board’s view that a higher standard be applied to medicinal products finds support in previous decisions of this court, Clifton v. Plough, 341 F.2d 934, 936 (1965) (“[It] is necessary, for obvious reasons, to avoid confusion in the dispensing of pharmaceuticals.”); Campbell Products, Inc. v. John Wyeth & Bro., Inc., 143 F.2d 977, 979 (1944) (“[It] seems to us that where ethical goods are sold and careless use is dangerous, greater care should be taken in the use and registration of trade-marks to assure that no harmful confusion results.”). As Judge Rich points out in dissent, this is a doctrine which has been adopted by other Federal courts in which injunction against the use of a mark has been sought on the ground of likelihood of confusion. Judge Rich, however, would distinguish between actions brought to enjoin use and inter partes contests arising in the Patent Office (as well, presumably, as ex parte actions arising in the Patent Office) wherein it is registration which is sought to be prevented. Because use or nonuse is independent of registration, and since a judgment of this court can only affect registration, Judge Rich concludes that any special harm which might result from confusion of goods in use stemming from similarity in the identifying marks is a consideration irrelevant to any trade-mark proceeding before us. We cannot agree with

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this view. Instead, we reaffirm our position as accurately presented by the board in this case. . . .

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TECHNICAL STANDARDS

46. There is an uneasy relationship between intellectual property and technical standards. General, that relationship is analyzed in the context of patents in the information technology industry, but it goes much beyond that. Standardization also affects how copyright is acquired and used. Trademarks are also strongly affected, not only vis-à-vis tobacco packaging (see case no. 75), but also when they are included in standards as substitutes of the description of ingredients, or when they are used to designate services of certification (where they are subject to constraints similar to compulsory licenses—see case no. 36) and restrictions to use by their owners. 47. In general, an important distinction must be made between mandatory and voluntary standards. The mandatory nature of a standard may lead to compulsory licenses of essential patents, but they do not affect the acquisition of the respective rights. However, in the field of copyrights, the mandatory nature of standards tends to bar their acquisition, in view of the generally adopted exclusion of statutes from copyright protection. Voluntary standards do not have such strong impact, and yet they may submit essential patents to contractually established fair, reasonable and non-discriminatory licensing terms (FRAND).

78. Practice Management Information Corp. v. The American Dental Medical Association, 121 F.3d 516 (9th Cir. 1997) UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT Opinion by Browning, Circuit Judge: Practice Management Information Corporation (“Practice Management”) appeals from a partial summary judgment and preliminary injunction forbidding it from publishing a medical procedure code copyrighted by the American Medical Association (“the AMA”). Over thirty years ago, the AMA began the development of a coding system to enable physicians and others to identify particular medical procedures with precision. These efforts culminated in the publication of the Physician’s Current Procedural Terminology (“the CPT”), on which the AMA claims a copyright. The current edition of the CPT identifies more than six thousand medical procedures and provides a five-digit code and brief description for each. The CPT is divided into six sections—evaluation, anesthesia, surgery, radiology, pathology, and medicine. Within each section, procedures are arranged to enable the user to locate the code number readily. In the anesthesia section, procedures are grouped according to the body part receiving the anesthetic; in the surgical section, the procedures are grouped according to the body system, such as the digestive or urinary system, on

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which surgery is performed. The AMA revises the CPT each year to reflect new developments in medical procedures. In 1977, Congress instructed the Health Care Financing Administration (“HCFA”) to establish a uniform code for identifying physicians’ services for use in completing Medicare and Medicaid claim forms. See 42 U.S.C. § 1395w-4(c)(5). Rather than creating a new code, HCFA contracted with the AMA to “adopt and use” the CPT. . . . The AMA gave HCFA a “non-exclusive, royalty free, and irrevocable license to use, copy, publish and distribute” the CPT. . . . In exchange, HCFA agreed “not to use any other system of procedure nomenclature . . . for reporting physicians’ services” and to require use of the CPT in programs administered by HCFA, by its agents, and by other agencies whenever possible. . . . HCFA published notices in the Federal Register incorporating the CPT in HCFA’s Common Procedure Coding System, see 48 Fed. Reg. 16750, 16753 (1983); 50 Fed. Reg. 40895, 40897 (1985), and adopted regulations requiring applicants for Medicaid reimbursement to use the CPT. See 42 C.F.R. §433.112(b)(2) (requiring compliance with Part 11 of the State Medicaid Manual, which requires states receiving federal funding for Medicaid to adopt the Administration’s Common Procedure Coding System as the exclusive medical procedure coding system). Practice Management, a publisher and distributor of medical books, purchases copies of the CPT from the AMA for resale. After failing to obtain the volume discount it requested, Practice Management filed this lawsuit seeking a declaratory judgment that the AMA’s copyright in the CPT was invalid for two reasons: (1) the CPT became uncopyrightable law when HCFA adopted the regulation mandating use of CPT code numbers in applications for Medicaid reimbursement, and (2) the AMA misused its copyright by entering into the agreement that HCFA would require use of the CPT to the exclusion of any other code. The district court granted partial summary judgment for the AMA and preliminarily enjoined Practice Management from publishing the CPT. Practice Management appeals. Practice Management’s argument that the CPT became law and entered the public domain when HCFA by regulation required its use rests ultimately upon Banks v. Manchester, 128 U.S. 244 (1888), which held that judicial opinions are uncopyrightable. Banks in turn rests upon two grounds, neither of which would justify invalidation of the AMA’s copyright. The first ground for the Banks holding that judicial opinions are not subject to copyright is that the public owns the opinions because it pays the judges’ salaries. Id. at 253. The second is that as a matter of public policy, “the whole work done by the judges constitutes the authentic exposition and interpretation of the law, which, binding every citizen, is free for publication to all . . . .” Id. The first ground is clearly not applicable to the CPT. The copyright system was not significant in Banks because judges had no proprietary interest in their opinions. The copyright system is of central importance in this case because the AMA authored, owns, and maintains the CPT and claims a copyright in it. The copyright system’s goal of promoting the arts and sciences by granting temporary monopolies to copyrightholders was not at stake in Banks because judges’

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salaries provided adequate incentive to write opinions. In contrast, copyrightability of the CPT provides the economic incentive for the AMA to produce and maintain the CPT. “To vitiate copyright, in such circumstances, could, without adequate justification, prove destructive of the copyright interest, in encouraging creativity,” a matter of particular significance in this context because of “the increasing trend toward state and federal adoptions of model codes.” . . . As the AMA points out, invalidating its copyright on the ground that the CPT entered the public domain when HCFA required its use would expose copyrights on a wide range of privately authored model codes, standards, and reference works to invalidation. Non-profit organizations that develop these model codes and standards warn they will be unable to continue to do so if the codes and standards enter the public domain when adopted by a public agency. The second consideration underlying Banks—the due process requirement of free access to the law—may be relevant but does not justify termination of the AMA’s copyright. There is no evidence that anyone wishing to use the CPT has any difficulty obtaining access to it. See Texas v. West Publ’g Co., 882 F.2d 171, 177 (5th Cir. 1989). Practice Management is not a potential user denied access to the CPT, but a putative copier wishing to share in the AMA’s statutory monopoly. Practice Management does not assert the AMA has restricted access to users or intends to do so in the future. The AMA’s right under the Copyright Act to limit or forgo publication of the CPT poses no realistic threat to public access. The AMA has no incentive to limit or forgo publication. If the AMA were to do so, HCFA would no doubt exercise its right to terminate its agreement with the AMA. Other remedies would also be available, including “fair use” and due process defenses for infringers, . . . and, perhaps most relevant, mandatory licensing at a reasonable royalty could be required in light of the great public injury that would result if adequate access to the CPT were denied. See Abend v. MCA, Inc., 863 F.2d 1465, 1479 (9th Cir. 1988); Universal City Studios, Inc. v. Sony Corp. of America, 659 F.2d 963, 976 (9th Cir. 1982), rev’d on other grounds, 464 U.S. 417 (1984). The Supreme Court has not considered a case in which the author asserted a proprietary interest in material adopted by the government as law. However, the First and Second Circuits have declined to enjoin enforcement of private copyrights in these circumstances. In Building Officials & Code Admin. v. Code Technology, Inc., 628 F.2d 730 (1st Cir. 1980), the district court preliminarily enjoined Code Technology, Inc. from copying a building code copyrighted by Building Officials & Code Administration (“BOCA”), a private, non-profit group, and adopted by the State. The First Circuit reversed. It recognized the problem posed by Banks, but nonetheless refrained from holding BOCA’s copyright invalid: Groups such as BOCA serve an important public function; arguably they do a better job than could the state alone in seeing that complex yet essential regulations are drafted, kept up to date and made available. Since the rule denying copyright protection to judicial opinions and statutes grew out of a much different set of circumstances than do these technical regulatory codes, we think BOCA should at least be allowed to argue its position fully on the basis of an evidentiary

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record, into which testimony and materials shedding light on the policy issues discussed herein may be placed. Id. at 736.

In CCC Info. Servs., Inc. v. Maclean Hunter Mkt. Reports, Inc., 44 F.3d 61 (2d Cir. 1994), the Second Circuit declined to invalidate the copyright on a privately prepared listing of automobile values that several states required insurance companies to use in calculating insurance awards: We are not prepared to hold that a state’s reference to a copyrighted work as a legal standard for valuation results in loss of the copyright. While there are indeed policy considerations that support CCC’s argument, they are opposed by countervailing considerations. For example, a rule that the adoption of such a reference by a state legislature or administrative body deprived the copyright owner of its property would raise very substantial problems under the Takings Clause of the Constitution. We note also that for generations, state education systems have assigned books under copyright to comply with a mandatory school curriculum. It scarcely extends CCC’s argument to require that all such assigned books lose their copyright—as one cannot comply with the legal requirements without using the copyrighted works. Yet we think it unlikely courts would reach this conclusion. Although there is scant authority of CCC’s argument, Nimmer’s treatise opposes such a suggestion as antithetical to the interests sought to be advanced by the Copyright Act. 628 F.2d at 736.

For the reasons we have stated earlier, as well as those relied upon by the First and Second Circuits, we affirm the district court’s conclusion that the AMA’s copyright in the CPT should be enforced. . . .

79. Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297 (2007) UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT Opinion by Barry, Circuit Judge This appeal presents important questions regarding whether a patent holder’s deceptive conduct before a private standards-determining organization may be condemned under antitrust laws and, if so, what facts must be pled to survive a motion to dismiss. Broadcom Corporation (“Broadcom”) alleged that Qualcomm Inc. (“Qualcomm”), by its intentional deception of private standards-determining organizations and its predatory acquisition of a potential rival, has monopolized certain markets for cellular telephone technology and components, primarily in violation of Sections 1 and 2 of the Sherman Act and Sections 3 and 7 of the Clayton Act. . . . Mobile wireless telephony is the general term for describing the technology and equipment used in the operation of cellular telephones. A cellular telephone contains one or more computer “chipsets”—the core electronics that allow it to transmit and receive information, either telephone calls or data, to and from the wireless network. Chipsets transmit information, via radio waves, to cellular base stations. Base stations, in turn, transmit information to and from telephone and computer networks. It is

