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Patent Misuse: Scheiber v Dolby Laboratories

Kelly Hershey

Berkeley Technology Law Journal, Vol 18, No 1, 2003

As the basis for his observations on patent misuse, that is, in the context of pplying anti-trust law to patent law, the author of this article describes the circumstances arising in the Scheiber case. The inventor of "surround sound" stereo technology, Peter Scheiber, licensed the use of his patents to Dolby Laboratories. What marked out his licensing agreement, bringing it within the ambit of anti-trust considerations, was the payment of the royalty rate at a low level over a long period of time, rather than at a high level over a short period of time. There were some good commercial reasons for this arrangement. But it did mean that payments extended beyond the period of patent protection; and Dolby subsequently refused to pay royalties on expired patents. This refusal precipitated the suit. The author sketches the background to the relationship between patent and anti-trust laws; the patent misuse doctrine; and the question of market power in the hands of a patent owner. He describes the case in some detail and rightly makes the point that the Seventh Circuit Court was largely bound by the Supreme Court decision in Brulotte v Thys. Judge Posner said that the Seventh Circuit could not disregard a Supreme Court decision, "no matter how dubious its reasoning": he added that "post-expiration royalty payments did not extend the patent term, as the patentee no longer had the right to exclude others from making or using the product". The author mildly chides the judge, not on account of a disagreement on the substance, but because it was open to the judge to have interpreted the rate schedule as reflecting post-expiration collection of royalties for pre-expiration use. It is true, as the author says, that the Brulotte case was decided on the analogy of tying agreements; but the author argues that the circumstances should be subject to a rule of reason. Not all post-expiration royalties undermine competition; and, where a patentee does not have (or no longer has) market power in the protected product, post-expiration royalties should not be treated as per se illegal on the tying analogy. This concept would not jeopardize the principle in the Motion Pictures Patents case, in which the patentee tied use of the patented movie projector to the requirement that licensees must use only film manufactured by the patentee, regardless of the patent term. The author concludes that the courts should require a showing of market power in any cases in which post-expiration royalties are claimed to be a form of patent misuse. [20093]