Judges: Rader, Newman, Mayer (concurring-in-part), Lourie, Bryson (author), Gajarsa (dissenting), Linn, Dyk (dissenting), Prost (concurring-in-part), Moore [Appealed from ITC]

In Princo Corp. v. International Trade Commission, No. 07-1386 (Fed. Cir. Aug. 30, 2010) (en banc), the Federal Circuit affirmed the ITC’s determination that the doctrine of patent misuse did not bar the patentee, U.S. Philips Corporation (“Philips”), from enforcing its patent rights against Princo Corporation and Princo America Corporation (collectively “Princo”).

This case began when Philips commenced a proceeding before the ITC, alleging that Princo was importing recordable compact discs (“CDs”) that infringed two of Philips’s patents, referred to as the “Raaymakers patents.” The Raaymakers patents are directed to the encoding of position information on a disc so that a consumer’s CD reader/writer could maintain proper positioning while writing data to the disc. In its defense, Princo asserted that Philips’s Raaymakers patents were unenforceable based on the doctrine of patent misuse. Among other arguments, Princo contended that Philips had improperly forced Princo and other licensees, as a condition of licensing patents that were necessary to manufacture CDs, to take licenses to other patents not necessary to manufacture those products. In particular, Princo alleged that Philips forced its licensees to license Sony Corporation’s (“Sony”) “Lagadec patent,” which is directed to a method of encoding location codes on the disc grooves—an alternative method of encoding to the approach taken in the Raaymakers patents. The approach taken in the Raaymakers patents was selected for incorporation in the standard for manufacturing CDs.

The ITC agreed with Princo that Philips’s patents were unenforceable because Philips’s package licensing practice constituted patent misuse for unlawfully tying patents that were essential for the manufacturing standard to licenses for other patents that were not essential. After the Federal Circuit reversed and remanded, the ITC ultimately rejected Princo’s misuse defense. Princo appealed.

The Federal Circuit agreed to hear the appeal en banc to determine whether an agreement between Philips and Sony to suppress potentially competing technology embodied in Sony’s Lagadec patent would constitute patent misuse and would therefore be a defense to Philips’s infringement claim against Princo. Specifically, the Court considered whether Philips had misused the asserted Raaymakers patents (1) by agreeing with Sony to jointly license the Raaymakers patents together with the Lagadec patent and providing, as part of that agreement, that the alternative technology embodied in the Lagadec patent would not be licensed in competition with the Raaymakers technology; and (2) by securing an agreement from the licensees of the Raaymakers and Lagadec patents barring them from using the Lagadec patent to develop an alternative technology that would compete with the Raaymakers technology. The en banc Court ultimately affirmed the ITC’s finding that the agreements did not constitute misuse.

The Court explained that Philips’s alleged misuse did not involve the Raaymakers patents that were the subject of Princo’s infringing activities. Instead, the alleged misuse concerned an anticompetitive agreement to suppress technology covered by Sony’s Lagadec patent. While an improper anticompetitive agreement to suppress competing technology might have increased the licensing value of the Raaymakers patents, and while such an agreement might itself be vulnerable to challenge under antitrust laws, the Court refused to characterize the agreement as misuse of the Raaymakers patents. According to the Court, a misuse allegation must relate directly to the alleged misused patent and not merely to a collateral agreement that might impact the value of an otherwise enforceable patent. Thus, because the alleged agreement between Philips and Sony did not specifically leverage the Raaymakers patents, it did not impermissibly enlarge the physical or temporal scope of those patents, and the majority was therefore unwilling to immunize Princo against the legal effects of its infringing conduct.

The Court went on to articulate a second reason why Princo could not find protection from infringement prosecution in its misuse allegation—Princo had failed to show either that the alleged agreement to suppress the Lagadec technology was per se anticompetitive, or that, as a factual matter, the agreement’s overall effect was to restrain competition unlawfully in the relevant market. As for Princo’s allegation that the agreement between Philips and Sony was per se anticompetitive, the Court stated that “[a]lthough joint ventures can be used to facilitate collusion among competitors and are therefore subject to antitrust scrutiny, research joint ventures such as the one between Philips and Sony can have significant procompetitive features, and it is now well settled that an agreement among joint venturers to pool their research efforts is analyzed under the rule of reason.” Slip op. at 30 (citation omitted).

While the Court recognized that the Lagadec technology provided a potential alternative to the Raaymakers technology, it ultimately viewed the agreement between Philips and Sony as a legitimate exchange of assurances that the resources invested by one party to a joint venture would not be undermined or competitively exploited to the sole benefit of the other.

Absent a finding of a per se anticompetitive agreement, the Court next considered whether Princo had shown that the challenged agreement had a significant anticompetitive effect under a rule-of-reason analysis, and concluded that it had not. To support its conclusion, the Court noted that the Lagadec technology was not a commercially viable technological alternative to the Raaymakers patents, nor was it likely to become so. Thus, the majority affirmed the ITC’s orders granting relief against Princo.

In a separate concurring opinion, which Judge Mayer joined, Judge Prost agreed that the patent misuse defense was unwarranted in this case because Princo failed to show that the alleged agreement between Sony and Philips had anticompetitive effects. However, Judge Prost took issue with the majority’s view that antitrust considerations are an entirely different issue, separate from the question of whether there has been patent misuse. Instead, Judge Prost explained that whether use of a patent runs afoul of antitrust law seemed probative of whether the patent owner had also misused the patent, and she would not foreclose a finding of patent misuse based, at least in part, on finding an antitrust violation. Unlike the majority, Judge Prost would be willing to consider whether the combined effect of an agreement to license the Raaymakers patents, but not the Lagadec patent, might amount to misuse. However, because Princo’s failure to show that the alleged agreement between Sony and Philips had anticompetitive effects was sufficient to affirm the ITC’s judgment, Judge Prost opted to refrain from articulating the precise metes and bounds of the patent misuse doctrine.

In a separate dissenting opinion, which Judge Gajarsa joined, Judge Dyk viewed Sony and Philips’s noncompete agreement as part and parcel of the agreements governing the asserted Raaymakers patents because the noncompete agreement was designed to protect the Raaymakers patents from competition from the alternative Lagadec technology. The agreement to suppress the Lagadec technology, according to the dissent, was therefore enough to constitute misuse of the Raaymakers patents. As to the anticompetitive effect analysis, Judge Dyk reasoned that an agreement between competitors not to compete was a classic antitrust violation and that, given the inherently suspect nature of Philips’s agreement to suppress the Lagadec technology, the burden should have been on Philips to offer a plausible competitive justification for the restraint.