En Banc Federal Circuit Decision Clarifies Permissible Conduct By Patent Pools And Other Joint Ventures Under The Patent Misuse Doctrine

Monday, December 6, 2010 - 01:00

In Princo Corp. v. International Trade Commission ,1the en banc U.S. Court of Appeals for the Federal Circuit addressed whether certain licensing practices related to a patent pool involving optical disc-related patents constituted patent misuse. The decision provides guidance for patent holders that want to license their patents through pools for use in implementing industry standards, or to engage in other joint conduct concerning related patent rights.


Princo involves a patent pool administered by U.S. Philips Corporation ("Philips") relating to the "Orange Book" standard for recordable and rewritable optical disc technology that was developed by Philips, Sony, and other companies. The legitimacy of this patent pool under competition law principles has been litigated around the world, including in Germany, the Netherlands, and Taiwan. In the United States, Philips sued Princo Corp. ("Princo") for infringement before the International Trade Commission (the "Commission"). The Commission held that Princo infringed six Philips patents and rejected Princo's patent misuse defense.

Princo alleged that Philips committed patent misuse based on two theories: (1) that Philips included a Sony patent that was not essential to the standard in the Orange Book patent pool along with Philips patents that were essential to the standard (the "tying theory"); and (2) that Philips agreed with Sony not to license the Sony patent for use in technologies that compete with the Orange Book standard (the "price-fixing theory").

The Federal Circuit panel decision held that Philips did not commit patent misuse based on the tying theory because the Sony patent was essential to the standard.2However, the panel majority held that Philips could have committed patent misuse based on the price-fixing theory and remanded the case to the Commission for a final determination.3

The Federal Circuit granted rehearing en banc and reinstated the tying portion of the panel decision. The en banc majority reversed the price-fixing portion of the panel decision, however, on two grounds. First, it held that even if an agreement restricted competition related to one patent, such an agreement could not constitute misuse of a different patent that was being asserted in an infringement suit.4Patent misuse requires some kind of "leveraging" of the asserted patent that impermissibly broadens its scope.

Second, the majority concluded that Princo did not meet its burden of proving anticompetitive effects of the alleged agreement because (1) the parties acted legitimately in choosing not to compete against their own joint venture and (2) Princo failed to demonstrate a reasonable probability that the Sony patent could have become a viable competing technology.5

The Tying Theory

The en banc court reinstated the panel decision, which held that inclusion of the Sony patent in the pool did not constitute misuse based on tying because one claim of the patent could have been seen as blocking the implementation of the Orange Book standard.6

The panel decision noted patent pools can generate many procompetitive efficiencies. Prohibiting the inclusion of an arguably essential patent because it might ultimately prove not to be essential would undercut or eliminate those efficiencies.7

The panel decision also clarified the standard for determining whether a pool administrator can include a patent in a package license without committing misuse: "[P]erfect certainty is not required to avoid a charge of misuse through unlawful tying. Rather, in this context a blocking patent is one that at the time of the license an objective manufacturer would believe reasonably might be necessary to practice the technology at issue."8

Princo could provide more certainty for patentees that administer patent pools, as it may be more difficult for accused infringers to assert a successful misuse defense based on a tying theory. The Princo standard for identifying essential patents also could have implications for patent holders outside of the patent-pool context. For example, the question of whether a patent settlement has anticompetitive effects can hinge on whether the patents at issue are blocking patents for the settling parties. By providing a relatively low threshold for essentiality, the Princo decision could make it harder for challengers to prove that a license or cross-license entered into as part of a settlement agreement is anticompetitive.

The Price-Fixing Theory

The Federal Circuit reversed the price-fixing portion of the panel decision and held that Philips had not committed patent misuse based on that theory.

The en banc majority agreed with Philips's argument that "regardless of whether Philips and Sony agreed to suppress the technology embodied in Sony's [] patent, such an agreement would not constitute patent misuse."9

The majority reviewed the history of the patent misuse doctrine and explained that, under Supreme Court precedent, "the key inquiry under the patent misuse doctrine is whether, by imposing the condition in question, the patentee has impermissibly broadened the physical or temporal scope of the patent grant and has done so in a manner that has anticompetitive effects ."10

The baseline for measuring whether a patent holder has broadened the scope of the patent is already broad and "begins with substantial rights under the patent grant."11Accordingly, patent misuse is a narrow doctrine that "has largely been confined to a handful of specific practices" that involved extending the scope of the patent grant.12

