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Patent Misuse After Federal Circuit’s Princo Decision En Banc

The AIPLA Antitrust News
February 2011


Authored by Kenneth M. Frankel

The Federal Circuit's August 2010 en banc decision in Princo Corp. v. Int'l Trade Comm'n, 616 F.3d 1318 (Fed. Cir. 2010) ("Princo II"), interpreted the patent misuse defense narrowly. It required proof of both leveraging of an enforced patent and an anticompetitive effect outside the scope of the patent right, absent per se misuse. The six-member majority concluded that Princo had not met its burden to show each element and rejected Princo's misuse defense, while two judges concurred and two judges wrote a vigorous dissent. Princo recently filed its petition seeking Supreme Court review based heavily on that dissent. The Federal Circuit's en banc decision will govern all assertions of a misuse defense in patent infringement cases, unless reversed or modified by the Supreme Court.

I. Facts

The Federal Circuit reviewed the International Trade Commission's Final Determination in an investigation into Princo's infringement of U.S. Philips Corporation's patents by the importation of CD-Rs and CD-RWs. According to the Federal Circuit majority's opinion, CD-R/RW technology was developed in the 1980s and 1990s, principally by Philips and Sony Corporation working in collaboration with each other. They and others involved in the development of that technology set a technical standard for CD-Rs and CD-RWs known as the "Orange Book" standard. See Princo II at 1322.

Engineers at Philips and Sony each developed solutions for encoding position information in a disc. Philips' engineers proposed using an analog method to encode that information, while Sony's engineers proposed a digital method. They patented their respective approaches, Philips in the "Raaymakers" patents and Sony in the "Lagadec" patent. The companies' engineers agreed that the Raaymakers technology provided a better approach, and the companies incorporated the Raaymakers technology in the Orange Book as the standard for making CD-R/RW discs. See id.

To commercialize CD-R/RW technology, the companies developing the technology and standard pooled their Orange Book-related patents and Philips administered a licensing program for the pooled patents. Philips offered package licenses that included licenses to patents regarded as potentially necessary to manufacture Orange Book-compliant discs, and included both the Raaymakers and Lagadec patents. The licenses included a field of use restriction limiting the scope of the licenses to the technology for Orange Book-compliant discs. See id. at 1322, 1344.

Princo entered into a license agreement but soon stopped making payments. In response, Philips filed a complaint with the Commission under 19 U.S.C. § 1337(a)(1)(B), alleging that Princo's importation of discs infringed the Raaymakers patents. Philips did not allege infringement of Sony's Lagadec patent. See id. at 1323.

II. Procedural History

Princo asserted patent misuse as an infringement defense. As one misuse theory, Princo argued that Philips improperly required licensees to accept licenses on patents that were not essential to comply with the Orange Book standard as a condition for receiving licenses on essential patents. In its first decision in the case, the Commission agreed, holding that Philips' tying practice constituted patent misuse. See id.

On appeal, the Federal Circuit reversed the Commission. See U.S. Philips Corp. v. Int'l Trade Comm'n, 424 F.3d 1179 (Fed. Cir. 2005). The court held that Philips' patent-to-patent tying arrangement did not constitute per se misuse, because Philips did not require licensees to use any particular technology. The court also rejected the Commission's analysis under the rule of reason, holding that the Commission had an insufficient basis for finding Philips' licensing program anticompetitive. The court remanded the case to the Commission to address Princo's remaining patent misuse theories. See id. at 1197-99.

On remand, the Commission rejected the remaining misuse theories, including theories concerning the Lagadec patent. More specifically, it rejected the theory that Philips improperly tied the Lagadec patent to the pool license because that patent was not essential to Orange Book-compliant discs. It also rejected the theory that the Lagadec and Raaymakers patents covered potentially competing technologies, and that Philips and Sony foreclosed potential competition between them by agreeing that the Lagadec patent would be available only through package licenses for Orange Book-complaint discs. See Princo Corp. v. Int'l Trade Comm'n, 563 F.3d 1301, 1302 (Fed. Cir. 2009) ("Princo I") (vacated in part in Princo II); Princo II, 616 F.3d at 1324-25.