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essential that all components involved in this transmission of information be able to communicate seamlessly with one another. Because multiple vendors manufacture these components, industry-wide standards are necessary to ensure their interoperability. In mobile wireless telephony, standards are determined privately by industry groups known as standards-determining organizations (“SDOs”). Two technology paths, or families of standards, are in widespread use today: “CDMA,” which stands for “code division multiple access”; and “GSM,” which stands for “global system for mobility.” Cellular telephone service providers operate under one or the other path, with, for example, Verizon Wireless and Sprint Communications operating CDMA-path networks, and Cingular (now AT&T) and T-Mobile operating GSM-path networks. The CDMA and GSM technology paths are not interoperable; equipment and technologies used in one cannot be used in the other. For this reason, each technology path has its own standard or set of standards. The standard used in current generation GSM-path networks is the third generation (“3G”) standard created for the GSM path, and is known as the Universal Mobile Telecommunications System (“UMTS”) standard. The UMTS standard was created by the European Telecommunications Standards Institute (“ETSI”) and its SDO counterparts in the United States and elsewhere after a lengthy evaluation of available alternative equipment and technologies. Qualcomm supplies some of the essential technology that the ETSI ultimately included in the UMTS standard, and holds intellectual property rights (“IPRs”), such as patents, in this technology. Given the potential for owners of IPRs, through the exercise of their rights, to exert undue control over the implementation of industry-wide standards, the ETSI requires a commitment from vendors whose technologies are included in standards to license their technologies on fair, reasonable, and non-discriminatory (“FRAND”) terms. Neither the ETSI nor the other relevant SDOs further define FRAND. Broadcom alleged that Qualcomm was a member of the ETSI, among other SDOs, and committed to abide by its IPR policy. Specifically, Broadcom alleged, the ETSI included Qualcomms proprietary technology in the UMTS standard only after, and in reliance on, Qualcomm’s commitment to license that technology on FRAND terms. The technology in question is called Wideband CDMA (“WCDMA”), not to be confused with the CDMA technology path. Although it represents only a small component of the technologies that collectively comprise the UMTS standard, WCDMA technology is said to be essential to the practice of the standard. Broadcom filed this action in the U.S. District Court for the District of New Jersey on July 1, 2005, and filed its First Amended Complaint (the “Complaint”) shortly thereafter. The Complaint alleged that Qualcomm induced the ETSI and other SDOs to include its proprietary technology in the UMTS standard by falsely agreeing to abide by the SDOs’ policies on IPRs, but then breached those agreements by licensing its technology on non-FRAND terms. The intentional acquisition of monopoly power through deception of an SDO, Broadcom posits, violates antitrust law. The Complaint also alleged that Qualcomm ignored its FRAND commitment to the ETSI and other SDOs by demanding discriminatorily higher (i.e., non-FRAND) royalties from competitors and customers using chipsets not manufactured by Qualcomm. Qualcomm, the Complaint continued, has a 90% share in the market for

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CDMA-path chipsets, and by withholding favorable pricing in that market, coerced cellular telephone manufacturers to purchase only Qualcomm-manufactured UMTSpath chipsets. These actions are alleged to be part of Qualcomm’s effort to obtain a monopoly in the UMTS chipset market because it views competition in that market as a long-term threat to its existing monopolies in CDMA technology. Broadcom claims to have been preparing to enter the UMTS chipset market for several years prior to its filing of the Complaint. After Broadcom purchased Zyray Wireless, Inc., a developer of UMTS chipsets, Qualcomm allegedly demanded that Broadcom license Qualcomm’s UMTS technology on non-FRAND terms. Broadcom refused, and commenced this action. Qualcomm also allegedly acquired Flarion Technologies, a competitor in the development of technologies for inclusion in the forthcoming B3G and 4G standards, in an effort to extend Qualcomm’s monopolies into future generations of standards. Based on the above factual allegations, the Complaint asserted claims under Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§1, 2; Sections 3 and 7 of the Clayton Act, 15 U.S.C. §§14, 18; and various state and common-law claims. . . . Broadcom raises these issues on appeal: whether deception of an SDO may give rise to antitrust liability under the circumstances alleged, whether the Complaint adequately pled claims of attempted monopolization and monopoly maintenance, and whether the claim relating to Qualcomm’s acquisition of Flarion was properly dismissed. Broadcom does not appeal the dismissal of its claims for tying and exclusive dealing. The District Court erred in dismissing Claim 1—the monopolization claim—on the ground that abuse of a private standard-setting process does not state a claim under antitrust law. Claim 1 of the Complaint alleged that Qualcomm monopolized markets for WCDMA technology by inducing the relevant SDOs to include Qualcomm’s patented technology as an essential element of the UMTS standard. Qualcomm did this by falsely promising to license its patents on FRAND terms, and then reneging on those promises after it succeeded in having its technology included in the standard. These actions, the Complaint alleged, violated §2 of the Sherman Act, 15 U.S.C. §2. Section 2 of the Sherman Act, in what we have called “sweeping language,” makes it unlawful to monopolize, attempt to monopolize, or conspire to monopolize, interstate or international commerce. It is, we have observed, “the provision of the antitrust laws designed to curb the excesses of monopolists and near-monopolists.” . . . Liability under §2 requires “(1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.” United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966). Monopoly power is the ability to control prices and exclude competition in a given market. Id. at 571. If a firm can profitably raise prices without causing competing firms to expand output and drive down prices, that firm has monopoly power. Harrison Aire, Inc. v. Aerostar Int’l, Inc., 423 F.3d 374, 380 (3d Cir. 2005). . . . The primary goal of antitrust law is to maximize consumer welfare by promoting competition among firms. . . . Private standard setting advances this goal on several

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levels. In the end-consumer market, standards that ensure the interoperability of products facilitate the sharing of information among purchasers of products from competing manufacturers, thereby enhancing the utility of all products and enlarging the overall consumer market. See Allied Tube, 486 U.S. at 501, 506-07 (noting the procompetitive benefits of private standard setting); . . . This, in turn, permits firms to spread the costs of research and development across a greater number of consumers, resulting in lower per-unit prices. . . . Industry-wide standards may also lower the cost to consumers of switching between competing products and services, thereby enhancing competition among suppliers. . . . Standards enhance competition in upstream markets, as well. One consequence of the standard-setting process is that SDOs may more readily make an objective comparison between competing technologies, patent positions, and licensing terms before an industry becomes locked in to a standard. . . . Standard setting also reduces the risk to producers (and end consumers) of investing scarce resources in a technology that ultimately may not gain widespread acceptance. . . . The adoption of a standard does not eliminate competition among producers but, rather, moves the focus away from the development of potential standards and toward the development of means for implementing the chosen standard. . . . Each of these efficiencies enhances consumer welfare and competition in the marketplace and is, therefore, consistent with the procompetitive aspirations of antitrust law. . . . Thus, private standard setting—which might otherwise be viewed as a naked agreement among competitors not to manufacture, distribute, or purchase certain types of products—need not, in fact, violate antitrust law. See Allied Tube, 486 U.S. at 500-01; see also Standards Development Organization Advancement Act of 2004, 15 U.S.C. §§4302, 4303 (Supp. 2004) (providing that private standard-setting conduct shall not be deemed illegal per se, and insulating such conduct from treble damages); Pub. L. 108-237, Title I, § 102, June 22, 2004, 118 Stat. 661 (noting congressional finding of “the importance of technical standards developed by voluntary consensus standards bodies to our national economy”). This is not to say, however, that acceptance, including judicial acceptance, of private standard setting is without limits. Indeed, that “private standard-setting by associations comprising firms with horizontal and vertical business relations is permitted at all under the antitrust laws [is] only on the understanding that it will be conducted in a nonpartisan manner offering procompetitive benefits,” Allied Tube, 486 U.S. at 506-07, and in the presence of “meaningful safeguards” that “prevent the standard-setting process from being biased by members with economic interests in stifling product competition,” id. at 501; Hydrolevel, 456 U.S. at 572; see also Clamp-All Corp. v. Cast Iron Soil Pipe Inst., 851 F.2d 478, 488 (1st Cir. 1988) (acknowledging possibility of antitrust claim where firms both prevented SDO from adopting a beneficial standard and did so through “unfair, or improper practices or procedures”). As the Supreme Court acknowledged in Allied Tube, and as administrative tribunals, law enforcement authorities, and some courts have recognized, conduct that undermines the procompetitive benefits of private standard setting may, at least in some circumstances, be deemed anticompetitive under antitrust law.

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Inefficiency may be injected into the standard-setting process by what is known as “patent hold-up.” An SDO may complete its lengthy process of evaluating technologies and adopting a new standard, only to discover that certain technologies essential to implementing the standard are patented. When this occurs, the patent holder is in a position to “hold up” industry participants from implementing the standard. Industry participants who have invested significant resources developing products and technologies that conform to the standard will find it prohibitively expensive to abandon their investment and switch to another standard. They will have become “locked in” to the standard. In this unique position of bargaining power, the patent holder may be able to extract supracompetitive royalties from the industry participants. . . . In actions brought before the Federal Trade Commission (“FTC”), patent holders have faced antitrust liability for misrepresenting to an SDO that they did not hold IPRs in essential technologies, and then, after a standard had been adopted, seeking to enforce those IPRs. In 1996, the FTC entered into a consent order with Dell Computer Corporation. The complaint issued in conjunction therewith alleged that Dell participated in an SDO’s adoption of a design standard for a computer bus (i.e., an information-carrying conduit), but failed to disclose that it owned a patent for a key design feature of the standard, and even certified to the SDO that the proposed standard did not infringe any of Dell’s IPRs. After the design standard proved successful, Dell attempted to assert its IPRs, prompting the FTC to commence an enforcement action under §5 of the FTC Act, 15 U.S.C. §45, for unfair methods of competition in or affecting commerce. Dell’s actions, it was alleged, created uncertainty that hindered industry acceptance of the standard, increased the costs of implementing the standard, and chilled the willingness of industry participants to engage in the standard-setting process. In the Matter of Dell Computer Corp., 121 F.T.C. 616, 618 (May 20, 1996). The consent order required, among other things, that Dell cease and desist from asserting that the use or implementation of the standard violated its IPRs. Significantly, the FTCs announcement that accompanied the order stated that in the “limited circumstances . . . where there is evidence that the [SDO] would have implemented a different non-proprietary design had it been informed of the patent conflict during the certification process, and where Dell failed to act in good faith to identify and disclose patent conflicts . . . enforcement action is appropriate to prevent harm to competition and consumers.” Id. at 624. It also noted that once the standard had gained widespread acceptance, “the standard effectively conferred market power upon Dell as the patent holder. This market power was not inevitable: had [the SDO] known of the Dell patent, it could have chosen an equally effective, non-proprietary standard.” . . . One Commissioner, writing in dissent, conceded that “[i]f Dell had obtained market power by knowingly or intentionally misleading a standards-setting organization, it would require no stretch of established monopolization theory to condemn that conduct.” . . . She objected, nevertheless, to imposing antitrust liability on Dell absent specific allegations in the proposed complaint that Dell misled the SDO intentionally or knowingly, and that it obtained market power as a result of its misleading statements. ... In 2005, the FTC entered into a consent order resolving allegations that Union Oil Company of California (“Unocal”) made deceptive and bad-faith misrepresentations to

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a state standards-determining board concerning the status of Unocal’s IPRs. The administrative complaint had alleged that the board relied on these misrepresentations in promulgating new standards governing low-emissions gasoline, and that Unocal’s misrepresentations led directly to its acquisition of monopoly power and harmed competition after refiners became locked in to regulations that required the use of Unocal’s proprietary technology. Unocal’s anticompetitive conduct was alleged to have violated § 5 of the FTC Act. The consent order required Unocal, among other things, to cease and desist from all efforts to enforce its relevant patents. . . . Most recently, a landmark, 120-page opinion in In the Matter of Rambus, Inc., was entered on the docket on August 2, 2006 by a unanimous FTC. Rambus, a developer of computer memory technologies, was found to have deceived an SDO by failing to disclose its IPRs in technology that was essential to the implementation of now-ubiquitous computer memory standards, by misleading other members of the SDO into believing that Rambus was not seeking any new patents relevant to the standard then under consideration, and by using information that it gained from its participation in the standard-setting process to amend its pending patent applications so that they would cover the ultimate standard. . . . Noting that such conduct “has grave implications for competition,” . . . the FTC found that Rambus had distorted the standard-setting process and engaged in anticompetitive hold-up. For the first time, the FTC held that deceptive conduct of the type alleged in Dell Computer and Union Oil constituted “exclusionary conduct” under §2 of the Sherman Act, as well as unlawful monopolization under §5 of the FTC Act. . . . Rambus is particularly noteworthy for its extensive discussion of deceptive conduct in the standard-setting context and the factors that make such conduct anticompetitive under §2 of the Sherman Act. The FTC likened the deception of an SDO to the type of deceptive conduct that the D.C. Circuit found to violate §2 of the Sherman Act in Microsoft. There, the Court found that Microsoft had marketed softwaredevelopment tools that would permit software developers to create programs that, ostensibly, did not need to run on Microsoft’s ubiquitous operating system, but that, in fact, could operate properly only on Microsofts operating system. The Court found that in an environment in which software developers reasonably expected Microsoft not to mislead them, Microsoft’’ s deceptive conduct was anticompetitive. Microsoft, 253 F.3d at 76-77. Analogizing to Microsoft, the FTC found that Rambus’s deception occurred in an environment—the standard-setting process—in which participants “expected each other to act cooperatively.” Rambus, No. 9302, 2006 FTC LEXIS 60 at 73. The FTC discussed at length the unique dangers of deception in the standardsetting context. Private standard setting occurs in a consensus-oriented environment, where participants rely on structural protections, such as rules requiring the disclosure of IPRs, to facilitate competition and constrain the exercise of monopoly power. In such an environment, participants are less likely to be wary of deception and may not detect such conduct and take measures to counteract it until after lock-in has occurred. At that point, the resulting harm to competition may be very difficult to correct. . . . These decisions reflect a growing awareness of the risks associated with deceptive conduct in the private standard-setting process. The Supreme Court acknowledged these risks in Allied Tube, and the FTC has found deception of an SDO to constitute

