Any company involved in patent licensing or litigation that concerns technology subject to patent rights “pooled” among multiple companies (such as when competitors have jointly-developed industry standards patent pools) should pay close attention to an en banc hearing that will take place in Princo Corporation v. International Trade Commission in 2010.1 At present, the parties, the NYIPLA, and the AIPLA are preparing briefs on the patent misuse issues that the Federal Circuit specifically identified in its October 13, 2009 order granting en banc review.2 In this case, the Federal Circuit may decide whether it is patent misuse for patent owners, who create a patent pool for technology that is also subject to other companies’ patents, to agree among themselves not to license a pooled patent for a potentially competing technology outside of the pool.3

Background

The root of the patent misuse issues in Princo started in the late 1980s and early 1990s, when U.S. Philips Corporation and Sony Corporation jointly developed the technical industry standards (called the “Orange Book”) for the production of CD-R and CD-RW discs. Philips developed and patented an analog method for encoding position data on a blank disk to determine position (“Raaymakers patent”). Sony developed and patented a digital method for doing the same (“Lagadec patent”). Philips and Sony, nevertheless, chose to define the Orange Book standard using only Philips’s analog approach. However, when Philips and Sony and two other companies agreed to pool their patents that covered the Orange Book standard, they also included Sony’s Lagadec patent in the patent pool’s joint license, even though this patent did not cover the chosen analog approach described in the Orange Book.

Princo Corporation and Princo American Corporation originally took a license to the Orange Book pooled patents but they quickly stopped paying royalties, insisting they should not have to pay royalties for a variety of reasons, including patent misuse on the part of Philips. Though Princo did not dispute that its products were covered by the patent pool, it asserted that Philips’s and Sony’s agreement not to license the Lagadec patent outside the patent pool was patent misuse because that agreement prevented the development of a technology that competed with the Orange Book technology.4 Princo’s nonpayment of royalties resulted in Philips filing a complaint against Princo before the International Trade Commission (“Commission”), where Philips claimed that Princo, among others, imported CDs that infringed Philips’s patents. The Commission’s administrative law judge and the Commission ruled in Princo’s favor, finding patent misuse.5 However, Philips appealed and the Federal Circuit reversed and remanded.6 On remand, the Commission rejected Princo’s misuse defense. 7 Princo then appealed and asserted the Commission erred because Philips’s conditional licensing of essential patents for production of Orange Book compliant CD-R and CD-RW discs upon the purchase of a license to the Lagadec patent was patent misuse, as was Philips’s agreement with Sony not to license the Lagadec patent as competing technology to the Orange Book.

On April 20, 2009, a Federal Circuit panel issued a decision after reviewing an International Trade Commission ruling in Princo. The Panel Decision rejected Princo’s argument that the Lagadec patent was not necessary to practice the technology of the Orange Book standard,8 but it also remanded to the Commission for further fact-finding on whether Sony and Philips had agreed not to license the Lagadec patent.9 In its en banc order, the Federal Circuit vacated its Panel Decision, granted the petitions for rehearing en banc filed by Philips and the Commission, and reinstated the appeal filed by Princo.10 Princo’s reinstated appeal will now be decided by the Federal Circuit sitting en banc, after the parties file new briefs primarily addressing Section II of the Panel Decision.11

Arguments Addressed By The Princo 2009 Panel Decision

Generally, Section II of the Panel Decision, on which the en banc court will focus, addressed whether the Lagadec patent was a viable alternative to the technology licensed through the Orange Book patent pool, and whether Philips and Sony did agree not to license the Lagadec patent in a way that would permit a competitor to develop, use, or license the Lagadec patent’s technology to create a competing technology.

Thus, in its en banc decision, the Federal Circuit will likely address whether and when the patent misuse doctrine will apply to pooling arrangements in which participants agree not to license a patent outside of the pool. First, it is unclear whether the court has viewed the relationship between Sony and its patents and Philips and its patents as a vertical or horizontal relationship. In the Panel Decision, the panel discussed the “the appropriate standard under the rule of reason,”12 as if it was the correct standard to apply to the relationship between Sony and Philips. However, in contrast, the Panel Decision also identified the Lagadec patent as “a pool competitor to the Raaymakers pool patents,”13 rejected Philips’s characterization of the licensing agreement with Sony as tantamount to a merger that would make the question of competition moot,14 and implied that Philips and Sony were “horizontal competitors.”15

If the Federal Circuit concludes the relationship between Sony and Philips was vertical (i.e., one in which the parties own complementary patents), the court will likely apply a rule of reason analysis, which balances the procompetitive and anticompetitive effects of the restriction, to determine if there was patent misuse. However, if the Federal Circuit views the relationship between Sony and Philips as horizontal (i.e., one in which the parties own competing patents), then there will be the potential that the court would find the agreement to be per se patent misuse. The fundamental question the court must answer is whether procompetitive benefits of the patent pool potentially justify an agreement not to license outside of the pool. If so, the court would apply a rule of reason analysis even though the relationship is horizontal. If not, the court could apply a per se analysis.

Second, if the Federal Circuit concludes that the purported agreement between Philips and Sony is subject to a rule of reason analysis, it is unclear whether, on remand, the Federal Circuit will provide instructions on how the Commission should determine the relevant market in which to evaluate the effects of the purported agreement and whether there is market power. For example, although the “relevant market” was already determined by the Commission, the Panel Decision has also cited a couple of markets that could be considered the “relevant market.” The “relevant market” could be the market for the licensing of the technology covered by the Lagadec patent,16 the market for the technology of the Raaymakers patented processes or products,17 or even the patent pool market.18

This case could have a significant impact on the kinds of agreements that patent owners, who are forming a pool, may enter into with each other, and how licensees regard these agreements. If the Federal Circuit decides the agreement in Princo was per se patent misuse, patent pool owners will not be able to agree not to license pooled patents that arguably involve substitutable technologies outside of the pool without fear that they will violate the patent misuse doctrine. Equally, potential licensees of pooled patents will then be able to insist on paying royalties only on the patents that actually cover the competing technology being licensed. And if a potential licensee discovers that any of the patents in the pool disclose alternative, substitutable technologies to the licensed technology, that potential licensee may be able to use this discovery in negotiations against the patent pool owners, or if later sued for patent infringement, raise patent misuse as a defense against the patent pool owners.

If, on the other hand, the Federal Circuit decides that the rule of reason applies to pooling arrangements in which participants agree not to license a patent outside of the pool, the competitive effects of entering into such an agreement could expose pooling arrangements to patent misuse claims. Though this would make it harder for a former licensee sued for patent infringement to prove a patent misuse claim than under a per se analysis, such companies will still be able to raise questions about the patent pool agreement if there is any doubt as to the true nature of the relationship among the patent pool owners, i.e., horizontal as opposed to vertical; the necessity of a patent being part of the pool; or whether a particular patent may apply to a competing, substitutable technology. Thus, until the Federal Circuit issues its en banc decision in Princo, patent owners and licensees should closely scrutinize agreements they may be entering into, particularly if any agreements restrict access to patents.