III. The Panel Opinion

Princo appealed the Commission's second decision, and a three-judge Federal Circuit panel vacated the Commission's decision in part. The panel rejected Princo's theory of patent misuse based on tying essential and non-essential patents. The panel held that one claim of the Lagadec patent reasonably might be necessary as a blocking patent to the Orange Book standard, even if it did not necessarily cover the standard, which was sufficient to reject Princo's tying claim. See Princo I, 563 F.3d at 1309-12. The panel concluded that a "blocking patent is one that at the time of the license an objective manufacturer would believe reasonably might be necessary to practice the technology at issue." Id. at 1310. For the same reason, the panel rejected Princo's argument that Philips' package licensing arrangement was improper because Sony would receive royalties under the parties' joint licensing agreement, even though the Lagadec patent does not necessarily cover Orange Book-compliant discs. See id. at 1312-13. The subsequent en banc decision did not modify this part of the panel's decision. See Princo II, 616 F.3d at 1326.

The panel agreed, however, with Princo's misuse theory based on Philips' alleged agreement with Sony not to license the Lagadec patent in a manner that would permit competition between the Lagadec and Raaymakers technologies. The panel held that the essential nature of the Lagadec patent could not be used to justify an alleged joint refusal to license the Lagadec patent for non-Orange Book purposes. The panel also rejected the Commission's reliance on a lack of evidence that Sony and Philips would have competed in a market to license the Raaymakers and Lagadec technologies. The panel held that the alleged agreement between Sony and Philips was unlikely to have any efficiencies that they could not achieve through an agreement that would have allowed individual licensing of the Lagadec patent. The panel also rejected Philips' argument that no misuse occurred because the Lagadec patent did not cover a commercially viable technology, concluding that the law should not permit patentees to suppress technologies before they become viable. See Princo I, 563 F.3d at 1313-21.

Judge Bryson dissented. He rejected Princo's tying and package licensing theories, and would not have allowed Princo's theory of patent misuse based on an alleged agreement between Sony and Philips not to license the Lagadec patents by including competing patents in the pool. Judge Bryson concluded that the record contained sufficient evidence to find that the package licenses did not include competing patent rights. In his view, Princo failed to present sufficient evidence that the Lagadec patent covered a substitute technology that might compete with Orange Book-compliant technology. See id. at 1321-26.

IV. The En Banc Decision

Philips, Princo, and the Commission filed petitions for rehearing en banc. In its en banc decision, the Federal Circuit addressed only whether the alleged agreement between Philips and Sony to suppress the Lagadec technology would constitute misuse and provide a defense to Philips' claim of infringement of the Raaymakers patents. See Princo II, 616 F.3d at 1326. Judge Bryson now wrote for a majority of the court, affirming the Commission's decision and finding no misuse.

Narrowly construing the misuse defense, the court explained that patent misuse is a "judge-made doctrine that is in derogation of statutory patent rights against infringement," and noted the court had not applied the doctrine "expansively." Princo II, 616 F.3d at 1321-22. The court reviewed the case law and legislative history related to the misuse doctrine. See id. at 1326-31. While it observed that the need for the doctrine has been questioned, the court noted that the Supreme Court has not overruled its patent misuse cases. See id. at 1329 n.2. The court concluded, however, that this case presented a "completely different scenario." See id. at 1331. It had applied the doctrine of patent misuse to prevent a patentee from "impermissibly broaden[ing] the 'physical or temporal scope' of the patent grant with anticompetitive effect." See id. at 1328 (quoting Windsurfing Int'l, Inc. v. AMF, Inc., 782 F.2d 995, 1001 (Fed. Cir. 1986)). In contrast, Princo based its misuse claim on an alleged agreement to restrict the availability of a patent that Philips had not asserted against Princo, i.e., Sony's Lagadec patent. See Princo II. at 1331.

The court explained that a key element of patent misuse is "patent leverage," which requires that the asserted patent significantly contribute to the misconduct at issue. Princo had failed, however, to establish the required connection between any misconduct and the enforced Raaymakers patents. See id. at 1331-33. The court rejected Princo's argument that Philips leveraged its patents by using the licensing program to effectively pay Sony to suppress the Lagadec technology. The court held that using funds from a lawful licensing program is not the type of conduct against which patent misuse protects. Further, it held that Philips' licensing program did not restrict the availability of Philips' patents and therefore did not use Philips' patents for leverage. See id. at 1332.