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anticompetitive conduct in violation of § 2 of the Sherman Act. Recent statements by Department of Justice officials support this trend. . . . Against this backdrop, we must determine whether Broadcom has stated actionable anticompetitive conduct with allegations that Qualcomm deceived relevant SDOs into adopting the UMTS standard by committing to license its WCDMA technology on FRAND terms and, later, after lock-in occurred, demanding non-FRAND royalties. As Qualcomm is at pains to point out, no court nor agency has decided this precise question and, in that sense, our decision will break new ground. The authorities we have cited in our lengthy discussion that has preceded this point, however, decidedly favor a finding that Broadcom’s allegations, if accepted as true, describe actionable anticompetitive conduct. To guard against anticompetitive patent hold-up, most SDOs require firms supplying essential technologies for inclusion in a prospective standard to commit to licensing their technologies on FRAND terms. . . . A firm’s FRAND commitment, therefore, is a factor—and an important factor—that the SDO will consider in evaluating the suitability of a given proprietary technology vis-a-vis competing technologies. . . . The FRAND commitment or lack thereof, is, moreover, a key indicator of the cost of implementing a potential technology. . . . During the critical competitive period that precedes adoption of a standard . . . technologies compete in discrete areas, such as cost and performance characteristics . . . Misrepresentations concerning the cost of implementing a given technology may confer an unfair advantage and bias the competitive process in favor of that technology’s inclusion in the standard. See Allied Tube, 486 U.S. at 501 (noting the need for private standard setting to be free “from being biased by members with economic interests in stifling product competition”); see also Rambus, No. 9302, 2006 FTC LEXIS 60 at 62 (“[D]istorting choices through deception obscures the relative merits of alternatives and prevents the efficient selection of preferred technologies.”); Qualcomm, 2007 WL 2296441, at 15 (noting that intentional concealment of IPRs deprived SDO of opportunity to design around patented technologies in developing standard). A standard, by definition, eliminates alternative technologies. See Hydrolevel, 456 U.S. at 559 (“Obviously, if a manufacturer’s product cannot satisfy the applicable [standard], it is at a great disadvantage in the marketplace.”). When a patented technology is incorporated in a standard, adoption of the standard eliminates alternatives to the patented technology. Although a patent confers a lawful monopoly over the claimed invention, Ethyl Gasoline Corp. v. United States, 309 U.S. 436, 456 (1940); Scheiber v. Dolby Labs., Inc., 293 F.3d 1014, 1018 (7th Cir. 2002), its value is limited when alternative technologies exist. See Northern Pac. Ry. Co. v. United States, 356 U.S. 1, 10 n.8 (1958) (“Often the patent is limited to a unique form or improvement of the product and the economic power resulting from the patent privileges is slight.”); see also Ill. Tool Works Inc. v. Indep. Ink, Inc., 547 U.S. 8, 44 (2006) (“[A] patent does not necessarily confer market power.”). That value becomes significantly enhanced, however, after the patent is incorporated in a standard. Rambus, No. 9302, 2006 FTC LEXIS 60, [slip op.] at 35. Firms may become locked in to a standard requiring the use of a competitor’s patented technology. The patent holder’s IPRs, if unconstrained, may

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permit it to demand supracompetitive royalties. It is in such circumstances that measures such as FRAND commitments become important safeguards against monopoly power. . . . We hold that (1) in a consensus-oriented private standard-setting environment, (2) a patent holder’s intentionally false promise to license essential proprietary technology on FRAND terms, (3) coupled with an SDO’s reliance on that promise when including the technology in a standard, and (4) the patent holder’s subsequent breach of that promise, is actionable anticompetitive conduct. This holding follows directly from established principles of antitrust law and represents the emerging view of enforcement authorities and commentators, alike. Deception in a consensus-driven private standard-setting environment harms the competitive process by obscuring the costs of including proprietary technology in a standard and increasing the likelihood that patent rights will confer monopoly power on the patent holder. See Rambus, No. 9302, 2006 FTC LEXIS 60 at 161 (holding that “distorting [the SDO’s] technology choices and undermining [SDO] members ability to protect themselves against patent hold-up . . . caused harm to competition”). Deceptive FRAND commitments, no less than deceptive nondisclosure of IPRs, may result in such harm. See 2006 FTC LEXIS at 155-56 (noting that SDO’s rules requiring members to disclose IPRs and commit to FRAND licensing “presented the type of consensus-oriented environment in which deception is most likely to contribute to competitive harm”). The District Court’s only stated reason for dismissing Broadcom’s Claim 1 was that it did not plead an antitrust cause of action. Having now held that a firm’s deceptive FRAND commitment to an SDO may constitute actionable anticompetitive conduct, we conclude quickly and easily that Claim 1 states a claim for monopolization under §2 of the Sherman Act. First, the Complaint adequately alleged that Qualcomm possessed monopoly power in the relevant market. The Complaint defined the relevant market as the market for Qualcomm’s proprietary WCDMA technology, a technology essential to the implementation of the UMTS standard. . . . This technology was not interchangeable with or substitutable for other technologies . . . and adherents to the UMTS standard have become locked in . . . With respect to monopoly power, Qualcomm had the power to extract supracompetitive prices . . . it possessed a dominant market share . . . and the market had entry barriers . . . These allegations satisfied the first element of a §2 monopolization claim. Qualcomm objects to a relevant market definition that is congruent with the scope of its WCDMA patents, arguing that such a definition would result in every patent holder being condemned as a monopolist. This objection misconstrues Broadcom’s theory. It is the incorporation of a patent into a standard—not the mere issuance of a patent—that makes the scope of the relevant market congruent with that of the patent. Second, the Complaint also adequately alleged that Qualcomm obtained and maintained its market power willfully, and not as a consequence of a superior product, business acumen, or historic accident. Qualcomm excluded competition . . . and refused to compete on the merits . . . As discussed above, the alleged anticompetitive conduct was the intentional . . . false promise . . . that Qualcomm would license its

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WCDMA technology on FRAND terms, on which promise the relevant SDOs relied in choosing the WCDMA technology for inclusion in the UMTS standard . . . followed by Qualcomm’s insistence on non-FRAND licensing terms . . . Qualcomm’s deceptive conduct induced . . . relevant SDOs to incorporate a technology into the UMTS standard that they would not have considered absent a FRAND commitment. . . . Although the Complaint did not specifically allege that Qualcomm made its false statements in a consensus-oriented environment of the type discussed in Microsoft and Rambus, this omission is not fatal in light of allegations that FRAND assurances were required . . . as well as allegations concerning the SDOs’ reliance on Qualcomm’s assurances . . . Together, these allegations satisfy the second element of a §2 claim. Qualcomm makes much of the Complaint’s failure to allege that there were viable technologies competing with WCDMA for inclusion in the UMTS standard. . . . As Qualcomm concedes, however, the Complaint does allege that an SDO’s adoption of a standard eliminates competing technologies. . . . The District Court also inferred that the relevant SDOs selected Qualcomm’s WCDMA technology “to the detriment of those patent-holders competing to have their patents incorporated into the standard.” . . . This inference was reasonable, particularly because even if Qualcomm’s WCDMA technology was the only candidate for inclusion in the standard, it still would not have been selected by the relevant SDOs absent a FRAND commitment. . . . Thus, the allegations of the Complaint foreclose the possibility that WCDMA’s inclusion in the standard was inevitable. Finally, in closing our discussion of Claim 1, we acknowledge, and will briefly address, certain of the concerns voiced by Amici regarding the reasoning of the District Court as to Claim 1. The Court, focusing on the anticompetitive conduct element, proceeded from the premise that “the basic allegation is that Qualcomm’s conduct amounts to a refusal to deal fairly in the WCDMA technology market, which affects the UMTS chipset market and CDMA markets.” . . . The Court then rejected this “basic allegation” as an impermissible attempt to extend the Supreme Court’s refusal-to-deal jurisprudence. This case does not involve a refusal to deal; Qualcomm conceded as much at oral argument. But even if we were to analyze it as such, we would find that the Complaint does not run afoul of established Supreme Court precedent. A firm is generally under no obligation to cooperate with its rivals. Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752, 761 (1984). In Aspen Skiing, 472 U.S. at 610-11, however, the Supreme Court created an exception to this rule by holding that the decision of a defendant who possessed monopoly power to terminate a voluntary agreement with a smaller rival evidenced the defendants willingness to forego shortrun profits for anticompetitive purposes. The Court has since refused to expand this exception. Most recently, in Verizon, 540 U.S. at 410-11, the Court considered whether plaintiffs stated a claim under §2 of the Sherman Act by alleging that the defendant did not honor a statutory duty to give competitors access to its telecommunications network on “just, reasonable, and nondiscriminatory” terms. Id. at 401, 405-06. The Court held that they did not. First, the Court observed, the complaint did not allege that the defendant engaged in a voluntary course of dealing with its rivals, or would have done so absent statutory compulsion. Id. at 409. Second, said the Court, the defendant would not have publicly marketed the allegedly withheld services absent a statutory

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duty to do so. Id. at 410. Here, by contrast, Qualcomm is alleged to have actively marketed its WCDMA technology for inclusion in an industry-wide standard, and to have voluntarily agreed to license that technology on FRAND terms. We note, albeit in passing, that the Court in Verizon pointed as well to the extensive regulatory framework that created oversight functions and remedies that the antitrust laws were unsuited to augment. Id. at 410-15. No such regulatory framework exists here. We also agree with Amici that the District Court erred when it concluded that Qualcomm’s alleged inducement of an SDO did not harm competition, as is required for a §2 claim, because “it is the SDO’s decision to set a standard for WCDMA technology, not Qualcomm’s ‘inducement,’ that results in the absence of competing WCDMA technologies.” . . . This conclusion failed to recognize that Qualcomm’s FRAND commitment was an essential part of its competitive effort to win inclusion of its patented technology in the UMTS standard. Cf. Rambus, No. 9302, 2006 FTC LEXIS 60 at 231 (“If Rambus had refused to provide the requisite [F]RAND assurances, [the SDO] would have been bound by its rules to avoid Rambus’s patented technologies.”). The Court also failed to recognize that even if adoption of the UMTS standard did not expand Qualcomm’s exclusionary rights as a patent holder, it nevertheless significantly expanded Qualcomm’s market power by eliminating alternatives to its patented technology. Finally, the Court erroneously assumed that monopoly is the “natural consequence of the standard-setting process,” an unsupported factual finding that ignores the possibility of a standard comprised of nonproprietary technologies. . . . The Complaint alleged a relevant market that was global in scope . . . and comprised of non-interchangeable UMTS chipsets . . .—a market that was in its “infancy,” but experiencing rapid growth . . . In that market, the Complaint continued, Qualcomm engaged in a variety of anticompetitive practices. Contrary to the District Court’s puzzling characterization of these allegations as “broad and non-specific” . . . the Complaint described numerous specific practices. Qualcomm possessed a near monopoly in the CDMA chipset market . . . and was exploiting that monopoly to obtain a new monopoly in the UMTS chipset market . . . Qualcomm was discriminating among licensees of the essential WCDMA technology by charging more and higher fees to those who do not use Qualcomm’s UMTS chipsets. . . .Qualcomm was demanding royalties on parts of UMTS chipsets for which it did not own patents . . . and demanding that UMTS licensees grant back to Qualcomm licenses for their own proprietary technologies on terms much more favorable to Qualcomm . . . Qualcomm was charging double royalties to UMTS cell phone manufacturers who use non-Qualcomm UMTS chipsets . . ., in violation of its FRAND commitment . . . Qualcomm was discouraging price competition by demanding sensitive sales and pricing information from its UMTS chipset licensees, even when those licensees were competing directly with Qualcomm. . . . Qualcomm was also providing discounts, incentives, and payments to cell phone manufacturers who use only Qualcomm UMTS chipsets. . . . These actions, the Complaint concluded, harmed competition and undermined innovation in the UMTS chipset market. . . . Such factual allegations of anticompetitive conduct are sufficiently specific to satisfy the first element of an attempted monopolization claim. See LePage’s, 324 F.3d at 152-57.

