Princo v. U.S. Philips: Limiting the Patent Misuse Defense

An en banc opinion by the U.S. Court of Appeals for the Federal Circuit narrows the scope of the patent misuse doctrine by holding that antitrust violations alone do not support a patent misuse claim. In Princo Corp. v. International Trade Commission and U.S. Philips Corp., 616 F.3d 1318 (Fed. Cir. 2010), the panel found that patent misuse can only be found when the patent holder impermissibly broadens the scope of its own patent rights, not when its actions work to suppress potentially competitive patents. The decision limits the availability of patent misuse as a defense and will likely impact future patent licensing practices.

BACKGROUND

Philips and Sony Corporation each developed the CD-R and CD-RW technology that allows consumers to create discs readable by CD players and CD-ROM drives. Philips’ analog technology was set forth in its “Raaymakers patents;” Sony’s digital technology was set forth in its “Lagadec patent.” Engineers from both companies agreed that Philips’ technology was the better, more workable of the two, and thus it should be codified as the industry standard for the CD-R and CD-RW technology in what is known as the “Orange Book”.

Philips and Sony, along with several other patent holders, pooled their patents in a single group for the purpose of selling the licenses required to manufacture CDs under the Orange Book standard. The patent pool included the Lagadec patent, though it was not the standard identified in the Orange Book. The license package contained field-of-use limitations, limiting the use of all included patents to Orange Book-compliant disc production.

Princo obtained a license from Philips under this license pool, but then stopped paying fees to Philips, even though it was still importing readable discs into the U.S. Philips filed suit against Princo at the International Trade Commission to block Princo’s imports due to Princo’s infringement. The administrative law judge found that Princo had infringed claims on six Philips’ patents, but it denied relief to Philips because it found that Philips’ patent misuse rendered the patents unenforceable.

That ALJ decision triggered six more years of litigation, leading up to the Federal Circuit’s en banc review of Princo’s patent misuse claims. Of specific focus was the claim that Philips foreclosed competition from Sony and its Lagadec technology by including the Lagadec patent in the patent pool, thus securing Sony’s adherence to the Orange Book Standard.

Inducing a 3rd Party Not To Sell Its Separate Patent is Not Patent Misuse

The patent misuse doctrine provides a legal defense for accused infringers who claim that the patentee has misused the asserted patent in an anticompetitive manner, therefore rendering the asserted patent unenforceable. The anticompetitive conduct required for a finding of patent misuse is similar to an antitrust violation.

The question before the en banc Federal Circuit was: “When a patentee offers to license a patent, does the patentee misuse that patent by inducing a third party not to license its separate, competitive technology?” Princo Corp. v. International Trade Commission and U.S. Philips Corp., 616 F.3d 1318, 1331 (Fed. Cir. 2010). In the Philips case, the Court found that there was no patent misuse.

The Court reviewed the history of patent misuse law, finding that just because a patentee “engages in some kind of wrongful commercial conduct, even conduct that may have anticompetitive effects,” that does not necessarily constitute patent misuse. Id. at 1329.

Rather, in order for a patentee’s acts to constitute patent misuse, the conduct must be related to the patentee’s efforts to leverage its own patent, i.e., to use its own “patent power to impose over-broad conditions on the use of the patent in suit that are not within the reach of the monopoly granted by the Government.” Id. at 1331.

This “patent leverage” test asks whether the patentee “impermissibly broaden[ed] the ‘physical or temporal’ scope of the patent grant with anticompetitive effect.” Id. at 1328 (citing Windsurfing Int’l Inc. v. AMF Inc., 782 F.2d 995, 1001 (Fed. Cir. 1986).

The Court explained that patent misuse does not exist where the misconduct in question is not connected to the use of the patentee’s own patent, even if the misconduct has anticompetitive effects and may even constitute an antitrust violation. Princo, at 1331.

In the Philips case, the en banc court found that the patent pooling arrangement in question did not meet the patent leverage test for patent misuse. The patents in suit were Philips’ Raaymaker patents, but it was Sony’s Lagadec patents that Princo claims were wrongfully suppressed. Because the alleged wrongful conduct related to Sony’s separate patents, and not to the patents in suit, there was no patent misuse. Id.

The Court recognized “the narrow scope of the doctrine,” based on Congressional treatment of the doctrine in section 271(d) of the Patent Act. Id. at 1329. The Court further acknowledged the procompetitive effects of research joint ventures and industry-wide standard setting. Id. at 1334-1335.

A concurring opinion by Judge Prost suggested that the dispute could have been resolved on narrower grounds because Princo had failed to sufficiently show the anticompetitive effects of the patent pooling arrangement. Id. at 1341. The majority and Judge Prost pointed out that Princo had failed to provide evidence of the independent commercial viability of the Lagadec technology. Judge Prost added that this failure alone could have supported the court’s holding without defining the “precise metes and bounds of the patent misuse doctrine.” Id.

A dissent by Judge Dyk, joined by Judge Gajarsa, sharply criticized the majority, arguing that patent misuse should include any conduct that constitutes an antitrust violation.

CONCLUSION

The Philips decision may significantly limit the availability and effectiveness of patent misuse arguments by accused infringers. Furthermore, while the decision may give patent owners more flexibility in structuring use agreements, it does not make patent owners invincible to antitrust claims. Even after Philips, patentees should exercise caution when entering into horizontal agreements so as to avoid antitrust claims.

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Jeffrey J. Zuber

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