The United States Court of Appeals for the Federal Circuit’s recent en banc review of the decision in the closely-followed Princo case provides some guidance for patentees looking to ensure that their participation in patent pools does not render their patents unenforceable.1

A patent pool is an arrangement between multiple patentees to cross-license their patents and/or to license their patents to other entities.2 The pool members will often form a joint venture or other separate entity set up specifically to administer the patent pool.3 While un-pooled patents create a situation in which individual patentees can “block” each other and third-parties from developing any commercially-tenable product in a certain technology, licensing from patent pools removes this hurdle, allowing for market entry without fear of hold-up by each individual patentee.

Both courts and the U.S. Department of Justice have recognized that patent pools can provide pro-competitive benefits without violating antitrust laws. However, pool members should be cognizant of specific issues which, if improperly addressed, can place the pool members at risk of an antitrust violation or a finding of patent misuse that could render the patents unenforceable. The en banc Princo decision of the Federal Circuit directly addresses these issues in the context of a patent pool that offered a package license to practice a standard, where the package included an arguably non-essential or non-blocking patent.

I. Princo Overview

The patent pool in the Princo case involved technology related to recordable compact discs (“CD-Rs”) and rewritable compact discs (“CD-RWs”). U.S. Philips Corporation (“Philips”) and Sony Corporation (“Sony”), the principal technology drivers, eventually incorporated the technology into a set of standards known as the “Orange Book.” During development of the of CD-R/RW technology, engineers had to decide on a method of embedding position information into a disc to enable proper operation with a CD reader/writer. Philips proposed an analog technique (embodied in the so-called Raaymakers patents) while Sony devised a digital technique (embodied in the so-called Lagadec patent). The companies eventually incorporated the Raaymakers approach for manufacturing CDs into the Orange Book rather than the Lagadec approach. Apparently, the latter “was prone to error and would have been very difficult to implement.”4

Philips administered an Orange Book licensing program that offered several package licenses for its patents, including the Raaymakers and Lagadec patents. After initially entering into a license agreement, Princo Corp. (“Princo”) stopped paying the license fees. Philips subsequently sued Princo in the International Trade Commission (the “ITC”) to preclude Princo from importing CDs that Philips alleged infringed its patents. Among other things, Princo asserted patent misuse as a defense based on theories of impermissible: (1) tying of essential patents to the Lagadec patent;5 (2) conditioning the grant of a license to a patent on royalty payments for products that do not embody the patent’s claims;6 and (3) price fixing “by agreeing with Sony to not license Lagadec in a manner allowing the further development of the Lagadec technology and the possibility of competition” with the Raaymakers approach.7 A three-judge panel of the Federal Circuit unanimously rejected Princo’s first and second arguments. As to the third, a majority held that the licensing practice, if proven, could constitute patent misuse and, thus, remanded to the ITC for further consideration.8 The Federal Circuit granted a petition for en banc rehearing of the panel’s decision.

II. The Federal Circuit’s En Banc Review

A. Sometimes Non-Essential May Be Essential

The en banc court left undisturbed the panel’s prior unanimous opinions rejecting Princo’s arguments regarding impermissible tying and conditioned license.9 Referencing the pro-competitive efficiencies along with the inherent uncertainties related to patent pools, the panel defined a blocking patent as “one that at the time of the license an objective manufacturer would believe reasonably might be necessary to practice the technology at issue.”10 Given that Claim 6 of the Lagadac patent did not explicitly require digital encoding and arguably could read onto the Orange Book Standards, the panel held that no impermissible tying occurred. The panel rejected Princo’s argument regarding impermissible conditioning of a license for the same reason.11