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The Complaint also alleged that Qualcomm acted with specific intent to obtain a monopoly in the UMTS chipset market. . . . Several of the anticompetitive practices, moreover, allegedly lacked a legitimate business justification. . . . In Aspen Skiing, the Supreme Court noted that evidence that business conduct is “not related to any apparent efficiency” may constitute proof of specific intent to monopolize. 472 U.S. at 608 n. 39 (emphasis and internal quotation marks omitted); see also LePage’s, 324 F.3d at 152 (“[A] monopolist will be found to violate §2 of the Sherman Act if it engages in exclusionary or predatory conduct without a valid business justification.”). There is no doubt, therefore, that the Complaint satisfied the specific intent element. . . .

80. Rambus Inc. v. Federal Trade Commission, 522 F.3d 456 (D.C. Cir 2008) UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT Opinion by Williams, Senior Circuit Judge. Rambus Inc. develops computer memory technologies, secures intellectual property rights over them, and then licenses them to manufacturers in exchange for royalty payments. In 1990, Rambus’s founders filed a patent application claiming the invention of a faster architecture for dynamic random access memory (“DRAM”). In recent years, Rambus has asserted that patents issued to protect its invention cover four technologies that a private standard-setting organization (“SSO”) included in DRAM industry standards. Before an SSO adopts a standard, there is often vigorous competition among different technologies for incorporation into that standard. After standardization, however, the dynamic typically shifts, as industry members begin adhering to the standard and the standardized features start to dominate. In this case, 90% of DRAM production is compliant with the standards at issue, and therefore the technologies adopted in those standards—including those over which Rambus claims patent rights—enjoy a similar level of dominance over their alternatives. After lengthy proceedings, the Federal Trade Commission determined that Rambus, while participating in the standard-setting process, deceptively failed to disclose to the SSO the patent interests it held in four technologies that were standardized. Those interests ranged from issued patents, to pending patent applications, to plans to amend those patent applications to add new claims; Rambus’s patent rights in all these interests are said to be sufficiently connected to the invention described in Rambus’s original 1990 application that its rights would relate back to its date. . . . Finding this conduct monopolistic and in violation of §2 of the Sherman Act, 15 U.S.C. §2, the Commission went on to hold that Rambus had engaged in an unfair method of competition and unfair or deceptive acts or practices prohibited by §5(a) of the Federal Trade Commission Act (“FTC Act”), id. § 45(a). Rambus petitions for review. We grant the petition, holding that the Commission failed to sustain its allegation of monopolization. Its factual conclusion was that

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Rambus’s alleged deception enabled it either to acquire a monopoly through the standardization of its patented technologies rather than possible alternatives, or to avoid limits on its patent licensing fees that the SSO would have imposed as part of its normal process of standardizing patented technologies. But the latter—deceit merely enabling a monopolist to charge higher prices than it otherwise could have charged—would not in itself constitute monopolization. We also address whether there is substantial evidence that Rambus engaged in deceptive conduct at all, and express our serious concerns about the sufficiency of the evidence on two particular points. During the early 1990s, the computer hardware industry faced a “memory bottleneck”: the development of faster memory lagged behind the development of faster central processing units, and this risked limiting future gains in overall computer performance. To address this problem, Michael Farmwald and Mark Horowitz began collaborating during the late 1980s and invented a higher-performance DRAM architecture. Together, they founded Rambus in March 1990 and filed Patent Application No. 07/510,898 (“the ‘898 application”) on April 18, 1990. As originally filed, the ‘898 application included a 62-page written description of Farmwald and Horowitz’s invention, 150 claims, and 15 technical drawings. Under the direction of the Patent Office, acting pursuant to 35 U.S.C. §121, Rambus effectively split the application into several (the original one and 10 “divisionals”). Thereafter, Rambus amended some of these applications and filed additional continuation and divisional applications. While Rambus was developing a patent portfolio based on its founders’ inventions, the computer memory industry was at work standardizing DRAM technologies. The locus of those efforts was the Joint Electron Device Engineering Council (“JEDEC”)—then an “activity” of what is now called the Electronics Industries Alliance (“EIA”) and, since 2000, a trade association affiliated with EIA and known as the JEDEC Solid State Technology Association. Any company involved in the solid state products industry could join JEDEC by submitting an application and paying annual dues, and members could receive JEDEC mailings, participate in JEDEC committees, and vote on pending matters. One JEDEC committee, JC 42.3, developed standards for computer memory products. Rambus attended its first JC 42.3 meeting as a guest in December 1991 and began formally participating when it joined JEDEC in February 1992. At the time, JC 42.3 was at work on what became JEDEC’s synchronous DRAM (“SDRAM”) standard. The committee voted to approve the completed standard in March 1993, and JEDEC’s governing body gave its final approval on May 24, 1993. The SDRAM standard includes two of the four technologies over which Rambus asserts patent rights—programmable CAS latency and programmable burst length. Despite SDRAM’s standardization, its manufacture increased very slowly and asynchronous DRAM continued to dominate the computer memory market, so JC 42.3 began to consider a number of possible responses—among them specifications it could include in a next-generation SDRAM standard. As part of that process, JC 42.3 members received a survey ballot in October 1995 soliciting their opinions on features of an advanced SDRAM—which ultimately emerged as the double data rate (“DDR”)

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SDRAM standard. Among the features voted on were the other two technologies at issue here: on-chip phase lock and delay lock loops (“on-chip PLL/DLL”) and dual-edge clocking. The Committee tallied and discussed the survey results at its December 1995 meeting, which was Rambus’s last as a JEDEC member. Rambus formally withdrew from JEDEC by letter dated June 17, 1996, saying (among other things) that the terms on which it proposed to license its proprietary technology “may not be consistent with the terms set by standards bodies, including JEDEC.”. . . JC 42.3’s work continued after Rambus’s departure. In March 1998 the committee adopted the DDR SDRAM standard, and the JEDEC Board of Directors approved it in 1999. This standard retained SDRAM features including programmable CAS latency and programmable burst length, and it added on-chip PLL/DLL and dual-edge clocking; DDR SDRAM, therefore, included all four of the technologies at issue here. Starting in 1999, Rambus informed major DRAM and chipset manufacturers that it held patent rights over technologies included in JEDEC’s SDRAM and DDR SDRAM standards, and that the continued manufacture, sale, or use of products compliant with those standards infringed its rights. It invited the manufacturers to resolve the alleged infringement through licensing negotiations. A number of manufacturers agreed to licenses . . .; others did not, and litigation ensued, . . . On June 18, 2002, the Federal Trade Commission filed a complaint under §5(b) of the FTC Act, 15 U.S.C. §45(b), charging that Rambus engaged in unfair methods of competition and unfair or deceptive acts or practices in violation of the Act, . . . Specifically, the Commission alleged that Rambus breached JEDEC policies requiring it to disclose patent interests related to standardization efforts and that the disclosures it did make were misleading. By this deceptive conduct, it said, Rambus unlawfully monopolized four technology markets in which its patented technologies compete with alternative innovations to address technical issues relating to DRAM design—markets for latency, burst length, data acceleration, and clock synchronization technologies. . . . Proceedings began before an administrative law judge, who in due course dismissed the Complaint in its entirety. . . . He concluded that Rambus did not impermissibly withhold material information about its intellectual property, . . . and that, in any event, there was insufficient evidence that, if Rambus had disclosed all the information allegedly required of it, JEDEC would have standardized an alternative technology, . . . Complaint Counsel appealed the ALJ’s Initial Decision to the Commission, which reopened the record to receive additional evidence and did its own plenary review. . . . On July 31, 2006 the Commission vacated the ALJ’s decision and set aside his findings of fact and conclusions of law. . . . The Commission found that while JEDEC’s patent disclosure policies were “not a model of clarity,” . . . members expected one another to disclose patents and patent applications that were relevant to technologies being considered for standardization, plus (though the Commission was far less clear on these latter items) planned amendments to pending applications or “anything they’re working on that they potentially wanted to protect with patents down the road,” . . . Based on this interpretation of JEDEC’s disclosure requirements, the Commission held that Rambus willfully and intentionally engaged in misrepresentations, omissions, and

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other practices that misled JEDEC members about intellectual property information “highly material” to the standard-setting process. . . . The Commission focused entirely on the allegation of monopolization. . . . In particular, the Commission held that the evidence and inferences from Rambus’s purpose demonstrated that “but for Rambus’s deceptive course of conduct, JEDEC either would have excluded Rambus’s patented technologies from the JEDEC DRAM standards, or would have demanded RAND assurances [i.e., assurances of “reasonable and non-discriminatory” license fees], with an opportunity for ex ante licensing negotiations.” . . . Rejecting Rambus’s argument that factors other than JEDEC’s standards allowed Rambus’s technologies to dominate their respective markets, . . . the Commission concluded that Rambus’s deception of JEDEC “significantly contributed to its acquisition of monopoly power,” . . . After additional briefing by the parties, . . . the Commission rendered a separate remedial opinion and final order. . . . It held that it had the authority in principle to order compulsory licensing, but that remedies beyond injunctions against future anticompetitive conduct would require stronger proof that they were necessary to restore competitive conditions. . . . Applying that more demanding burden to Complaint Counsel’s claims for relief, the Commission refused to compel Rambus to license its relevant patents royalty-free because there was insufficient evidence that “absent Rambus’s deception” JEDEC would have standardized non-proprietary technologies instead of Rambus’s; thus, Complaint Counsel had failed to show that such a remedy was “necessary to restore competition that would have existed in the ‘but for’ world.” . . . Instead, the Commission decided to compel licensing at “reasonable royalty rates,” which it calculated based on what it believed would have resulted from negotiations between Rambus and manufacturers before JEDEC committed to the standards. . . . The Commission’s order limits Rambus’s royalties for three years to 0.25% for JEDEC-compliant SDRAM and 0.5% for JEDEC-compliant DDR SDRAM (with double those royalties for certain JEDEC-compliant, non-DRAM products); after those three years, it forbids any royalty collection. . . . Rambus moved for reconsideration, and the Commission denied the motion in relevant part on April 27, 2007. Rambus timely petitioned for our review of both the Commission’s Final Order and its Denial of Reconsideration, see 15 U.S.C. §45(c), and we consolidated those petitions. Rambus challenges the Commission’s determination that it engaged in unlawful monopolization—and thereby violated §5 of the FTC Act—on a variety of grounds, of which two are most prominent. First, it argues that the Commission erred in finding that it violated any JEDEC patent disclosure rules and thus that it breached any antitrust duty to provide information to its rivals. Second, it asserts that even if its nondisclosure contravened JEDEC’s policies, the Commission found the consequences of such nondisclosure only in the alternative: that it prevented JEDEC either from adopting a non-proprietary standard, or from extracting a RAND commitment from Rambus when standardizing its technology. As the latter would not involve an antitrust violation, says Rambus, there is an insufficient basis for liability. We find the second of these arguments to be persuasive, and conclude that the Commission failed to demonstrate that Rambus’s conduct was exclusionary under

