13 September 2010

Antitrust Alert: Federal Circuit Decision Limits Patent Misuse and Distinguishes It From Antitrust

Jones Day


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The U.S. Court of Appeals for the Federal Circuit issued an en banc decision with significant implications for the doctrine of patent misuse.
United States Antitrust/Competition Law
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The U.S. Court of Appeals for the Federal Circuit issued an en banc decision with significant implications for the doctrine of patent misuse. The decision issued last week overturns part of a Federal Circuit panel decision last year holding that Philips may have committed patent misuse by entering into a patent pool agreement with Sony and others pursuant to which Sony agreed not to license a potentially competing patent outside the patent pool. Princo Corp. v. International Trade Commission, 2007-1386 (Fed. Cir., August 30, 2010). The decision restricts patent misuse to situations in which a patent holder uses a patent to leverage its power beyond the scope of the patent. By distinguishing patent misuse from antitrust law, the decision opens the possibility that a patent holder's conduct may violate the antitrust laws but not constitute patent misuse, thus permitting the patent holder to enforce its patent in court or before the International Trade Commission despite the conduct in question and the possibility of antitrust liability.


The decision arises from patent pools formed by Philips, Sony, Taiyo Yuden, and Ricoh to combine and license patents for use in the manufacture of CD-Rs and CD-RWs. The four companies developed standards for recordable CDs, which they published in a format known as the "Orange Book." Among the technologies in the standard was a technology to determine the position of the laser on the disk. Philips had an analog version of this technology; Sony had a digital version. The Philips version was included in the Orange Book standards. The four companies then pooled their patents necessary for the manufacture of these standards. The Sony patent was included in the pool, although it was ultimately determined not to be necessary to practice the Orange Book standards. Philips acted as administrator of the patent pool. Philips permitted third parties to license certain pre-determined packages of patents, but did not permit third parties to license individual patents.

Princo had taken a license to the patent pool, but subsequently stopped paying royalties. Philips sued Princo before the ITC for infringement of two of its patents. Initially, the ITC refused to enforce Philips' patents on the ground that Philips committed per se patent misuse by improperly bundling patents in the pool. The Federal Circuit overturned the ITC decision in Philips Corp. v. International Trade Commission, 424 F.3d 1179 (Fed. Cir. 2005). The Federal Circuit held that bundling and pooling of patents must be evaluated under a rule of reason analysis, and thereby set a fairly high threshold for establishing anticompetitive harm with respect to the combination and licensing of patents within a patent pool.

The Federal Circuit panel decision

On remand, applying a rule of reason analysis, the ITC rejected Princo's argument that Philips misused its patents. Princo appealed. In April 2009, a three-judge panel of the Federal Circuit found that Philips did not commit patent misuse by including the non-essential Sony patent in the pool. The panel applied a flexible standard of essentiality. Princo Corp. v. International Trade Commission, 2007-1386 (Fed. Cir., April 20, 2009). The court held that a patent could qualify as essential if, at the time of the license, an objective manufacturer would have believed that a license to the patent "reasonably might be necessary" to practice the Orange Book standards. The fact that the patent ultimately might be proved non-essential would not affect this determination. The panel's decision was a welcome acknowledgement of the difficulties of predicting, at the time a patent pool is formed, whether particular patents ultimately may be found necessary to manufacture the underlying standard. The approach adopted by the Federal Circuit protects pool members against second-guessing if one or more patents reasonably included in a pool ultimately are found not to be essential. This decision was not part of the en banc reconsideration.

By a 2-1 majority, however, the panel also held that Philips and Sony may have committed patent misuse by agreeing that Sony would not license its patent outside the patent pool. Princo alleged that this prevented Sony from licensing its patent to any third party to create a product that would compete with Orange-Book-compliant CD-Rs and CD-RWs. The Federal Circuit panel majority held that an agreement not to license Sony's patent for a competing use could constitute patent misuse, stating "[i]t is one thing to offer a pooled license to competing technologies; it is quite another to refuse to license the competing technologies on any other basis." The panel remanded to the ITC to determine whether the Philips and Sony technologies in fact competed and whether Philips and Sony had reached an agreement not to license the Sony patent for other uses.

The Federal Circuit en banc decision

In a rare en banc decision, the full Federal Circuit vacated and reversed the latter portion of the panel decision. The six-member majority opinion limited patent misuse to conduct involving "patent leverage," in which the patent holder uses "the patent power" to impose "overbroad conditions on the use of the patent in suit that are 'not within the reach of the monopoly granted by the Government.'" Princo, 2007-1386 (Fed. Cir., August 30, 2010), slip op. at 24. The en banc majority found that an agreement between Philips and Sony restricting Sony from licensing its potentially competing patent outside the pool did not place any conditions on the availability of Philips' patents and so did not misuse the power of the Philips patents at issue in the lawsuit. The en banc majority distinguished between patent misuse and an antitrust violation, stating that "[w]hile proof of an antitrust violation shows that the [patent holder] has committed wrongful conduct having anticompetitive effects, that does not establish misuse of the patent in suit unless 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." Princo, slip op. at 19. The en banc majority further held that Princo had failed to prove that Sony's technology was a viable technology that potentially competed with that of Philips. Two judges concurred in the result on separate grounds and two judges dissented.

Implications of the Princo decision

The Princo decision is the latest in a series of decisions issued in the past 25 years limiting the doctrine of patent misuse. Beginning with Windsurfing Int'l, Inc. v. AMF, Inc. in 1986, the Federal Circuit held in a series of cases that patent misuse applies only to conduct that impermissibly broadens the scope of a patent "with anticompetitive effect." 782 F.2d 995, 1001 (Fed. Cir. 1986). Ironically, the Federal Circuit applied principles of antitrust law to the determination of whether conduct in question caused such anticompetitive effect. These decisions brought the doctrine of patent misuse into fairly close alignment with antitrust law, although an antitrust plaintiff typically had to satisfy certain additional elements, including antitrust standing and injury. As a result, with respect to patent-related misconduct, antitrust liability in effect was a subset of patent misuse. In the words of the Federal Circuit, "conduct that is insufficient to support a misuse defense cannot support an...antitrust judgment." Virginia Panel Corp. v. MAC Panel Co., 133 F.3d 860, 868 (Fed. Cir. 1997).

The Princo decision continues this trend of narrowing the doctrine of patent misuse. But by divorcing patent misuse from antitrust law, the Princo decision significantly altered the prior relationship between them. The Federal Circuit specifically contemplated that patent-related conduct may constitute patent misuse without giving rise to antitrust liability, but now such conduct equally may create antitrust liability without amounting to patent misuse. Following Princo, it will be important to evaluate separately whether particular patent-related conduct may amount to patent misuse or an antitrust violation.

The Princo decision may also affect the litigation of certain patent infringement cases. In particular, it may make it more difficult for alleged infringers to raise certain affirmative defenses in patent infringement litigation. Alleged infringers may only be able to challenge certain patent-related conduct by filing an antitrust claim or counterclaim (assuming the additional elements of an antitrust claim are satisfied). The Princo decision may prove to be a further factor encouraging patent-holders to bring enforcement actions before the ITC. Because the ITC lacks jurisdiction to hear antitrust counterclaims, it will likely be impossible for alleged infringers to introduce certain patent-related conduct into patent enforcement actions brought at the ITC. Although alleged infringers could file a separate antitrust action in federal court, the ITC procedures ensure that the patent enforcement action is likely to be decided long before any separate antitrust claim.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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