Federal Circuit Clarified Intersection of Patent Misuse and Antitrust

En Banc Court Finds Block Licensing Of Essential and Non-Essential Patents Does No Provide Patent Misuse Defense

In Princo Corp. v. Int’l Trade Comm’n, 2010 U.S. App. LEXIS 18101 (Fed. Cir. August 30, 2010) (en banc), Sony and Philips own patents related to CD-R/RW technology as defined in a standard, the Orange Book standard.  In arriving at this standard, there were competing methods of encoding position information on the disc: The Philips approach, which is outlined in the “Raaymakers patents,” and the Sony approach, which is outlined in the “Lagadec patent.”  Eventually, both Sony and Philips decided on using the Philips approach for the Orange Book standard since the Sony approach was difficult to implement and prone to error.  In order to provide a convenient mechanism for licensing the necessary patents to conform to the Orange Book standard, Philips managed block license packages.   The block license packages included both the Raaymakers patents and the Lagadec patent.

Princo imports CD-R/RW into the United States, and entered into a block license package.  When Princo stopped paying the license fees, Philips filed suit at the ITC under 19 U.S.C. §1337 to prevent Princo from importing CD-R/RWs.  In defense, Princo asserted a patent misuse defense due to the block license package including both the Raaymakers patents and the Lagadec patent, which effectively tied a non-essential patent with patents essential to complying with the Orange Book.  The administrative judge agreed with Princo that the block license package amounted to tying, which therefore rendered all of the patents included in the block license package unenforceable due to patent misuse.

On request for reconsideration, the Commission upheld the administrative judge since the arrangement “forced licensees to purchase licenses to patents that they did not want or need, and it did not allow them the option of licensing individual patents.”

On appeal, a panel of the Federal Circuit reversed the Commission.  Specifically, the Federal Circuit found that there was no impermissible tying of essential and non-essential patents since Philips offered only the option to use the patents, and that the fee was effectively a license to comply with the Orange Book.   Therefore, the Federal Circuit held that there was insufficient evidence to find patent misuse under a rule of reason analysis, and remanded the case to the Commission.

On remand, the Commission reviewed additional grounds for the patent misuse not decided on appeal, and rejected Princo’s claim for patent misuse due to price fixing.  Specifically, the Commission held that there was evidence that the Lagadec patent was a blocking patent, and therefore was essential for the Orange Book block license package and was not usable in a competing patent pool or block license package for a competing technology.  Further, Commission noted that the technology in the Lagadec patent was not a substitute since it did not work well and thus was not an adequate substitute for the Raaymakers patents.  As such, there was no defense of patent misuse available due to horizontal price fixing between Sony and Philips.

On a second appeal to the Federal Circuit, Princo argued again that there was impermissible tying under the rule of

reason, which was rejected by the Federal Circuit.  However, the Federal Circuit ruled against Philips on the issue of whether there was patent misuse through suppression of a competing technology.  The theory of suppressions was that the agreement between Sony and Philips was, effectively, an agreement to suppress the competing Lagadec technology.  As such, the Commission was directed to consider “whether an agreement that would prevent the development of alternatives [to the licensed technology] would constitute misuse under a theory of elimination”.  Princo Corp. v. Int’l Trade Comm’n, 563 F.3d 1301, 1314 (Fed. Cir. 2009).

Philips, Princo, and the Commission all filed petitions for rehearing en banc on the question of whether the block license package was an agreement to suppress a competing technology which would warrant making the patents unenforceable for patent misuse.

In its en banc ruling, the Federal Circuit found that the agreement did not constitute patent misuse.  In arriving at this conclusion, the Federal Circuit first noted that “the Supreme Court established the basic rule of patent misuse: that the patentee may exploit his patent but may not ‘use it to acquire a monopoly not embraced in the patent.’ Transparent-Wrap Mach. Corp. v. Stokes & Smith Co., 329 U.S. 637, 643, 67 S. Ct. 610.”  As a result, the Federal Circuit found that tying patented and unpatented products was patent misuse, as was requiring continued payment of license fees after the expiration of the patent.  As such, the Federal Circuit held that the “key inquiry under the patent misuse doctrine is whether, by imposing the condition in question, the patentee has impermissibly broadened the physical or temporal scope of the patent grant and has done so in a manner that has anticompetitive effects.”

At the same time, the Federal Circuit held that the mere inclusion of a patented product in the context of an agreement which violates antitrust law is not sufficient to find patent misuse.  Thus, when attempting to use antitrust law to show patent misuse, there must be evidence that “the conduct in question restricts the use of that patent and does so in one of the specific ways that have been held to be outside the otherwise broad scope of the patent grant.”

The Federal Circuit next noted that, while patent misuse is judicially created, Congress enacted 35 U.S.C. § 271(d) specifically to restrict its application.  As such, 35 U.S.C. § 271(d) prohibited the application of patent misuse for “(4) refus[ing] to license or use any rights to the patent” or for  “(5) condition[ing] the license of any rights to the patent or the 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.”  The Federal Circuit acknowledged that the behavior in question did not fall within the exceptions of 35 U.S.C. § 271(d), but relied upon this statute as evidence of a need to restrain this judicially-created doctrine.

In view of the above, the Federal Circuit held that as the Lagadec patent was not asserted in the underlying action, there could be no patent misuse based upon an anticompetitive injury due to horizontal price fixing between Sony and Philips.  The block license package did not extend the temporal or physical scope of the Raaymakers patents.  According to the Federal Circuit, there is no patent misuse merely by offering a license to one patent on condition of not licensing a separate patented invention.  As such, in view of precedent and the policies of patent misuse as opposed to antitrust, the Federal Circuit found that showing of an antitrust injury, absent a showing of how such injury relates to the patents being asserted, does not constitute patent misuse rendering the patents unenforceable.

Lastly, the Federal Circuit held that Princo had not shown that anticompetitive effects even occurred due to the alleged suppression of the Lagadec technology.  There was no showing that the Lagadec was even a competitive technology, and the Commission specifically found that the technology was not a substitute for the Raaymakers technology.  The Federal Circuit further noted that joint ventures, while susceptible to antitrust scrutiny, have precompetitive effects in the context of joint ventures for research and development to bring new products to market.  Dep’t of Justice & FTC, Antitrust Guidelines for the Licensing of Intellectual Property §§ 5.1, at 24; 5.5, at 28 (Apr. 6, 1995).  These pro-competitive effects are enhanced in the standard setting arena.  Patrick D. Curran, Comment, Standard-Setting Organizations: Patents, Price Fixing, and Per Se Legality, 70 U. Chi. L. Rev. 983, 985-90 (2003).  As such, these agreements are judged under the rule of reason for antitrust purposes.  Thus, without relying on hypothetical harms caused by the suppression of the Lagadec technology, the agreement did not have anticompetitive effects which outweighed the precompetitive effects in a manner causing an antitrust injury, or patent misuse stemming from such injury.

Significance for Patent Owners and Applicants

The Princo decision provides patent owners with an analytical framework as to when a particular arrangement will render sets of patents unenforceable under a patent misuse theory as opposed to running afoul of antitrust laws.  While the decision in certain ways narrows the application of antitrust theories in the patent misuse context, it also shows how a defendant can link patent misuse to anticompetitive injuries.  Moreover, the Federal Circuit’s discussion on the Congressional and policy needs to reduce the application of patent misuse outside of traditional analyses should provide licensors with greater certainty in how to structure licensing deals, thereby simplifying the analysis.


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