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settled principles of antitrust law. Given that conclusion, we need not dwell very long on the substantiality of the evidence, which we address only to express our serious concerns about the breadth the Commission ascribed to JEDEC’s disclosure policies and their relation to what Rambus did or did not disclose. In this case under §5 of the FTC Act, the Commission expressly limited its theory of liability to Rambus’s unlawful monopolization of four markets in violation of §2 of the Sherman Act, 15 U.S.C. §2. . . . see also FTC v. Cement Inst., 333 U.S. 683, 694 (1948) (§5 reaches all conduct that violates §2 of the Sherman Act). Therefore, we apply principles of antitrust law developed under the Sherman Act, and we review the Commission’s construction and application of the antitrust laws de novo. FTC v. Indiana Fed’n of Dentists, 476 U.S. 447, 454 (1986); Polygram Holding, Inc. v. FTC, 416 F.3d 29, 33 (D.C. Cir. 2005). It is settled law that the mere existence of a monopoly does not violate the Sherman Act. See Verizon Commc’ns, Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 407 (2004); United States v. Microsoft Corp., 253 F.3d 34, 58 (D.C. Cir. 2001) (en banc) (per curiam). In addition to “the possession of monopoly power in the relevant market,” the offense of monopolization requires “the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historical accident.” Trinko, 540 U.S. at 407 (quoting United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966)); Microsoft, 253 F.3d at 50 (same). In this case, Rambus does not dispute the nature of the relevant markets or that its patent rights in the four relevant technologies give it monopoly power in each of those markets. . . . The critical question is whether Rambus engaged in exclusionary conduct, and thereby acquired its monopoly power in the relevant markets unlawfully. To answer that question, we adhere to two antitrust principles that guided us in Microsoft. First, “to be condemned as exclusionary, a monopolist’s act must have ‘anticompetitive effect.’ That is, it must harm the competitive process and thereby harm consumers. In contrast, harm to one or more competitors will not suffice.” Microsoft, 253 F.3d at 58; see also Trinko, 540 U.S. at 407; Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 224 (1993); Covad Commc’ns. Co. v. Bell Atlantic Corp., 398 F.3d 666, 672 (D.C. Cir. 2005). Second, it is the antitrust plaintiff—including the Government as plaintiff—that bears the burden of proving the anticompetitive effect of the monopolist’s conduct. Microsoft, 253 F.3d at 58-59. The Commission held that Rambus engaged in exclusionary conduct consisting of misrepresentations, omissions, and other practices that deceived JEDEC about the nature and scope of its patent interests while the organization standardized technologies covered by those interests. . . . Had Rambus fully disclosed its intellectual property, “JEDEC either would have excluded Rambus’s patented technologies from the JEDEC DRAM standards, or would have demanded RAND assurances, with an opportunity for ex ante licensing negotiations.” . . . But the Commission did not determine that one or the other of these two possible outcomes was the more likely. . . . The Commission’s conclusion that Rambus’s conduct was exclusionary depends, therefore, on a syllogism: Rambus avoided one of two outcomes by not disclosing its patent interests; the

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avoidance of either of those outcomes was anticompetitive; therefore Rambus’s nondisclosure was anticompetitive. We assume without deciding that avoidance of the first of these possible outcomes was indeed anticompetitive; that is, that if Rambus’s more complete disclosure would have caused JEDEC to adopt a different (open, non-proprietary) standard, then its failure to disclose harmed competition and would support a monopolization claim. But while we can assume that Rambus’s nondisclosure made the adoption of its technologies somewhat more likely than broad disclosure would have, the Commission made clear in its remedial opinion that there was insufficient evidence that JEDEC would have standardized other technologies had it known the full scope of Rambus’s intellectual property. . . . Therefore, for the Commission’s syllogism to survive—and for the Commission to have carried its burden of proving that Rambus’s conduct had an anticompetitive effect—we must also be convinced that if Rambus’s conduct merely enabled it to avoid the other possible outcome, namely JEDECs obtaining assurances from Rambus of RAND licensing terms, such conduct, alone, could be said to harm competition. Cf. Avins v. White, 627 F.2d 637, 646 (3d Cir. 1980) (“Where . . . a general verdict may rest on either of two claims—one supported by the evidence and the other not—a judgment thereon must be reversed.” (quoting Albergo v. Reading Co., 372 F.2d 83, 86 (3d Cir. 1966))). We are not convinced. Deceptive conduct—like any other kind—must have an anticompetitive effect in order to form the basis of a monopolization claim. “Even an act of pure malice by one business competitor against another does not, without more, state a claim under the federal antitrust laws,” without proof of “a dangerous probability that [the defendant] would monopolize a particular market.” Brooke Group, 509 U.S. at 225. Even if deception raises the price secured by a seller, but does so without harming competition, it is beyond the antitrust laws’ reach. Cases that recognize deception as exclusionary hinge, therefore, on whether the conduct impaired rivals in a manner tending to bring about or protect a defendant’s monopoly power. In Microsoft, for example, we found Microsoft engaged in anticompetitive conduct when it tricked independent software developers into believing that its software development tools could be used to design cross-platform Java applications when, in fact, they produced Windows-specific ones. The deceit had caused “developers who were opting for portability over performance . . . unwittingly [to write] Java applications that [ran] only on Windows.” 253 F.3d at 76. The focus of our antitrust scrutiny, therefore, was properly placed on the resulting harms to competition rather than the deception itself. Another case of deception with an anticompetitive dimension is Conwood Co. v. U.S. Tobacco Co., 290 F.3d 768 (6th Cir. 2001), where the Sixth Circuit found that U.S. Tobacco’s dominance of the moist snuff market caused retailers to rely on it as a “category manager” that would provide trusted guidance on the sales strategy and in-store display for all moist snuff products, id. at 773-78. Under those circumstances, the court held that its misrepresentations to retailers about the sales strength of its products versus its competitors’ strength reduced competition in the monopolized market by increasing the display space devoted to U.S. Tobacco’s products and decreasing that allotted to competing products. Id. at 783, 785-88, 790-91; see also

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LePage’s Inc. v. 3M, 324 F.3d 141, 153 (3d Cir. 2003) (calling Conwood “a good illustration of the type of exclusionary conduct that will support a §2 violation”). But an otherwise lawful monopolist’s use of deception simply to obtain higher prices normally has no particular tendency to exclude rivals and thus to diminish competition. Consider, for example, NYNEX Corp. v. Discon, Inc., 525 U.S. 128 (1998), in which the Court addressed the antitrust implications of allegations that NYNEX’s subsidiary, New York Telephone Company, a lawful monopoly provider of local telephone services, charged its customers higher prices as result of fraudulent conduct in the market for the service of removing outdated telephone switching equipment (called “removal services”). Discon had alleged that New York Telephone (through its corporate affiliate, Materiel Enterprises) switched its purchases of removal services from Discon to a higher-priced independent firm (AT&T Technologies). Materiel Enterprises would pass the higher fees on to New York Telephone, which in turn passed them on to customers through higher rates approved by regulators. Id. at 131-32. The nub of the deception, Discon alleged, was that AT&T Technologies would provide Materiel Enterprises with a special rebate at year’s end, which it would then share with NYNEX. Id. By thus hoodwinking the regulators, the scam raised prices for consumers; Discon, which refused to play the rebate game, was driven out of business. Discon alleged that this arrangement was anticompetitive and constituted both an agreement in restraint of trade in violation of §1 of the Sherman Act and a conspiracy to monopolize the market for removal services in violation of §2. Id. at 132. As to Discon’s §1 claim, the Court held that where a single buyer favors one supplier over another for an improper reason, the plaintiff must “allege and prove harm, not just to a single competitor, but to the competitive process.” Id. at 135; see generally id. at 133-37. Nor, as Justice Breyer wrote for a unanimous Court, would harm to the consumers in the form of higher prices change the matter: “We concede Discon’s claim that the [defendants’] behavior hurt consumers by raising telephone service rates. But that consumer injury naturally flowed not so much from a less competitive market for removal services, as from the exercise of market power that is lawfully in the hands of a monopolist, namely, New York Telephone, combined with a deception worked upon the regulatory agency that prevented the agency from controlling New York Telephone’s exercise of its monopoly power.” Id. at 136. Because Discon based its §2 claim on the very same allegations of fraud, the Court vacated the appellate court’s decision to uphold that claim because “[u]nless those agreements harmed the competitive process, they did not amount to a conspiracy to monopolize.” Id. at 139; see also Forsyth v. Humana, Inc., 114 F.3d 1467, 1477-78 (9th Cir. 1997) (rejecting a claim that an insurance company’s alleged kickback scheme caused antitrust injury to group health insurance customers where the evidence showed the scheme caused higher copayments and premium payments, but did “not explain how the scheme reduced competition in the relevant market”), aff’d on other grounds, 525 U.S. 299 753 (1999); Schuylkill Energy Res., Inc. v. Penn. Power & Light Co., 113 F.3d 405, 414 (3d Cir. 1997) (finding conduct did not violate antitrust laws where absent that conduct consumers would still receive the same product and the same amount of competition).

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While the Commission’s brief doesn’t mention NYNEX, much less try to distinguish it, it does cite Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297 (3d Cir. 2007), which in turn had cited the Commission’s own “landmark” decision in the case under review here, id. at 311. There the court held that a patent holder’s intentionally false promise to a standard-setting organization that it would license its technology on RAND terms, “coupled with [the organization”s] reliance on that promise when including the technology in a standard,” was anticompetitive conduct, on the ground that it increased “the likelihood that patent rights will confer monopoly power on the patent holder.” Id. at 314; accord id. at 315-16. To the extent that the ruling (which simply reversed a grant of dismissal) rested on the argument that deceit lured the SSO away from non-proprietary technology, see id., it cannot help the Commission in view of its inability to find that Rambus’s behavior caused JEDEC’s choice; to the extent that it may have rested on a supposition that there is a cognizable violation of the Sherman Act when a lawful monopolist’s deceit has the effect of raising prices (without an effect on competitive structure), it conflicts with NYNEX. Here, the Commission expressly left open the likelihood that JEDEC would have standardized Rambus’s technologies even if Rambus had disclosed its intellectual property. Under this hypothesis, JEDEC lost only an opportunity to secure a RAND commitment from Rambus. But loss of such a commitment is not a harm to competition from alternative technologies in the relevant markets. . . . Indeed, had JEDEC limited Rambus to reasonable royalties and required it to provide licenses on a nondiscriminatory basis, we would expect less competition from alternative technologies, not more; high prices and constrained output tend to attract competitors, not to repel them. Scholars in the field have urged that if nondisclosure to an SSO enables a participant to obtain higher royalties than would otherwise have been attainable, the “overcharge can properly constitute competitive harm attributable to the nondisclosure,” as the overcharge “will distort competition in the downstream market.” . . . The contention that price-raising deception has downstream effects is surely correct, but that consequence was equally surely true in NYNEX (though perhaps on a smaller scale) and equally obvious to the Court. The Commission makes the related contention that because the ability to profitably restrict output and set supracompetitive prices is the sine qua non of monopoly power, any conduct that permits a monopolist to avoid constraints on the exercise of that power must be anticompetitive. But again, as in NYNEX, an otherwise lawful monopolist’s end-run around price constraints, even when deceptive or fraudulent, does not alone present a harm to competition in the monopolized market. Thus, if JEDEC, in the world that would have existed but for Rambus’s deception, would have standardized the very same technologies, Rambus’s alleged deception cannot be said to have had an effect on competition in violation of the antitrust laws; JEDEC’s loss of an opportunity to seek favorable licensing terms is not as such an antitrust harm. Yet the Commission did not reject this as being a possible—perhaps even the more probable—effect of Rambus’s conduct. We hold, therefore, that the Commission failed to demonstrate that Rambus’s conduct was exclusionary, and thus to establish its claim that Rambus unlawfully monopolized the relevant markets.

