The Federal Circuit Hems in the Patent Misuse Doctrine, Making Patent Pooling Safer

By Thomas Carey. A member of our Business Practice Group

September 2010 IP Update

Competitors sometimes choose to share patent rights by pooling their patents and authorizing each entity to license the combined bundle of patents. These arrangements have long been of concern under the antitrust laws because of the opportunity that they provide for competitors to engage in price-fixing, market allocation, and other practices that cross the line under the antitrust laws.[1]

But there are policy considerations that favor patent pools as well, including promotion of industry standards, avoidance of fragmented patent rights that may impede rather than promote progress, and reaping the benefits of collaborative research and development. For that reason, patent pools have often been deemed lawful.

A patent pool is a consortium of companies, often competitors, that license their patents to each other, enabling the companies to pursue technologies that might otherwise have been foreclosed to them.

Those involved in patent pooling have been troubled by two related legal headaches: the specter of antitrust liability, and the concern that the doctrine of patent misuse might invalidate some or all of the patents in the pool. The Federal Circuit’s August 30, 2010 opinion in Princo Corp. v. International Trade Commission eases that second anxiety.

Some background is necessary. Philips Electronics and several Japanese electronics companies, including Sony Corporation, pooled patents related to the creation of writeable CDs and made the pool available through a standard known as the “Orange Book,” published and administered by Philips.

Philips licensed the Orange Book patents solely for practicing the specification set forth in the Orange Book. Sony’s principal contribution was a patent covering a digital means of providing location data on the disc, a technology that the Orange Book ignored in favor of an analog method described in a set of Philips patents.

In a separate agreement with Philips, Sony agreed not to license the patent that it contributed to the Orange Book other than in exceptional circumstances. Thus, the Sony technology, which might have provided the platform for a technology that could have competed with the Orange Book standard, was placed in a deep freeze, in exchange for which Sony received a 36% interest in the Orange Book patent pool.

The Orange Book became the worldwide standard for the manufacture of writeable CDs. Philips charges a royalty rate that ranges from 50% to 67% of the selling price of the discs, which are made by over 100 licensees who manufacture billions of CDs each year. Given these facts, there is no question that Philips has market power in this industry.

The actions of Philips and Sony in conspiring to suppress the Sony technology may have constituted a violation of the Sherman Act or the Clayton Act, but a different legal question was ultimately presented to the Federal Circuit: Did Philips commit patent misuse, rendering its patents unenforceable?

Patent misuse, in a nutshell, is a judicially created defense to a patent infringement claim that can thwart an infringement claim if the patent has been used in an improper manner with anticompetitive effects. A finding of patent misuse can prevent the owner of the patent from enforcing the patent as long as the misuse continues.

The question of Philips’s possible misuse arose as a result of Princo’s entry into the marketplace. Although it originally took a license from Philips, it soon stopped paying royalties. Philips brought an infringement action before the International Trade Commission (ITC) seeking to stop the importation of Princo-manufactured CDs. The litigation has dragged on for years at both the administrative and appellate levels.

One of Princo’s arguments was that Philips and Sony had engaged in an improper scheme to suppress Sony’s digital technology in violation of the antitrust laws, that such conduct constituted patent misuse, and that therefore the Philips patents were unenforceable.

In a 2009 opinion that we reported, a divided panel of the Federal Circuit accepted this argument, overruled the contrary holding of the ITC, and sent the case back down to the ITC for further proceedings. The full Federal Circuit later agreed to re-hear the case.  Amicus briefs were filed on behalf of numerous trade organizations and the Federal Trade Commission.

In its decision of August 30, the Federal Circuit —again, closely divided— ruled that the doctrine of patent misuse does not apply to all antitrust violations, only to those that seek to extend the scope or term of the patents that are sought to be enforced. For example, a patentee might seek to extend the scope of its patent by requiring the licensee to purchase a commodity item exclusively from it as a condition of the license; or expand the term of the patent by imposing royalties that extend beyond the life of the patent.

Since the patent pooling arrangement of the Orange Book did not commit those particular sins with respect to the Philips patents being enforced, the majority held that there was no patent misuse.

In arriving at its narrow definition of patent misuse, the court took its cues from Congress, which enacted section 271(d) of the Patent Act in 1988 to identify a number of practices that do not constitute patent misuse. Among those are a refusal to license; and, more relevant to Princo, tying the license to another product or patent license unless the patent owner has market power in the relevant market.

An earlier proceeding had concluded that Philips had the necessary market power, so this statute was not of direct benefit to Philips. Nonetheless, the court said:  “Importantly, Congress enacted section 271(d) not to broaden the doctrine of patent misuse, but to cabin it.…”

As a result of the court’s narrow definition of patent misuse, other actions that may raise antitrust concerns, including agreements between competitors that limit or eliminate their competition, will not constitute misuse. Thus, a defendant facing down an infringement suit brought by a participant in a patent pool may have a counterclaim based upon antitrust violations, but cannot avoid the patentee’s infringement claim on the defense of patent misuse unless in its licensing practices the patent holder has sought to extend the term or the scope of its own patent rights.

The court did not comment directly on whether Philips and Sony had violated the antitrust laws because no antitrust claim had been preserved on appeal. The majority expressed skepticism on this question, however, because of testimony of a Philips scientist who said that there were technical problems with the Sony technology. In the court’s eyes, this cast considerable doubt upon whether the Sony technology was a viable potential competitor to the Philips technology. The dissent did not buy this thesis, suggesting that the technical problems might have been overcome.

Competitors may now find it inviting to jump into the patent pool. Companies that choose to enter the market without taking a license of that pool will have one less defense to muster in an infringement action, since patent misuse is now confined to a narrow ‘cabin’, no longer an all-purpose means of attacking those engaged in apparent antitrust violations.

And if, as the dissent claims, antitrust enforcement is not up to the task of hemming in anticompetitive patent practices, the Federal Circuit’s crabbed view of the patent misuse doctrine may leave an open field for licensing arrangements that inhibit competition.

[1] Such concerns prompted the Federal Trade Commission to take action in 1998 against VISX and Summit Technologies, who licensed their competing technologies to each other, an arrangement that they dissolved in settling the matter in 1999.