A recent en banc decision by the Federal Circuit has clarified the scope of the patent misuse doctrine, holding that under Supreme Court precedent a misuse defense is available only where a patent owner has imposed a condition that both broadens the physical or temporal scope of the patent and has an anticompetitive effect. The specific issue considered by the court was whether an alleged agreement between U.S. Philips Corp. and Sony Corp. to suppress technology embodied in one patent that was part of a package of licensed patents would render other licensed patents unenforceable. The court held that the alleged conduct of Philips and Sony did not constitute patent misuse and thus affirmed the Commission’s decision in favor of Philips. Princo Corp. v. International Trade Commission, No. 2007-1386 (Fed. Cir. Aug. 30, 2010).

Background

In the 1980’s and 1990’s Philips and Sony entered into a collaborative research arrangement to develop digital storage devices, CD-R and CD-RW discs, which eventually led to the creation of an industry standard for this technology called the Orange Book standards. The development of this technology also resulted in a variety of patents. During this collaboration, Philips and Sony individually developed a solution for maintaining the proper positioning of a disc while writing data to the disc. Sony used a digital method that was covered by the “Lagadec patent.” Philips used an analog method that was covered by two “Raaymakers patents.” Ultimately, Philips and Sony determined that the Orange Book standards should use the technology contained in the Raaymakers patents.

Upon completing development of the digital storage device technology, Philips and Sony sought to commercialize the technology through licensing a package of patents covering the manufacture of this technology according to the Orange Book standards. Philips administered the licensing program and paid royalties to Sony. The licensing package included patents that Philips “regarded as potentially necessary to make Orange-Bookcompliant” discs, including the Lagadec and Raaymakers patents.

In the late 1990’s Princo entered into a licensing agreement with Philips in order to manufacture discs in compliance with the Orange Book standards for importation into the United States. Princo, however, failed to pay the licensing fees. Philips filed a complaint with the International Trade Commission alleging that Princo was violating 19 U.S.C. §1337(a)(1)(B) by reason of its importation of discs that infringed several of Philips’s patents, including the Raaymakers patents. Princo raised the affirmative defense of patent misuse. Princo argued that the licensing package improperly tied patents necessary to the Orange Book standards to unnecessary patents, including the Lagadec patent; that the packaging constituted price fixing and price discrimination; and that including the Lagadec patent in this package prevented Sony from developing or licensing this technology as a competitive alternative to the Orange Book standards.

A divided three judge panel of the Federal Circuit disposed of many of these arguments in Princo Corp. v. Int’l Trade Comm’n, 563 F.3d 1301 (Fed. Cir. 2009). The panel rejected the argument that Philips had engaged in improper tying by including the Lagadec patent in the Orange Book license packages. The panel noted that package licenses could have “procompetitive efficiencies such as clearing possible blocking patents, integrating complementary technology, and avoiding litigation.” The court explained that the inclusion in a package license of the patents that are necessary to enable the practice of the particular technology “is not tying of the type that patent misuse doctrine seeks to prevent.” Because the court concluded that it would have been reasonable for a manufacturer to believe that a license under the Lagadec patent was necessary to practice the Orange Book technology, and because “one of the major potential efficiencies of package licensing in the context of innovative technology is the avoidance of ‘uncertainty that could only be resolve through expensive litigation,’” the court ruled that the “inclusion of the Lagadec patent in the patent pool did not give rise to an illegal tying arrangement.”

The panel also unanimously rejected Princo’s argument that Philips had violated the principle of Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 135 (1969), that “conditioning the grant of a patent license upon payment of royalties on products which do not use the teaching of the patent [is] misuse.” Because, at the time the package licenses were executed, “it appeared that Lagadec reasonably might be necessary to manufacture Orange Book compact discs,” the panel concluded that “it cannot fairly be said on these facts that a royalty is paid on products which do not use the teaching of the Lagadec patent.”

On one issue, however, the panel majority ruled against Philips. It held that further consideration should be given to Princo’s argument that Philips and Sony agreed to suppress the Lagadec technology, thereby preventing the development of alternatives to the licensed technology. According to Princo, this constituted patent misuse under a theory of elimination of competition or price fixing. Accordingly, the panel directed the Commission to reexamine the record to determine whether “Philips and Sony agreed not to license Lagadec in a way that would allow a competitor ‘to develop, use or license the [Lagadec] technology to create a competing product,’” i.e., a product that would compete with the technology of the Raaymakers patents, and whether, if there was such an agreement, the suppressed technology “could not have been viable,” which would “negate a charge of misuse.”

One judge dissented, stating that there was no patent misuse as a factual matter based on the Commission’s findings that the Lagadec technology did not work well and would not have competed with the Orange Book technology.

Philips, Princo, and the Commission all filed petitions for rehearing en banc, raising a number of issues. The court granted rehearing en banc on only one of those issues: Philips’s argument that regardless of whether Philips and Sony agreed to suppress the technology embodied in Sony’s Lagadec patent, such an agreement would not constitute patent misuse and would not be a defense to Philips’s claim of infringement against Princo.

The En Banc Opinion

In an opinion by Judge Bryson, the en banc court reviewed the history of the patent misuse doctrine. The court noted that patent misuse is a nonstatutory defense to patent infringement that dates back to the early 1900’s. The court stated that a patent owner has a broad range of options available to him in licensing his invention and that traditionally patent misuse has been applied narrowly to cover specific practices that could extend the patent beyond the statutory limits. Thus, the key inquiry to determine patent misuse is whether the patentee has imposed a condition that impermissibly broadens the physical or temporal scope of the patent such that it has an anticompetitive effect on the market. The court emphasized, however, that a violation of the antitrust laws does not necessarily constitute patent misuse merely because it involves a patented product or process.

The court determined that the collaborative agreement between Philips and Sony was initiated to take advantage of the technical contributions of both parties. The parties ultimately agreed to place the Raaymakers patents in the Orange Book standards because this technology was more reliable than the technology covered by the Lagadec patent. Princo argued that the Raaymakers patents were unenforceable due to patent misuse because Philips and Sony agreed to restrict the availability of the Lagadec patent by including it in the licensing package which had a field of use provision restricting licensees to manufacturing discs that only complied with the Orange Book standards. However, the evidence showed that the Lagadec patent technology was prone to errors and thus unreliable. Therefore, the court found no evidence to support Princo’s contention that anyone might develop the Lagadec technology to compete with the Orange Book standard discs. Thus, Princo failed to meet the burden of showing that the alleged agreement between Philips and Sony had an actual anticompetitive effect in the relevant market.

Moreover, the Lagadec patent was not asserted in the underlying litigation. The court found that the licensing package offered by Philips did not impose restrictive conditions on the use of the Raaymakers patents to enlarge the scope of those patents. The court stated that even if Philips and Sony entered into an agreement as alleged by Princo, and if that agreement had anticompetitive effects on the market, such conduct would not be a misuse of the Raaymakers patents or any other patent that Philips alleged that Princo infringed because it did not broaden the scope of those patents.

Conclusion

The Federal Circuit’s en banc Princo decision holds, consistently with Supreme Court precedent, that patent misuse is a narrow affirmative defense that is available when a patent owner has imposed a condition that would broaden the physical or temporal scope of the patent with an anticompetitive effect. Wrongful conduct, such as an antitrust violation, does not by itself establish misuse of the patent. Rather, a party asserting a misuse defense must show that the conduct has an anticompetitive effect and that the scope of the patent in question is broadened by such conduct.