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Our conclusion that the Commission failed to demonstrate that Rambus inflicted any harm on competition requires vacatur of the Commission’s orders. But the original complaint also included a count charging Rambus with other unfair methods of competition in violation of §5(a) of the FTC Act, 15 U.S.C. § 45(a). . . . While the Commission dropped this aspect of its case and focused on a theory of liability premised on unlawful monopolization, . . . at least one Commissioner suggested that a “stand-alone” §5 action would have had a “broader province” than a Sherman Act case. . . . Because of the chance of further proceedings on remand, we express briefly our serious concerns about strength of the evidence relied on to support some of the Commission’s crucial findings regarding the scope of JEDEC’s patent disclosure policies and Rambus’s alleged violation of those policies. In noting our concerns, we recognize, of course, that the Commission’s findings are conclusive so long as they are supported by substantial evidence. See 15 U.S.C. § 45(c); see also Polygram Holding, 416 F.3d at 33. The Commission’s findings are murky on both the relevant margins: what JEDEC’s disclosure policies were, and what, within those mandates, Rambus failed to disclose. First, the Commission evidently could find that Rambus violated JEDEC’s disclosure policies only by relying quite significantly on participants’ having been obliged to disclose their work in progress on potential amendments to pending applications, as that work became pertinent. The Commission’s counsel confirmed as much at oral argument. . . . Indeed, the parties stipulated that as of Rambus’s last JEDEC meeting it held no patents that were essential to the manufacture or use of devices complying with any JEDEC standard, and that when JEDEC issued the SDRAM standard Rambus had no pending patent claims that would necessarily have been infringed by a device compliant with that standard. . . . The case appears (and we emphasize appears, as the Commission’s opinion leaves us uncertain of its real view) to turn on the idea that JEDEC participants were obliged to disclose not merely relevant patents and patent applications, but also their work in progress on amendments to pending applications that included new patent claims. We do not see in the record any formal finding that the policies were so broad, but the Commission’s opinion points to testimony of witnesses that might be the basis of such a finding. Five former JC 42.3 participants testified (in some cases ambiguously) that they understood JEDEC’s written policies, requiring the disclosure of pending applications, to also include a duty to disclose work in progress on unfiled amendments to those applications, and JEDEC’s general counsel testified that he believed a firm was required to disclose plans to amend if supported by the firm’s current interpretation of an extant application. . . . JEDEC participants did not have unanimous recollections on this point, however, and the Commission noted that another JC 42.3 member testified that there was no duty to disclose work on future filings. . . . Reading these statements as interpretations of JEDEC’s written policies seems to significantly stretch the policies’ language. The most disclosure-friendly of those policies is JEDEC Manual No. 21-I, published in October 1993, which refers to “the obligation of all participants to inform the meeting of any knowledge they may have of any patents, or pending patents, that might be involved in the work they are

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undertaking.” . . . This language speaks fairly clearly of disclosure obligations related to patents and pending patent applications, but says nothing of unfiled work in progress on potential amendments to patent applications. We don’t see how a few strands of trial testimony would persuade the Commission to read this language more broadly, especially as at least two of the five participants cited merely stated that disclosure obligations reached anything in the patent “process”—which leaves open the question of when that “process” can be said to begin. . . . Alternatively, to the extent the Commission reads this testimony not to broaden the interpretation of Manual 21-I, but rather to provide evidence of disclosure expectations that extended beyond those incorporated into written policies, a different problem may arise. As the Federal Circuit has said, JEDEC’s patent disclosure policies suffered from “a staggering lack of defining details.” Rambus Inc. v. Infineon Technologies AG, 318 F.3d 1081, 1102 (Fed. Cir. 2003); . . . Even assuming that any evidence of unwritten disclosure expectations would survive a possible narrowing effect based upon the written directive of Manual 21-I, the vagueness of any such expectations would nonetheless remain an obstacle. One would expect that disclosure expectations ostensibly requiring competitors to share information that they would otherwise vigorously protect as trade secrets would provide “clear guidance” and “define clearly what, when, how, and to whom the members must disclose.” Infineon, 318 F.3d at 1102. This need for clarity seems especially acute where disclosure of those trade secrets itself implicates antitrust concerns; JEDEC involved, after all, collaboration by competitors. Cf. Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. 492, 500 (1988) (stating that because SSO members have incentives to restrain competition, such organizations “have traditionally been objects of antitrust scrutiny”); Am Soc’y of Mech. Eng’rs v. Hydrolevel Corp., 456 U.S. 556, 571 (1982) (noting that SSOs are “rife with opportunities for anticompetitive activity”). In any event, the more vague and muddled a particular expectation of disclosure, the more difficult it should be for the Commission to ascribe competitive harm to its breach. . . . The Commission’s conclusion that Rambus engaged in deceptive conduct affecting the inclusion of on-chip PLL/DLL and dual-edge clocking in the DDR SDRAM standard, which JEDEC adopted more than two years after Rambus’s last JC 42.3 meeting, presents an additional, independent concern. To support this conclusion, the Commission looked to a technical presentation made to JC 42.3 in September 1994, and the survey balloting of that committee in October 1995 on whether to proceed with the consideration of particular features (including the two Rambus technologies ultimately adopted), finding that Rambus deliberately failed to disclose patent interests in any of the named technologies. . . . This finding is evidently the basis, so far as DDR SDRAM is concerned, of its conclusion that Rambus breached a duty to disclose. . . . Once again, the Commission has taken an aggressive interpretation of rather weak evidence. For example, the October 1995 survey ballot gauged participant interest in a range of technologies and did not ask those surveyed about their intellectual property (as did the more formal ballots on proposed standards). . . . The Commission nonetheless believes that every member of JC 42.3—membership that included most of the DRAM industry—was duty-bound to disclose any potential patents they were working on that related to any of the questions posed by the survey.

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The record shows, however, that the only company that made a disclosure at the next meeting was the one that formally presented the survey results. . . . For reasons similar to those that make vague but broad disclosure obligations among competitors unlikely, it seems to us unlikely that JEDEC participants placed themselves under such a sweeping and early duty to disclose, triggered by the mere chance that a technology might someday (in this case, more than two years later) be formally proposed for standardization. . . .

81. Huawei Technologies Co. Ltd v. ZTE Corp., Case C-170/13 (2014) OPINION OF ADVOCATE GENERAL WATHELET . . . 2. The case centres around a patent said to be ‘essential to a standard developed by a standardisation body’ (a standard-essential patent (SEP)) and, for the first time, the Court is called upon to analyse whether—and, if so, in what circumstances—an action for infringement brought by the SEP-holder against an undertaking which manufactures products in accordance with that standard constitutes an abuse of a dominant position. 3. The request for a preliminary ruling has been made in the course of a dispute between, on the one hand, Huawei Technologies Co. Ltd (‘Huawei’), a multinational group of undertakings active in the telecommunications sector, established in Shenzhen (China), and, on the other, ZTE Corp., established in Shenzhen, and ZTE Deutschland GmbH, established in Düsseldorf (Germany), (together, ‘ZTE’), members of a group of undertakings, also multinational, operating in the same sector. By its action for infringement, Huawei seeks an injunction prohibiting the continuation of the infringement and an order for the rendering of accounts, the recall of products and the assessment of damages. 4. The action for infringement concerns a European patent held by Huawei and registered under No EP 2 090 050 B 1 (the ‘patent at issue’). The Federal Republic of Germany is one of the Contracting Member States designated by that patent, which is ‘essential’ to the Long Term Evolution (LTE) standard developed by the European Telecommunications Standards Institute (‘ETSI’). This means that anyone using the standard inevitably uses the teaching of that patent. 5. The patent at issue was notified to ETSI by Huawei, which, on 4 March 2009, gave ETSI a commitment to grant licences to third parties on fair, reasonable and nondiscriminatory terms (‘FRAND terms’). 6. After the ‘breakdown’ of the negotiations for the conclusion of a licensing agreement on FRAND terms, Huawei brought an action for infringement before the referring court against ZTE in order to obtain an injunction prohibiting the continuation of the infringement and an order for the rendering of accounts, the recall of products and the

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assessment of damages. According to ZTE, that action for a prohibitory injunction constitutes an abuse of a dominant position, since ZTE is willing to negotiate a licence. 7. The conduct of SEP-holders who have given a commitment to grant licences to third parties on FRAND terms has given rise to a plethora of actions before the courts of several Member States and third countries. These various actions, based not only on competition law but also on civil law, have given rise to a number of divergent legal approaches and, consequently, a considerable degree of uncertainty as to the lawfulness of certain forms of conduct on the part of SEP-holders and undertakings which, in implementing a standard developed by a European standardisation body, use the teaching of an SEP. 8. In the light of the questions submitted by the referring court, I shall confine my observations in this Opinion to competition law and, in particular, to the question of abuse of a dominant position. . . . 21. Under paragraph 3.1 of the ETSI Intellectual Property Rights Policy, the objective of that standardisation body is to create standards which meet the technical objectives of the European telecommunications sector and to reduce the risk to ETSI, its members and others applying ETSI standards, that investment in the preparation, adoption and application of standards could be wasted as a result of an essential intellectual property right for those standards being unavailable. In order to do that, the ETSI Intellectual Property Rights Policy seeks to strike a balance between the needs of standardisation for public use in the field of telecommunications and the rights of the owners of intellectual property rights. Paragraph 3.2 of the ETSI Intellectual Property Rights Policy provides that intellectual property right holders should be adequately and fairly rewarded for the use of their intellectual property rights in the implementation of standards. 22. Paragraph 4.1 of the ETSI Intellectual Property Rights Policy provides that each member, in particular during the development of a standard in the establishment of which it participates, must take the necessary measures to inform ETSI of its standardessential intellectual property rights in a timely fashion. A member submitting a technical proposal for a standard must therefore draw the attention of ETSI to any of its intellectual property rights which might be essential to the standard if that proposal is adopted. 23. Paragraph 6.1 of the ETSI Intellectual Property Rights Policy provides that, when a standard-essential intellectual property right is brought to the attention of ETSI, the Director-General of ETSI must immediately request the owner of that right to give, within three months, an irrevocable undertaking that it is prepared to grant licences on FRAND terms in relation to that intellectual property right. Where no FRAND undertaking has been made, ETSI is to assess whether or not to suspend work on the relevant parts of the standard until the matter has been resolved and/or submit for approval any relevant standard. If the owner of the intellectual property rights refuses to submit a FRAND undertaking in accordance with paragraph 6.1 of that Policy, ETSI must seek an alternative technology and, if no such technology exists, work on the standard in

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question must cease. In accordance with paragraph 14 of the ETSI Intellectual Property Rights Policy, any violation of the Policy by a member is deemed to be a breach by that member of its obligations to ETSI. 24. In accordance with paragraph 15.6 of the ETSI Intellectual Property Rights Policy, intellectual property rights are considered ‘essential’ where, in particular, it is not possible on technical grounds to make equipment which complies with a standard without infringing the intellectual property right. However, ETSI does not check whether the intellectual property right which has been brought to its attention by one of its members is valid or essential. 25. The ETSI Intellectual Property Rights Policy does not precisely define what is meant by FRAND licensing terms. It is for the patent owner and the patent user to negotiate the terms and conditions of use of an SEP. Nor does the ETSI Intellectual Property Rights Policy lay down any rules or provisions as to how to resolve disputes in the event that the parties do not reach an agreement on specific FRAND terms. 26. Among the products developed and marketed by ZTE in Germany are base stations with LTE software (‘the disputed embodiments’). According to the referring court, the disputed embodiments developed and marketed by ZTE are unquestionably made for use with LTE software and operate on the basis of the LTE standard. Given that the patent at issue, owned by Huawei, is essential to the LTE standard, ZTE inevitably uses that patent. . . . 59. It should be pointed out that, that in order to answer the questions raised by the referring court, it is necessary, in the light of competition law, to strike a balance between the right to intellectual property and the SEP-holder’s (Huawei’s) right of access to the courts, on the one hand, and the freedom to conduct business which economic operators such as the undertakings implementing the LTE standard (ZTE) enjoy under Article 16 of the Charter, on the other hand. After all, the grant of an injunction sought by an action to cease and desist places a significant restriction on that freedom and is therefore capable of distorting competition. 60. It can be seen from the documents placed before the Court that, despite its commitment to ETSI that it would grant licences to third parties on FRAND terms, Huawei did not waive its right to bring actions for prohibitory injunctions against persons using the teaching protected by the patent at issue without its consent. However, it is readily apparent from that commitment that Huawei is willing to exploit the patent at issue not only by using the patent exclusively but also by licensing it to others. Moreover, Huawei accepts that a royalty fixed on FRAND terms constitutes adequate and fair compensation for the use of that patent by others. 61. Concurring with the observations of Huawei, ZTE, the Netherlands and Portuguese Governments and the Commission, I take the view that, in accordance with settled case-law, the exercise of an exclusive right linked to an intellectual property right—that is to say, in the present case, the right to bring an action for a prohibitory injunction in the event of infringement—cannot in itself constitute an abuse of a dominant position. After all, for a patent holder, that right represents the essential

