March 8, 2021
LES Insights
By John C. Paul; D. Brian Kacedon; Anthony D. Del Monaco; Amanda E. Stephenson
An Illinois court found that a licensor who did not have worldwide patent rights could enter into license agreements for royalties based on worldwide sales as an administrative convenience without misusing the patents.
Trading Technologies sued IBG for infringing several patents based on IBG’s Trader Workstation, which allows users to electronically trade stocks, options, and other financial instruments using downloadable software.
Before the suit, Trading Technologies had entered into 35 license and settlement agreements on these patents granting a worldwide license (as opposed to a license in the countries in which Trading Technologies had patent protection). The agreements stated:
WHEREAS, TT is willing to grant the discounted license granted herein for administrative convenience because the license is worldwide and requires payments of royalties for use of Licensed Products . . . anywhere in the world as opposed to royalties based only on the usage of Licensed Products in countries in which there is patent protection.
Counsel for Trading Technologies, who negotiated the agreements, testified that this language about discounted royalty rate was included largely for administrative convenience.
In its defense, IBG contended that Trading Technologies’ patents were unenforceable due to patent misuse—impermissibly broadening the scope or duration of a patent grant with anticompetitive effect. Specifically, IBG alleged that Trading Technologies misused its patents by forcing many of its competitors into agreements that tie its patent licenses to sales of products in jurisdictions where Trading Technologies did not hold any patents. Trading Technologies then asked the court to declare on summary judgment that it did not misuse the patents.
The court evaluated the language in the patent license agreements and testimony from Trading Technologies’ counsel who negotiated the licenses and found that any tying that occurred was done for administrative convenience and did not amount to patent misuse.
The court explained that certain practices, like “tying” agreements and agreements that effectively extend the duration or scope of a patent, may amount to patent misuse. Here, the parties disagreed whether IBG’s theory of patent misuse was based on a tying agreement or was more akin to expanding the duration or scope of the patent.
IBG argued it was the latter because Trading Technologies improperly expanded the geographic reach of its patents like expanding duration. The court disagreed, finding IBG cited no case law supporting its argument. Because the only support IBG cited pertained to tying agreements, the court analyzed the issue of patent misuse accordingly.
To prove that tying agreements amount to patent misuse, IBG had to show: “(1) the involvement of two separate products or services; (2) the sale of one product or service is conditioned on the purchase of another; (3) the seller has market power in the tying product; and (4) the amount of interstate commerce in the tied product is not insubstantial.” In this case, Trading Technologies did not dispute the first two elements were satisfied.
The court found that the third and fourth element were also satisfied. As to the third prong, the court explained that absent market power, a tying agreement does not constitute patent misuse. Here, the court evaluated testimony from Trading Technologies’ counsel about the agreements and about deadlines with the Chicago Mercantile Exchange (“CME”). Trading Technologies’ counsel testified that CME was worried about the heavy concentration of trades using Trading Technologies’ platform. The court also evaluated statements Trading Technologies made in an open letter in 2004 that it was responsible for over half of the trades that passed through the “big four” futures exchanges and approximately half of the futures transactions conducted at CME. This evidence, the court found, showed Trading Technologies held market power and, if accurate, that the amount of interstate commerce tied to the product was not insubstantial.
Even if a tying arrangement existed, however, Trade Technologies argued the provisions for discounted royalties for worldwide licenses did not constitute patent misuse because they were entered into for administrative convenience. The court agreed, relying on a line of cases allowing a patentee to license unpatented components of an invention in the interest of administrative convenience. The court acknowledged there was no binding case law that extends the administrative convenience exception to licensing agreements that effectively expanded the territorial reach of patent protection. Nonetheless, if a party takes a license for a product that is patented in many of the jurisdictions in which it does business, it might just be more convenient for both parties to allow the license to apply on a global basis, at a discounted rate.
Because IBG presented no evidence to support its argument that the agreements were not administratively convenient and the only evidence before the court was the text of the agreements themselves, which explicitly indicated the arrangement is administratively convenient, and the consistent testimony from Trading Technologies’ counsel, the court found that administrative convenience was the force behind the agreements. The court, in a footnote, also noted that testimony from Trading Technologies’ counsel about what CME believed may be inadmissible hearsay evidence for purposes of its ruling on Trading Technologies’ motion.
Courts may allow a licensor who did not have worldwide patent rights to enter into license agreements for royalties based on worldwide sales where it can be shown by the terms of the agreement and testimony that administrative convenience was the motivating force behind the worldwide terms of the agreements.
The Trading Technologies decision can be found here.
Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm’s clients.
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