The standard adopted by the Federal Circuit effectively means that certain patents eventually regarded as non-essential (or non-infringing by a court) to practice a certain technology nevertheless may be essential for purposes of determining whether impermissible tying has occurred. This will make it harder for defendants to prevail on a patent misuse defense based on an impermissible patent-to-patent tying theory. On the other side of the equation, patentees will have more certainty when deciding whether to offer their patents in a package license. They may feel more comfortable including related patents and even patent applications, even though the latter may end up requiring much more than what is necessary to practice a technology before ultimate issuance or may not issue at all. This is not to say that patentees are relieved of all burden to avoid tying truly unrelated or irrelevant patents to core patents. To maintain their most defensible position, patentees should likely try to ensure that tying of the more tangential patents reasonably might be necessary to practice the technology at issue. As the Princo decision hints, a “reasonable” determination may require careful review of anything relevant to claim construction at the time a license is executed.12

B. Leverage Required For Patent Misuse

On the price-fixing issue, the en banc court held that even if an agreement to suppress the Lagadec patent existed and had an anticompetitive effect, “a horizontal agreement restricting the availability of Sony’s Lagadec patent would not constitute misuse of Philips’s Raaymakers patents or any of Philips’s other patents in suit.”13 A finding of patent misuse requires the patentee to have “leveraged” the patent beyond those uses “within the reach of the monopoly granted by the Government.”14 “Patent misuse will not be found when there is no connection between the patent right and the misconduct in question.”15 Even though a Philips-Sony agreement might arguably constitute an antitrust violation, the court held that no misuse occurred because no connection existed between the asserted patents and the alleged misconduct. It is notable, however, that four concurring and dissenting judges argued that an antitrust violation may constitute misuse in certain situations.

On this point, the en banc majority seemed to indicate that Philips’s power, if any, to secure an agreement with Sony to suppress the Lagadec patent did not come from Philips’s patents, and therefore, this situation cannot constitute misuse. One might argue that the majority’s holding would allow patent pools the ability to freely set up arrangements such as Philips’s alleged arrangement with Sony. Even if that situation always precluded a finding of patent misuse (which is not certain given the split in the en banc opinion), this behavior may still constitute an antitrust violation. The court implied that Princo’s true complaint is that the Lagadec patent is not available separately from the Orange Book license.16 Therefore, patent pools with arguably non-essential patents may want to make those non-essential patents available separately to largely foreclose the patent misuse defense. Indeed, patent pools may consider offering all patents in a stand-alone license given the uncertainty of designating a patent as essential from an ex ante perspective.

C. More Leeway Granted To Joint Ventures And Non-Viable Technologies

Moving to the question of antitrust violation, the Federal Circuit characterized the general arrangement between Philips and Sony as a research joint venture, which typically has pro-competitive features.17 The court explained that joint ventures and the ancillary restraints that often accompany them, such as agreements not to compete against the joint venture, are assessed under the antitrust rule of reason. The court rejected Princo’s argument that the putative agreement between Philips and Sony to suppress technology was not “ancillary” and further that Sony developed the digital encoding technology independently.18 It noted that the panel found that the Lagadec patent stemmed from joint efforts and nothing in Princo’s arguments persuaded the court otherwise.

The court declined to answer whether Philips and Sony actually agreed to suppress the Lagadec technology because they found that, even if they did, it did not suppress a potentially viable technology that could have competed with the Orange Book. They supported this holding with factual findings made by the ITC that the Lagadec technology did not work well technically nor was it likely to do well commercially. Though suppression of nascent technology may be found to be anticompetitive in some circumstances, “Princo had to demonstrate . . . a ‘reasonable probability’ that the Lagadec technology, if available for licensing, would have matured into a competitive force in the storage technology market.”19 In the court’s estimation, Princo failed to meet that burden.

The court’s opinion gives more leeway to joint ventures set up to administer patent pools when considering antitrust violations. Timing may be one thing to consider when determining whether an ancillary restraint is “ancillary.” If Sony’s Lagadec patent had been developed before the joint research venture came into existence, the court might perhaps have come to a different conclusion. Theoretically, the court still would have analyzed the agreement to suppress for anticompetitive effects under the rule of reason standard, but a pro-patentee result in this scenario seems less likely. Therefore, patentees should be careful when pooling their patents after independently developing them. Likewise, patentees should evaluate whether their patents embody technically-sound, potentially-viable technologies before pooling them with potentially-competing alternatives.