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means of asserting his intellectual property, the protection of which is specifically recognised by Article 17(2) of the Charter. 62. It follows that any restriction of the right to bring those actions necessarily constitutes a significant limitation of intellectual property rights and can therefore be permitted only in exceptional and clearly defined circumstances. 63. However, the right to intellectual property is not an absolute right. Accordingly, without making any reference to abuse of rights, recital 12 in the preamble to Directive 2004/48 states that ‘[t]his Directive should not affect the application of the rules of competition, and in particular Articles [101 TFEU] and [102 TFEU]. The measures provided for in this Directive should not be used to restrict competition unduly in a manner contrary to the Treaty’. It follows that the right to bring actions for a prohibitory injunction for the purpose of protecting intellectual property is not an absolute and inviolable right and must be reconciled, in the general interest, with the rules on competition laid down, in particular, in Articles 101 TFEU and 102 TFEU. Article 12 of Directive 2004/48 provides, for example, that, at the request of the person liable to be subject to an injunction and under certain circumstances, the competent judicial authorities may order pecuniary compensation to be paid to the intellectual property right holder instead of granting the injunction. Restrictions on the right to bring actions for a prohibitory injunction and the substitution of pecuniary compensation for that right are thus clearly envisaged by that directive. 64. Moreover, intellectual property right holders can themselves limit the manner in which they will exercise those rights. 65. In this regard, I believe that the commitment given by Huawei in the dispute before the referring court to grant licences to third parties on FRAND terms bears some similarity to a ‘licence of right’. Whereas the grant of compulsory licences is required by law, a patent owner can on his own initiative authorise third parties to use the teaching of his patent under certain conditions. I would point out that, where a patent licensee has a licence of right, an injunction may not, in principle, be issued against him. 66. The right of access to the courts and the possibility of asserting rights before a court are recognised by Article 47 of the Charter. In paragraph 51 of the judgment in ZZ (C-300/11, EU:C:2013:363), however, the Court held that Article 52(1) of the Charter permits limitations on the exercise of the rights enshrined in Article 47, but points out that, in view of the importance of the fundamental right guaranteed by Article 47, it should be taken into account that Article 52(1) of the Charter provides that any limitation must in particular respect the essence of the fundamental right in question and requires, in addition, that, subject to the principle of proportionality, the limitation must be necessary and must genuinely meet objectives of general interest recognised by the European Union. 67. Despite the fact that the Charter does not create a hierarchy among the fundamental rights which it recognises, with the exception of human dignity, which is inviolable and subject to no exception, the bringing an action for a prohibitory injunction can

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constitute an abuse of a dominant position only in exceptional circumstances, given the importance of the right of access to the courts. 68. It is settled case-law that the concept of abuse of a dominant position is an objective concept and refers to the conduct of a dominant undertaking which is such as to influence the structure of a market where the degree of competition is already weakened precisely because of the presence of the undertaking concerned, and which, through recourse to methods different from those governing normal competition in products or services on the basis of the transactions of commercial operators, has the effect of hindering the maintenance of the degree of competition still existing in the market or the growth of that competition. 69. Huawei, ZTE, the Netherlands and Portuguese Governments and the Commission argue that, in accordance with settled case-law, a finding of abuse of a dominant position following the bringing of an action for a prohibitory injunction requires the existence of ‘exceptional circumstances’. I would point out that ‘[i]t is clear from that case-law that, in order for the refusal by an undertaking which owns a copyright to give access to a product or service indispensable for carrying on a particular business to be treated as abusive, it is sufficient that three cumulative conditions be satisfied, namely, that that refusal is preventing the emergence of a new product for which there is a potential consumer demand, that it is unjustified and such as to exclude any competition on a secondary market’. 70. It is true, as Huawei has pointed out, that that case-law is based on facts which are not directly comparable with those of the dispute before the referring court. It is clear that, as in the cases which gave rise to that case-law, having a licence to use the patent at issue is indispensable to the production of LTE standard-compliant products and services. However, unlike in those cases, which concern refusals to grant licences for the use of intellectual property rights, Huawei informed ETSI of the patent at issue and voluntarily gave a commitment to license that patent to third parties on FRAND terms, thereby engaging in conduct which cannot, at first sight, be treated as a refusal akin to those envisaged in the case-law cited in footnote 44 of this Opinion. Consequently, that case-law is only partially applicable to the dispute before the referring court, in which everything will hinge on the manner in which Huawei fulfilled its commitment to ETSI to license the patent at issue on FRAND terms. 71. In this regard, I would point out that Huawei’s notification of that patent to ETSI and its commitment to license it had an impact on the standardisation procedure and the content of the LTE standard itself. The fact that the teaching protected by the patent at issue has been incorporated into the LTE standard and the fact that a licence to use that patent is therefore indispensable create a relationship of dependence between the SEP-holder and the undertakings which produce products and services in accordance with that standard. That technological dependence leads to economic dependence. 72. In paragraph 9 of its judgment in Volvo (EU:C:1988:477), the Court held that ‘the exercise of an exclusive right by the proprietor of a registered design in respect of car body panels may be prohibited by Article [102 TFEU] if it involves, on the part of an

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undertaking holding a dominant position, certain abusive conduct such as the arbitrary refusal to supply spare parts to independent repairers, the fixing of prices for spare parts at an unfair level or a decision no longer to produce spare parts for a particular model even though many cars of that model are still in circulation, provided that such conduct is liable to affect trade between Member States’. 73. I am of the opinion that the guidance given by the Court in that judgment concerning lines of conduct capable of constituting abuse of a dominant position attaches importance, on the one hand, to a relationship of dependence between the intellectual property right holder occupying a dominant position and other undertakings and, on the other, to the abusive exploitation of that position by the right holder through recourse to methods different from those governing normal competition. 74. In those circumstances, which are characterised, on the one hand, by the infringer’s technological dependence following the incorporation into a standard of the teaching protected by the patent and, on the other hand, by unfair or unreasonable conduct by the SEP-holder, at variance with its commitment to grant licences on FRAND terms, towards an infringer which has shown itself to be objectively ready, willing and able to conclude such a licensing agreement, the bringing of an action for a prohibitory injunction constitutes recourse to a method different from those governing normal competition; it has an adverse effect on competition to the detriment, in particular, of consumers and the undertakings which have invested in the preparation, adoption and application of the standard; and it must be regarded as an abuse of a dominant position for the purposes of Article 102 TFEU. 75. It is clear that such a finding of abuse of a dominant position in the context of standardisation and the commitment to license an SEP on FRAND terms can be made only after the conduct not only of the SEP-holder but also of the infringer has been examined. . . . 77. It goes without saying that the unlicensed use of a patent, in principle, infringes the intellectual property rights of the patent owner and that the latter has a number of legal remedies available to him under Directive 2004/48 for the purposes of enforcing his rights, including an action for a prohibitory injunction. In such cases, the infringer must open negotiations with the patent owner with a view to concluding a licensing agreement before committing an infringement. 78. The dispute before the referring court differs from the foregoing in that the patent owner gave a commitment to a standardisation body (of which it is a member, as is the alleged infringer) to grant licences to third parties on FRAND terms. 79. The guidelines applicable to such a case seem to me to be as follows. 80. To the extent that the infringer is and remains ‘able’ to conclude and comply with a licensing agreement on FRAND terms and, in particular, to pay an appropriate royalty, the SEP-holder must, given the importance of what is at stake, take certain specific steps before bringing an action for a prohibitory injunction in order to honour its commitment and discharge its special responsibility under Article 102 TFEU.

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81. This is particularly indispensable where it is not certain that the SEP infringer necessarily knows that it is using the teaching of a patent that is both valid and essential to a standard. As far as the LTE standard is concerned, it would appear that more than 4,700 patents have been notified to ETSI as essential, and that a large proportion of those may not be valid or essential to the standard. 82. It is therefore possible that even a large telecommunications undertaking such as ZTE was unable to verify in advance whether all the patents relating to the LTE standard which were notified to ETSI were essential and valid. It should also be taken into consideration that the telecommunications sector is constantly evolving and that undertakings (and therefore potential infringers) must respond quickly in order to bring their products and services to market. It does not therefore seem unreasonable to me that an agreement to license an SEP on FRAND terms should be negotiated and concluded ex post, that is to say, after the use of the teaching protected by that patent has begun. 83. On that basis, what specific steps must the SEP-holder take before bringing an action for a prohibitory injunction in order not to be deemed to be abusing its dominant position? 84. First, unless it is established that the alleged infringer is fully aware of the infringement, the SEP-holder must alert it to that fact in writing, giving reasons, and specifying the SEP concerned and the way in which it has been infringed. Such a step does not place a disproportionate burden on the SEP-holder as it is one which it would have to take in any event in order to substantiate an action for a prohibitory injunction. 85. Secondly, the SEP-holder must, in any event, present to the alleged infringer a written offer for a licence on FRAND terms that contains all the terms normally included in a licence in the sector in question, in particular the precise amount of the royalty and the way in which that amount is calculated. 86. Again, such a requirement is not disproportionate, as the SEP-holder has voluntarily undertaken to secure a return on its intellectual property in this manner, thus voluntarily restricting the way in which it exercises its exclusive right. It is therefore reasonable to expect it to prepare and draft such an offer immediately upon obtaining its patent and giving its commitment to grant licences on FRAND terms. Moreover, given that that commitment from the SEP-holder includes an obligation not to discriminate between licensees, the SEP-holder alone has the information necessary for the purposes of complying with that obligation, particularly if it has already granted other licences. 87. Once those steps have been taken, what are the obligations of the alleged infringer? 88. It must respond in a diligent and serious manner to the offer made by the SEP-holder. If it does not accept that offer, it must promptly submit to the SEP-holder, in writing, a reasonable counter-offer relating to the clauses with which it disagrees. As the referring court has pointed out, the bringing of an action for a prohibitory

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injunction would not constitute an abuse of a dominant position if the infringer’s conduct were purely tactical and/or dilatory and/or not serious. 89. The timeframe for the exchange of offers and counter-offers and the duration of the negotiations must be assessed in the light of the ‘commercial window of opportunity’ available to the SEP-holder for securing a return on its patent in the sector in question. 90. It is for the referring court to verify whether—and, if so, to what extent—the conduct of Huawei and ZTE is in keeping with those guidelines. I would qualify the few additional points that I am about to make by saying that the course and precise content of the series of contacts between Huawei and ZTE are not clear from the order for reference. Furthermore, in their observations before the Court, Huawei and ZTE give very different, not to say contradictory, accounts of that contact. 91. What is clear from the order for reference is that, during its discussions with ZTE between November 2010 and the end of March 2011, Huawei indicated the amount which, in its view, represented a reasonable royalty. It is for the referring court to assess the content of that ‘offer’ by Huawei and whether it satisfies the conditions and assumptions set out in points 84 and 85 above. 92. In addition, the referring court must verify whether, on the basis of the royalty proposed by Huawei and ZTE’s response, there was a real possibility of negotiating FRAND terms. In this regard, I take the view that the referring court must assess whether ZTE’s proposal for a cross-licensing agreement and the payment of a royalty of EUR 50 were appropriate in the circumstances and satisfied the conditions and assumptions set out in point 88 above. 93. Furthermore, if negotiations are not commenced or are unsuccessful, the conduct of the alleged infringer cannot be regarded as dilatory or as not serious if it asks for those terms to be fixed either by a court or an arbitration tribunal. In that event, it would be legitimate for the SEP-holder to ask the infringer either to provide a bank guarantee for the payment of royalties or to deposit a provisional sum at the court or arbitration tribunal in respect of its past and future use of the SEP. 94. The same would apply if, during the negotiations, the infringer reserved the right, following the conclusion of a licensing agreement, to challenge before a court or arbitration tribunal, on the one hand, the validity of that patent and, on the other hand, the illegality, or even the existence itself, of the use it had made or would make of the teaching protected by the patent. 95. Indeed, as regards the validity of the SEP, I share the view of the referring court, Huawei, ZTE and the Commission that it is in the public interest for an alleged infringer to have the opportunity, after concluding a licensing agreement, to challenge the validity of an SEP (as ZTE did). As the Commission has pointed out, the wrongful issue of a patent may constitute an obstacle to the legitimate pursuit of an economic activity. Moreover, if undertakings supplying standard-compliant products and services cannot call into question the validity of a patent declared to be essential to that standard, it