The majority concluded that patent misuse must involve some type of "patent leverage" that extends the scope of the patent grant.13An unrelated antitrust violation - such as a separate agreement between two competitors to suppress a different technology - cannot form the basis for a misuse defense. In sum, "it does not follow from the possible existence of an antitrust violation" with respect to a nonasserted patent that a patent holder has misused the asserted patent.14

Princo may allow patentees greater latitude in setting rules relating to patent pools, as it may be harder for accused infringers to assert a successful misuse defense based on alleged price-fixing or some other behavior that arguably violates the antitrust laws. Notably, the accused infringer has to prove "leveraging" of the patent-in-suit that impermissibly broadens the scope of the patent beyond the statutory grant. Other behaviors that could constitute antitrust violations, such as engaging in horizontal agreements not to compete, might not constitute misuse unless they involve such leveraging.

Two concurring judges agreed that Philips had not committed patent misuse. They explained that the alleged agreement was similar to Sony's granting an exclusive license to Philips, which Philips then decided not to practice.15The concurring judges felt, however, that the majority might have unnecessarily narrowed the scope of the misuse doctrine and that an antitrust violation might provide the basis for a misuse claim.16

Two judges dissented, arguing that the majority opinion would "emasculate" the doctrine of patent misuse in contravention of Supreme Court precedent.17To them, the "critical question is whether the existence of an antitrust violation - in the form of an agreement to suppress an alternative technology designed to protect a patented technology from competition - constitutes misuse of the protected patents."18They argued that it does. In particular, they found that the purported agreement between Philips and Sony was "part and parcel" of the conduct designed to protect the asserted patents from competition and thus could constitute misuse of those patents.19

Evaluation Of Anticompetitive Effects

While Princo's inability to show leveraging was fatal to its misuse defense, the majority also explained that Princo failed to show that the purported agreement between Philips and Sony had any anticompetitive effects.20

In finding that there were no anticompetitive effects, the majority used a different framework than the dissent would use for evaluating restraints that are ancillary to a joint venture. First, the majority explained that "Philips and Sony acted legitimately in choosing not to compete against their own joint venture."21Second, Princo failed to prove that the Sony technology was a viable potential competitor to the Philips patents.22

The majority emphasized many of the procompetitive aspects of joint ventures created to develop and commercialize new technologies.23Ancillary restraints, such as agreements not to compete against the venture, are assessed under the rule of reason and thus such restraints must cause anticompetitive effects in order to be condemned. Princo thus had the burden of showing an "actual adverse effect on competition in the relevant market."24

In contrast, the dissenting judges characterized the parties' agreement not to compete as not having been essential to the parties' collaboration and thus found the horizontal restriction on competition to be "inherently suspect."25

The dissenting judges cited the Supreme Court's recent American Needle decision insofar as it "made clear that otherwise anticompetitive agreements with respect to intellectual property are not justified simply because they are part of a joint agreement."26The dissenters would have applied a "quick look" analysis to the horizontal restriction, placing the burden on Philips to come forward with a competitive justification for the restraint.27

Another issue addressed by the majority and the dissent was the impact on potential competition or nascent competitors. The majority acknowledged that "the suppression of nascent threats can be construed as anticompetitive behavior under certain circumstances."28But, given that it viewed the restriction as arising out of a bona fide joint venture, the majority specified that Princo "had the burden of showing that the hypothesized agreement had an actual adverse effect on competition in the relevant market."29

Specifically, the majority held that Princo had to demonstrate "a 'reasonable probability' that the [Sony] technology, if available for licensing, would have matured into a competitive force in the storage technology market."30Princo failed to meet that burden, in the majority's opinion.

The dissenting judges thought that the majority opinion did not go far enough in protecting potential and emerging competition, noting that "[i]t is vitally important to protect competition from being stifled in its infancy."31

The dissenting judges pointed to the D.C. Circuit's Microsoft decision, which emphasized that it "would be inimical to the purpose of the Sherman Act to allow monopolists free reign to squash nascent, albeit unproven, competitors at will - particularly in industries marked by rapid technology advance and frequent paradigm shifts."32However, the dissent did not address whether the Orange Book standard had attained market power at the time that the purported agreement to restrict competition between Philips and Sony was made.

Eugene L. Chang is a Partner in the Willkie Farr & Gallagher LLP Intellectual Property and Litigation Departments, David K. Park is Special Counsel in the Litigation Department, and Heather M. Schneider is an Associate in the Intellectual Property Department. U.S. Philips Corporation is a client of Willkie Farr & Gallagher LLP. © 2010 by Willkie Farr & Gallagher LLP. All rights reserved.

Please email the authors at echang@willkie.com, dpark@willkie.com, or hschneider@willkie.com with questions about this article.