December 13, 2010
LES Insights
Authored by D. Brian Kacedon, John C. Paul, and James F. Sherwood
The doctrine of patent misuse is a judicially created defense to patent infringement that renders a patent unenforceable when the patentee has impermissibly extended the coverage or time scope of the patent. The Court of Appeals for the Federal Circuit has applied the doctrine to prevent patent holders from imposing licensing conditions that are considered anticompetitive.
Recent Federal Circuit decisions have confirmed that the doctrine's scope is limited, examining it in the context of package licenses and patent pooling arrangements. The court has addressed the doctrine in two successive appeals from an International Trade Commission investigation into the importation of CD-R and CD-RW discs covered by patents in a portfolio held by U.S. Philips Corp. First, in U.S. Philips Corp. v. International Trade Commission, 424 F.3d 1179, No. 2004-1361 (Fed. Cir. Sept. 21, 2005), the court reversed a decision by the Commission that invoked patent misuse based on Philips' package licensing arrangement for CD-R and CD-RW technology. In that case, the court recognized that package license arrangements have significant efficiencies and procompetitive benefits. And second, in Princo Corp. v. International Trade Commission, 616 F.3d 1318, No. 2007-1386 (Fed. Cir. Aug. 30, 2010) (en banc), the full court addressed the extent to which the doctrine of patent misuse prevents a patent owner from enforcing a patent that is part of an agreement among companies to pool their patents. The court held that even if a separate side agreement among two pool members regarding an unenforced patent in the pool might violate the antitrust laws, it would not be misuse of a different patent in the pool that is enforced.
In the 1980s and 1990s, Philips and several other companies developing technology in the field, including Sony, collaborated on the development of CD-Rs and CD-RWs. As part of their collaboration, Philips and Sony jointly developed a technical standard for CD-Rs and CD-RWs, which became known as the "Orange Book" standard. To commercialize Orange-Book compliant CD-Rs and CD-RWs, Philips and other companies developing technology in the field, including Sony, entered into a pooling arrangement. Under the arrangement, Philips offered several package licenses that allowed licensees to manufacture Orange Book-compliant CD-R and CD-RW discs. The package licenses included patents that were believed to be needed to manufacture the discs. Philips, which served as the licensing agent for all the patents in the pool, shared the royalties it received through the program with the other patent holders in the pooling arrangement.
Princo is licensed, stops paying royalties, and is sued for patent infringement
Princo entered into a package license agreement with Philips in the late 1990s. Shortly after entering the agreement, Princo ceased paying royalties to Philips for its manufacture and importation of CD-Rs and CD-RWs. In response, Philips filed a complaint with the International Trade Commission alleging that Princo's importation of Orange Book-compliant CD-Rs and CD-RWs infringed Philips' patents in violation of section 337(a)(1)(B) of the Tariff Act of 1930.
Princo alleges patent misuse for unlawful tying of essential and non-essential patents
Princo asserted patent misuse as a defense to Philips' claims of infringement. Princo contended that Philips' package licensing constituted misuse by unlawfully "tying" licenses for patents nonessential to the Orange Book standard with licenses for patents essential to the Orange Book standard. According to Princo, Philips' package licenses required Princo to accept a license on technology it did not need or want. Additionally, Princo contended that the pooling arrangement between Philips and its competitors unlawfully restrained competition by foreclosing access to technology not needed to manufacture Orange Book-compliant discs.
The ITC finds unlawful tying and patent misuse rendering the patents unenforceable
In its first decision in the case, the International Trade Commission agreed with Princo that Philips' package licenses impermissibly tied essential and nonessential patents. According to the Commission, Philips' package licenses constituted patent misuse because Philips did not offer potential licensees the option to take licenses on individual patents. On that basis alone, the Commission found against Philips.
The Federal Circuit finds the package license procompetitive and reverses the ITC
In U.S. Philips Corp. v. International Trade Commission, 424 F.3d 1179 (Fed. Cir. 2005), the Federal Circuit reversed the Commission's decision. First, the court rejected the argument that a mandatory package license that includes "essential" and "nonessential" patents is per se misuse. The court declined to treat patent-to-patent tying arrangements as prior cases have treated product-to-patent tying arrangements. The court explained that, unlike a product tying arrangement, a patent 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." Moreover, it was undisputed that Philips had not charged its licensees anything additional for the nonessential patents. Further, the court recognized that package licensing arrangements have significant procompetitive benefits. As a result, the court proceeded to analyze Philips' package license under the more flexible "rule of reason" framework and found insufficient evidence of anticompetitive effects for a finding of misuse.
The package license did not foreclose competition in potential alternative technologies
The case was remanded to the Commission, and on remand, the Commission reviewed additional arguments presented by Princo in support of its patent misuse defense. Princo contended that the agreement among Philips and its competitors to pool their patents into a single licensing program foreclosed competition in potential alternative technologies disclosed in a particular patent included in the pooling agreement but not incorporated into the standard. The Commission, however, found that Princo presented insufficient evidence that the patent covered a viable commercial alternative to the technologies incorporated into the Orange Book standard.
Patent misuse is a defense only against "patent leveraging" and not an anticompetitive "catch-all" defense
The Federal Circuit affirmed the Commission's decision that Princo did not present sufficient evidence that the pooling agreement was anticompetitive. But the court went a step further than the Commission. It broadly held that, even if the alleged side agreement to the pooling agreement were anticompetitive, the pooling agreement was not, and a finding of patent misuse was not warranted. Indeed, the court held that a finding of patent misuse was not warranted even if the alleged agreement between Philips and Sony violated federal antitrust laws. The court explained that patent misuse is a judicially created doctrine in derogation of a patentee's statutory right to enforce its patent. It therefore rejected a broad view of patent misuse as an anticompetitive catch-all, a view that was endorsed by two dissenting judges. Under the majority's opinion, the doctrine of patent misuse is limited to restrictive conditions specific to a patent being asserted where the patent being enforced is used in some way to have an effect outside the scope of the patent with anticompetitive effect. The court's short-hand rule is that "patent leverage" is required for patent misuse.
In the series of cases involving this dispute, the Federal Circuit made a number of other observations about patent misuse.
Patent misuse does not result from including patents reasonably believed to be essential in a patent pool, or an agreement not to license an unenforced patent
In reviewing the definition of "essential patent" the Federal Circuit discussed whether misuse could arise from having a patent pool that included a patent that arguably was not essential. They determined that if, objectively at the time of licensing, a licensee could reasonably have believed the patent was necessary to practice the standard, then the patent is a blocking patent and including it in the pool cannot result in misuse.
The court found that the two patents in issue, Lagadec and Raaymakers, were not competing patents. They also found that even if there were a side agreement not to license the Lagadec patent, it would not result in misuse for the Raaymakers patent, which was being enforced under the pooling agreement.
Antitrust defenses now may be eliminated fully more easily earlier in litigation
In contrast to affirmative liability under the antitrust laws, the patent misuse defense can be asserted by any party to render the affected patents unenforceable, regardless of whether they personally suffered harm. This causes the patent misuse defense to be available to a wider group of defendants than other assertions of anticompetitive conduct under the antitrust laws that are limited to those who can show they personally suffered harm. The limitations recently placed by the courts on the patent misuse defense therefore prevent some parties who are not personally harmed by the patent owner from sustaining an unenforceability defense under the patent laws.
These decisions serve as a useful tool for entities considering the use of patent pooling arrangements, specifically those related to industry standards.
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.
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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