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could prove effectively impossible to verify the validity of that patent because other undertakings would have no interest in bringing proceedings in that regard. 96. As regards the use of the teaching of a patent, undertakings which implement a standard clearly do not have to pay for intellectual property which they are not using. It follows that the alleged infringer can call in question ex post its supposed use of the teaching of a patent and the nature of that patent as being essential to the standard in question. . . . 99. By this question [question 5 of the referring German court], the referring court asks the Court whether the SEP-holder abuses its dominant position where it takes legal action to assert other claims arising from the infringement, namely, the rendering of accounts, the recall of products and damages. 100. Given that the corrective measures provided for in Article 10 of Directive 2004/48 may consist in the exclusion from the markets covered by the standard of the products and services supplied by an SEP infringer, the considerations set out in points 77 to 89 and 93 to 96 above regarding the action for a prohibitory injunction apply mutatis mutandis to the corrective measures provided for in Article 10 of that directive. 101. However, I do not see anything in Article 102 TFEU to preclude a SEP-holder from taking legal action to secure the rendering of accounts in order to determine what use the infringer has made of the teaching of an SEP with a view to obtaining a FRAND royalty under that patent. It is for the national court in question to ensure that the measure is reasonable and proportionate. 102. Finally, I am of the opinion that a claim for damages for past acts of use infringing the SEP is in no way problematic from the point of view of the application of Article 102 TFEU. Given that the sole purpose of such a claim is to compensate the SEP-holder for previous infringements of its patent, that claim does not, as the Commission has pointed out, lead ‘either to the exclusion from the market of standard-compliant products or to the acceptance by a potential licensee of unfavourable licensing terms for the future use of an SEP’. 103. In the light of the foregoing considerations, I propose that the Court should reply as follows to the questions referred for a preliminary ruling by the Landgericht Düsseldorf: 1) The fact that a holder of a standard-essential patent (SEP) which has given a commitment to a standardisation body to grant third parties a licence on FRAND (Fair, Reasonable and Non-Discriminatory) terms makes a request for corrective measures or brings an action for a prohibitory injunction against an infringer, in accordance with Article 10 and Article 11, respectively, of Directive 2004/48/EC of the European Parliament and of the Council of 29 April 2004 on the enforcement of intellectual property rights, which may lead to the exclusion from the markets covered by the standard of the products and services supplied by the infringer of an SEP, constitutes an abuse of its dominant position under Article 102 TFEU where it is shown that the

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2)

3)

4)

5)

6)

7)

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SEP-holder has not honoured its commitment even though the infringer has shown itself to be objectively ready, willing and able to conclude such a licensing agreement. Compliance with that commitment means that, prior to seeking corrective measures or bringing an action for a prohibitory injunction, the SEP-holder, if it is not to be deemed to be abusing its dominant position, must—unless it has been established that the alleged infringer is fully aware of the infringement—alert the alleged infringer to that fact in writing, giving reasons, and specifying the SEP concerned and the manner in which it has been infringed by the infringer. The SEP-holder must, in any event, present to the alleged infringer a written offer of a licence on FRAND terms which contains all the terms normally included in a licence in the sector in question, in particular the precise amount of the royalty and the way in which that amount is calculated. The infringer must respond to that offer in a diligent and serious manner. If it does not accept the SEP-holder’s offer, it must promptly present to the latter, in writing, a reasonable counter-offer relating to the clauses with which it disagrees. The making of a request for corrective measures or the bringing of an action for a prohibitory injunction does not constitute an abuse of a dominant position if the infringer’s conduct is purely tactical and/or dilatory and/or not serious. If negotiations are not commenced or are unsuccessful, the conduct of the alleged infringer cannot be regarded as dilatory or as not serious if it requests that FRAND terms be fixed either by a court or by an arbitration tribunal. In that event, it is legitimate for the SEP-holder to ask the infringer either to provide a bank guarantee for the payment of royalties or to deposit a provisional sum at the court or arbitration tribunal in respect of its past and future use of the patent. Nor can an infringer’s conduct be regarded as dilatory or as not serious during the negotiations for a FRAND licence if it reserves the right, after concluding an agreement for such a licence, to challenge before a court or arbitration tribunal the validity of that patent, its supposed use of the teaching of the patent and the essential nature of the SEP in question. The fact that the SEP-holder takes legal action to secure the rendering of accounts does not constitute an abuse of a dominant position. It is for the national court in question to ensure that the measure is reasonable and proportionate. The fact that the SEP-holder brings a claim for damages for past acts of use for the sole purpose of obtaining compensation for previous infringements of its patent does not constitute an abuse of a dominant position.

477

Index

Abstract ideas (patentability of), 92, 95 Abuse of dominant position, 230, 298 Alternativeness, 6, 48, 105 Assignment of patents, 255, 259, 261, 279–285

Computer software, 159, 161 Covenants not to challenge, 5, 203 Creativity, 5, 31, 33–35, 37–40, 48, 134, 161, 447 Cross licensing, 121, 226, 242, 257, 264–266, 269, 271, 389, 390, 475

B

D

Block exemption, 272–275, 277–279 Bundling. See Tying Business justifications, 105, 125, 127, 131, 133–134, 138, 458 Business methods (patentability of), 95

Differentiation, 1–7, 15–103, 105, 108, 116, 126, 176, 252, 266, 337, 346 Distinctiveness, 3, 43, 45, 48, 58, 60, 62–65, 79, 98, 129, 214, 233, 423, 425, 428–429, 436

A

C E Car spare parts (industrial designs), 302, 307 Certification marks, 213–216, 218–220 Claims (patents), 5, 11–14, 20, 28, 30, 31, 55, 74, 79, 92, 101, 232–233, 320, 321, 362–364, 398, 404, 409, 412, 416, 458 Compilations of facts (copyright), 33, 159 Compulsory licenses, 6, 145, 219, 220, 298–300, 335–337, 397–402, 418, 419, 445, 461

Enforcement, 4, 5, 121, 177, 209, 216–219, 256, 280, 282, 285, 287, 298, 306, 323–324, 341, 350, 351, 353, 394, 447, 451, 452, 455, 476 Estoppel, 205, 207–212, 215–220, 235, 328 Exclusive licensing, 170, 231, 252, 257–287, 318, 354, 425 Exhaustion, 65, 201, 270, 301, 402, 405–406. See also Parallel imports

479

Index F

J

Fair, reasonable and nondiscriminatory (FRAND), 228–229, 445, 449–450, 454–457, 468–477. See also Reasonable and non-discriminatory (RAND) Forfeiture, 399, 408, 417–419 Franchising, 10, 31–32, 141, 193–202, 260, 332, 403, 420, 421 Functionality (trademarks), 41, 60, 165

Jefferson, Thomas, 23, 24, 93, 99, 126, 137, 173–176, 182, 184–189, 192, 193, 234, 398

G

M

Genericizing, 43 Grant-back clauses, 5, 222, 252–257, 457

Machine-or-transformation test (patents), 92–94, 97 Manufacture (patents), 19, 89, 99, 172, 177–178, 182, 209, 229, 257, 263, 332, 336, 386, 397, 400, 401, 406, 416 Market power, 122–123, 127, 128, 173, 175–177, 179, 184–186, 188, 190, 191, 245, 248, 250, 279, 280, 283–285, 325, 350, 384, 389, 392, 393, 452, 454, 455, 457, 464 Market regulation, 6, 423 Misuse (patent), 128, 172–178, 181–183, 233–237, 318–321, 352, 384, 418 Monopolistic competition, 1–3

L Laws of nature (patents), 11, 93 Lock-in, 115, 453, 454

H Horizontal agreements, 167, 245, 246

I Improvement (patents), 18, 20, 48, 53, 55, 83–84, 253–257, 262, 266, 336, 414, 415, 418, 419, 454 Inequitable conduct, 350, 352, 355, 357–359, 362–365 Injunctions, 15, 46, 57, 58, 61, 90, 106, 125, 127–130, 140, 142, 153, 156, 163, 195, 203, 208, 233, 234, 252, 257, 260, 263, 294, 310–311, 313, 320, 321, 330, 331, 333–336, 346, 349, 367, 379, 394, 396, 402, 408–410, 412, 413, 416, 417, 421, 444, 445, 461, 468–477 Inventiveness, 15, 295. See also Non-obviousness; Obviousness

N Natural phenomena (patents), 14 New uses (patents), 67 Non-exclusive licensing, 280, 285, 286 Non-obviousness, 25, 48. See also Inventiveness; Obviousness Novelty, 3, 15, 19, 21, 24–26, 33, 37, 48–50, 55, 68, 75, 83, 99, 207, 208, 353, 367

480

Index O Obstruction of markets, 298–309 Obviousness, 21, 25, 26, 48, 99, 363 Originality, 3, 18, 31, 33–41, 48, 49, 380, 381

P Package licensing, 5, 173, 177–183. See also Tying Parallel imports, 147, 169, 170, 437–440, 443 Paris Convention, 330 Perfect competition, 1 Per se rule, 175, 176, 182, 184, 185, 187, 188, 190–193, 243–247, 249, 451 Pooling, 257, 270, 313, 397, 399, 400, 415 Post-expiry royalties, 236–237 PRE test, 337–350, 357, 359, 360, 362 Price competition, 229–230, 247, 385, 457 Price fixing, 242, 244, 248, 250–252, 267, 269–271, 399, 404, 407

R Reasonable and non-discriminatory (RAND), 228, 457, 461–463, 465. See also Fair, reasonable and nondiscriminatory (FRAND) Refusals to license, 5, 105, 298 Resale price maintenance, 242–252 Reverse payments, 5, 385, 387, 388, 390–393 Royalties, 5, 12, 178–180, 205–207, 209, 211, 212, 218, 220–252, 264, 270, 271, 323, 328, 345–346, 398–400, 403–404, 416–418, 446, 447, 454, 457, 461, 465, 470, 474, 475, 477

Rule of reason, 157, 168, 183, 184, 191, 193, 195, 196, 201, 202, 242–245, 248–252, 320, 321, 392, 393

S Second uses (patents). See New uses Settlements, 5, 117, 120, 203, 216–218, 220, 233, 337, 384, 385, 387–393, 410–411 Sham litigation, 337–394 Shapes of products (trademarks), 65–66 Specifications (patents), 28, 48, 51, 52, 70, 73, 83, 84, 318 Standard essential patents, 468, 469 Standard Setting Organizations (SSOs), 6, 227, 229, 458, 459, 465, 467 Suppression, 5, 9, 10, 23, 108, 185, 197, 230, 257, 260–262, 293, 297–298, 330, 333, 357, 407–408, 412, 414, 415, 418, 420, 443

T Taxonomy (copyright), 39, 40 Technical standards, 6, 177, 178, 222, 445–477 Telephone directories (copyright), 31–33 Territorial restrictions, 167–173, 201, 251 Threats to sue, 309–330 Tobacco packaging, 432, 445 Too less intellectual property, 4, 7 Too much intellectual property, 4, 7, 142 Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement, 220, 394, 408 TV guide (copyright), 141–142, 146 Tying, 121, 130, 136, 137, 173–203, 295, 450. See also Package licensing

481

Index U

W

Unfair competition, 58, 194, 195, 203, 215, 219, 287, 289–291, 294, 296, 298, 319, 350

Walker Process test, 323–325, 329, 350–353, 356–362

V Vertical agreements, 245–246, 248, 250, 251

482

IP and Antitrust

The Competition Policies of Intellectual Property in Eighty Cases Nuno Pires de Carvalho Consumers can make choices because of the differentiation that is preserved by intellectual property. Competition law informs intellectual property, generally with the intent of ensuring that it achieves this main purpose. However, very often, certain public policies relating to competition interfere with the way intellectual property should normally operate, either with the purpose of reinforcing its differentiating role, or with the objective of submitting it to other public goals – such as access to essential goods and services, or in recognition of situations where a given invention becomes part of a technical standard or is deemed dangerous to health or the environment. This book presents eighty cases that interpret the various public policies that mould the interface of intellectual property law with competition law (or antitrust). Although most cases are from the United States — which has developed an enormously wide wealth of jurisprudence in this area — there are also cases from the European Union, the United Kingdom, Australia, Canada, South Africa, Brazil, South Korea, India, and Argentina. The author presents the cases under the following general headings: • setting the right dosage (i.e., avoiding too much or too little intellectual property); • setting the standards of differentiation; • refusing to license intellectual property; • licensing (and assigning) intellectual property; • enforcing intellectual property rights;

• remedies; • intellectual property in sectors of special public interest; and • technical standards. Revealing in extraordinary depth the tensions behind the values of the free market which intellectual property serves and the variety of responses these tensions provoke, this book may be regarded as a watershed resource regarding the principles and policies that, sometimes coherently, sometimes not, preside over the very complex relationship between intellectual property and antitrust. It is sure to be greatly valued by all professionals in both fields, from practitioners to policymakers, as well as by academics.