The court also rejected Princo's argument that Supreme Court cases do not support a requirement for "leveraging" a patent to establish misuse. In response to Princo's reliance on United States v. United States Gypsum Co., 333 U.S. 364 (1948), and Standard Oil Co. v. United States, 283 U.S. 163 (1931), the court concluded that those cases involved antitrust claims, not patent misuse. Any antitrust violation based on an alleged side agreement between Philips and Sony to suppress the Lagadec technology was unrelated to the issue of misuse of the enforced Raaymakers technology patents. It concluded that the theoretical existence of an antitrust violation based on the Lagadec technology did not yield a defense of misuse of the Raaymakers patents. See Princo II, 616 F.3d at 1332.

The court further held that Princo failed to prove the required anticompetitive effects resulting from the alleged agreement to suppress the Lagadec technology. See id. at 1334-40. The record supported the Commission's finding that the Lagadec technology was not a "viable potential competitor" to the Raaymakers technology. Id. at 1334. The court rejected Princo's argument that patent misuse did not require an anticompetitive effect, and that the court should overturn its line of cases requiring a factual determination of anticompetitive effect for conduct that is not a per se antitrust violation or per se misuse. See id.2 Rejecting Princo's argument, the court pointed to, inter alia, Illinois Tool Works Inc. v. Independent Ink, Inc., 547 U.S. 28, 38 (2006), which described patent misuse as a patentee using its patent "as the effective means of restraining competition with its sale of an unpatented article." Princo II, 616 F.3d at 1334.

The court also rejected Princo's argument that the alleged agreement between Philips and Sony was a naked restraint on competition with no procompetitive justification. The court observed that research joint ventures, the activities of standards setting organizations, and ancillary restraints resulting from agreements between collaborators are analyzed under the antitrust rule of reason. See id. at 1334-36.

Applying a rule of reason analysis, the court concluded that substantial evidence supported the Commission's factual finding that the alleged agreement between Philips and Sony did not suppress a potentially viable alternative to the Orange Book standard. The Commission found that the Lagadec technology was error-prone and did not work well, and that Philips and Sony entered into their pooling arrangement for technical reasons, not as a means for Philips to provide royalties to Sony to suppress the Lagadec technology. In addition, the Commission had found a lack of evidence to support Princo's contention that Philips' licensing program avoided competition from non-Orange Book-compliant discs by including a license to the Lagadec patent in the package licenses. The Commission also had found no evidence that a potential licensee would develop a disc based on the Lagadec technology to compete with Orange Book-compliant discs. See id. at 1336-40.

The court further explained that Princo had the burden to demonstrate an adverse effect on competition, i.e., at least a reasonable probability that the Lagadec technology would have developed into a competitive technology in the market. Based on the Commission's findings, however, Princo had failed to carry its burden. See id. at 1338-39.

Accordingly, the court affirmed the Commission's decision and found no patent misuse. See id. at 1340.

V. Concurring Opinion

Judge Prost concurred in part with the majority, in an opinion joined by Judge Mayer. The concurring opinion agreed with the court's conclusion that the evidence did not support a finding of anticompetitive effect based on the alleged agreement between Philips and Sony, and agreed that Princo had failed to meet its burden of proof. See id. at 1340. The concurring opinion questioned, however, the court's conclusions that patent misuse requires leveraging, and that misuse of the Raaymakers patents is a different issue than the antitrust issue of the alleged suppression of the Lagadec technology. In the concurrence's view, an antitrust violation based on an agreement regarding the Lagadec patent could be relevant to expansion of the scope of the Raaymakers patents. The concurring opinion saw no need to address the precise scope of the patent misuse doctrine, however, because the court could affirm the Commission's decision based on Princo's failure to prove that the alleged agreement between Philip and Sony was anticompetitive. See id. at 1341.

VI. Dissenting Opinion

Judges Dyk and Gajarsa dissented from the majority, in an opinion authored by Judge Dyk. The dissent disagreed with a narrow view of misuse, concluding that Supreme Court cases and legislation support a "vigorous misuse defense." Id. at 1342.

