Patent Pools May be Cool, But Drowning Competitive Technologies is Not

By Thomas Carey.

May 2009 IP Update

The pooling of patents can be an efficient way to promote the exploitation of an invention. This is especially true where different patent owners each have claims to different aspects of a technology, so that the technology cannot be made available without the involvement of multiple patentees.

The most prominent recent example of this is the technology for MPEG compression, which involves the patents of numerous entities (among them, Columbia University, General Electric, Sony and Fujitsu) that are licensed collectively through a specially formed licensing entity, MPEG-LA. In 1997, when MPEG-LA was formed, the concept was so daring from an antitrust perspective that MPEG-LA sought and received clearance from the Department of Justice before proceeding with its patent pool.

While patent pools have become somewhat more common since then, a recurring question is whether a licensor can bundle a package of patents and insist that they are available only on an all-or-nothing basis. This approach has the benefit of simplicity, but may require a licensee to pay for more patent licenses than he needs. Is such a licensing strategy an antitrust violation?

On April 20, 2009, in Princo Corp. v. International Trade Commission, the Federal Circuit Court of Appeals considered this question in a case involving a patent pool covering the manufacture of writable compact disks. The patents in question relate to the manufacture of CDs in accordance with the “Orange Book” standard developed by Philips and Sony Corp.

Philips, Sony and two other Japanese manufacturers contributed their patents covering the technology to a patent pool, which Philips licensed to CD manufacturers.  Royalties were imposed on a per-disk basis, not on the number or identity of the patents infringed.

Philips did not make licenses to individual patents available, and the underlying agreements between Philips and Sony may be viewed as forbidding such licensing other than under extraordinary circumstances.

The popularity that this patent pool initially won among manufacturers soon waned, with many manufacturers ignoring it. To enforce the patents, Philips filed a complaint with the International Trade Commission (ITC), alleging the importation of infringing CDs into the United States.

The ITC initiated an investigation in 2002 that encompassed 20 potential infringers. The ITC found that the patent pool was an antitrust violation because it included four non-essential licenses. In 2005, the Federal Circuit disagreed, holding that the patents in question were essential to making CDs that meet the Orange Book standard. It remanded the case for further deliberation.

On remand, one of the affected manufacturers argued to the ITC that one of the Sony patents was improperly included in the pool. That patent covered a digital solution to a problem that the Orange Book standard solved using an incompatible analog solution. The analog solution was covered by a Philips patent included in the pool.

The manufacturer argued that the Sony patent was not essential to the pool and therefore improperly included in it; and also that it was a potentially competitive technology that was suppressed by its inclusion in the pool. (Philips would not license the Sony patent separately.)

The Commission rejected these arguments for reasons that did not persuade the Federal Circuit. On appeal, the Federal Circuit examined the permissibility of two separate licensing practices: the inclusion of the Sony patent in the patent pool; and the refusal to license the Sony patent separately.

In addressing the question of whether it was appropriate to include the Sony patent in the pool, the court asked whether that patent was a blocking patent – one that covered the Orange Book standard and was therefore essential to the production of CDs made to that standard. While the specification of the patent taught a digital technique for solving a particular problem, the patent included one claim that was not so specific, and could be read to encompass an analog technique.

The Federal Circuit said that the Sony patent would be an essential patent if that claim could be viewed as reasonably necessary to practice the Orange Book standard; and that the reasonableness of such a view must be determined in the context of the law in effect when the decision was made to include the Sony patent in the pool.

In light of the unsettled law regarding the role of the patent specification at the time that the patent pool was constructed, the Federal Circuit held that including the Sony patent in the pool was reasonable because its broadest claim would have caused concern to someone considering following the Orange Book standard.

The Federal Circuit then considered the argument that the patent pool had the effect of bundling together two potentially competing technologies, making them unavailable for separate licensing. This allegation, if true, could constitute a horizontal restraint of trade, a classic antitrust violation which in the past had often been practiced by means of patent pools.

In light of this potentially abusive practice, the court stated that the practice of refusing to license separately required a more demanding analysis than the practice of offering the patents as a pool.

The court explained that pooling patents together, particularly patents that cover different aspects of a single product (like a CD), has pro-competitive benefits even if the patents are held by competitors. But, the court said, there are no public benefits to be gained from an agreement between patent holders to forego separate licensing of competing technologies.

The court then mulled over the question of whether and when patents could be viewed as potentially competitive. It said that the fact that a patent’s disclosed embodiments may not be commercially viable cannot end the discussion, because technology disclosed in a patent typically needs further development before achieving commercial viability.

The court observed a continuum of possible legal tests that might be used to determine whether patent misuse exists when arguably competing technologies are pooled together and offered on an all-or-nothing basis. The continuum ranges from “the technology certainly would have been viable” to “it certainly could not have been viable.”

Rather than offer up an answer to the question that it posed, the Federal Circuit included this question among others being remanded to the ITC. Also remanded was the factual question of whether Sony and Philips had agreed not to license the Sony patent separately.

The Princo opinion offers two standards for weighing the propriety of patent pools: a gentle one when the pool facilitates the manufacture of a single product or family of products; and a stringent standard when potentially competing technologies are bundled in the same pool on an all-or-nothing basis. In the latter instance, a per se violation of the antitrust laws might be found.

The most difficult question before the Federal Circuit – how to decide whether a potentially competitive technology is a true contender or merely a fanciful but impracticable idea – was postponed until a later day. The court’s unwillingness to offer up a legal test for the ITC to apply on remand is disappointing, leaving practitioners in the dark until this case, or another like it, bubbles up once again.