The dissent disagreed with the court's holding that the alleged anticompetitive conduct did not involve any misuse of the Raaymakers patents. See id. at 1345-51. In the dissent's view, the court ignored Supreme Court precedent holding that patent misuse occurs when a patentee uses a patent licensing agreement to "control conduct by the licensee not embraced in the patent monopoly" (quoting Ethyl Gasoline Corp. v. United States, 309 U.S. 436, 456-57 (1940)), or to fix prices and suppress competition from alternative technologies (citing United States v. United States Gypsum, 333 U.S. 364 (1948)). Princo II at 1346. The dissent disagreed with the court's view of Gypsum as just an antitrust case, concluding that Gypsum was one of "the series of decisions in which the Court has condemned attempts to broaden the physical or temporal scope of the patent monopoly." See id. at 1347 (quoting Blonder-Tongue Labs., Inc. v. Univ. of Ill. Found., 402 U.S. 313, 343 (1971)). The dissent further concluded that other courts had cited Gypsum for patent misuse, and that some had applied similar reasoning in copyright misuse cases. According to the dissent, the alleged agreement between Philips and Sony was part of the pooling agreement between the companies that developed CD-R/RW technology. See Princo II at 1347-49.

The dissent also rejected the court's limiting the doctrine of patent misuse to cases in which a patentee leverages a patent. The dissent concluded that the cases requiring leveraging only involved tying and improper patent term extension. In the dissent's view, no leveraging requirement should exist for all misuse. See id. But even if leveraging were required, the dissent found sufficient evidence of leveraging in Sony's alleged agreement not to license the Lagadec technology. It found leveraging in, inter alia, the field of use limitations in the pool licenses that limited the license grant to use of the patents to manufacture Orange Book-complaint discs. See id. at 1344, 1349-50. The dissent concluded that the field of use limitations in the license "preclude[ed] the licensees from developing alternatives to the Orange Book." Id. at 1344.

The dissent further disagreed with court's requiring evidence of anticompetitive effect. Citing Illinois Tool Works, the dissent viewed the doctrine of patent misuse as broader than antitrust law, and concluded that evidence sufficient to establish anticompetitive effect under antitrust law is sufficient to establish anticompetitive effect for patent misuse. See id. at 1351-57.

According to the dissent, the court erred in placing the burden of proof on Princo. In the dissent's view, the burden rested on Philips, because competitive harm is presumed in a "quick look" rule of reason analysis that courts apply to inherently suspect agreements, such as an agreement not to compete. Further, the dissent concluded that, under a conventional rule of reason analysis, Philips still bore the burden of proving a lack of anticompetitive effects. The dissent questioned the court's reliance on the procompetitive benefits of joint ventures, stating that the suppression of the Lagadec patent was not necessary to the joint development of the Orange Book standard. Finally, the dissent disagreed with requiring proof that the Lagadec technology had a reasonable probability of commercial viability. In the dissent's view, the suppression of new technology has no procompetitive benefits, regardless of a technology's prospects. See id. at 1353-55.

VII. Princo's Petition for a Writ of Certiorar

On January 5, 2011, Princo filed a petition for a writ of certiorari. Princo Corp. v. Int'l Trade Comm'n, No. 10-898 (U.S. Jan. 5, 2011). In its petition, Princo challenged the requirements for both leverage and anticompetitive effect. In addition, Princo contended that the misuse doctrine should apply broadly, while the Federal Circuit construed it narrowly. As of the date of this article, Philips' had not yet filed its brief.


1 See U.S. Philips Corp. v. Int'l Trade Comm'n, 424 F.3d 1179 (Fed. Cir. 2005); Monsanto Co. v. McFarling, 363 F.3d 1336 (Fed. Cir. 2004); Va. Panel Corp. v. MAC Panel Co., 133 F.3d 860 (Fed. Cir. 1997); B. Braun Med., Inc. v. Abbott Labs., 124 F.3d 1419 (Fed. Cir. 1997); Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992); Windsurfing Int'l, Inc. v. AMF, Inc., 782 F.2d 995 (Fed. Cir. 1986)).

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