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Patent Misuse Becomes Narrower

Posted in Patent Law

by Audrey Millemann

Patent misuse is a judge-made doctrine (now partly codified in 35 U.S.C. § 271(d)) that provides a defense to patent infringement if the patent owner has used the patent in such a way as to expand the scope of the patent grant. Patent misuse prevents a patent owner from conditioning a license on requirements beyond the scope of the patent. For example, a patentee cannot condition a license on the licensee’s purchase of an unpatented product from the patentee. This would result in the patentee expanding the scope of its monopoly beyond that granted by the patent. Another type of patent misuse occurs when the patentee requires the licensee to pay royalties after the expiration of the patent. 

In Princo Corporation v. ITC and U.S. Philips Corporation, 616 F.3d 1318 (Fed.Cir. 2010), the Federal Circuit Court of Appeals, in an en banc decision, confirmed that patent misuse is a narrow doctrine. This issue in Princo was whether an infringer could rely on patent misuse as a defense to a claim of a patent infringement by alleging an unrelated antitrust violation. Specifically, the court addressed whether a patentee misused its patent by causing a third party not to license another patent for a separate technology. 

Princo involved technology related to digital storage devices, including recordable CDs and rewritable CDs. Two companies, Philips Corporation and Sony Corporation, worked together to develop the technology and to create technical standards to make sure that the discs manufactured by different companies would play on machines used for playing earlier generation CDs and CD-ROMs. The standards were referred to in the industry as the “Orange Book” standards. 

Philips and Sony jointly developed two different solutions to a particular problem addressed by the standards. Philips’ solution, an analog method, was patented in two patents called the “Raaymakers patents.” Sony’s solution, a digital method, was patented in a patent called the “Lagadec patent.” Philips and Sony decided to use the Raaymakers method in the Orange Book standards, rather than the Lagadec method, because the latter was difficult to use and caused many errors.

Philips and Sony offered licenses to the patents used in the Orange Book standards. The licenses were package licenses; they covered all of the patents that a company might need to make discs that satisfied the Orange Book standards, including the Raaymakers and Lagadec patents, as well as other patents. The licenses were limited in their field of use to the manufacture of discs compliant with the Orange Book standards.

Princo Corporation obtained a package license from Philips. Shortly thereafter, Princo ceased paying the fees due to Philips under the license. Philips filed a complaint with the International Trade Commission and alleged that Princo had infringed its patents.

Princo asserted the defense of patent misuse. Princo claimed that Philips had required it to take a license to other patents not necessary to make compliant CDs. The ITC judge found that Princo had infringed the patents and that the patents were not invalid, but that Philips had committed patent misuse by tying and price fixing. On review before the ITC, the ITC affirmed the judge’s decision. 

Philips appealed to the Federal Circuit Court of Appeals. A panel of the court reversed the ITC decision, holding that Philips had not committed tying. The panel found that Philips simply charged its licensee a fixed fee regardless of which patents the licensee used in making its CDs. The appellate court remanded the case to the ITC for a further decision on Princo’sremaining theories of patent misuse. 

The ITC ruled in favor of Philips. Princo appealed to the federal circuit. A panel of the court found that there was no unlawful tying, but remanded the case back to the ITC to decide whether Philips and Sony had agreed not to license the Lagadec technology to eliminate the possibility of another company developing a competing product. The parties then petitioned the federal circuit for a hearing on en banc.

On rehearing, the court considered a single issue:  Philips’ contention that regardless of whether Philips and Sony had entered into an agreement not to license the Lagadec technology, such an agreement could not be patent misuse. The court agreed with Philips and affirmed the ITC’s orders. 

The court explained that the doctrine of patent misuse is based on the policy that a patent owner cannot use the patent to secure an advantage in the market place beyond the scope of the patent grant. The key question is whether the condition imposed by 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.” The court further stated: “[T]he defense of patent misuse is not available to a presumptive infringer simply because a patentee engages in some kind of wrongful commercial conduct, even conduct that may have anticompetitive effects…the catalog of practices labeled ‘patent misuse’ does not include a general notion of ‘wrongful’ use. [citation omitted].”

The court next addressed 35 U.S.C. §271(d), which sets forth five types of acts that do not constitute patent misuse. According to the court, Congress enacted this statute to limit the doctrine of patent misuse, in the licensing context, to acts that had anticompetitive effects.

The court held that a horizontal agreement between Philips and Sony limiting the licensing of the Lagadec technology would not constitute patent misuse by Philips of its Raaymakers patents because the agreement would not broaden the physical or temporal scope of the Raaymakers patents. Because there was no link between the Raaymakers patents and the alleged misconduct, there could be no patent misuse. The package licenses were separate from the alleged agreement between Philips and Sony to suppress the Lagadec technology. The court held that even if there was an antitrust violation regarding the Lagadec technology, that violation would not be misuse of the Raaymaker patents. 

The court found that Princo could not establish patent misuse because it could not prove that the agreement between Philips and Sony had anticompetitive effects. Philips and Sony had chosen not to compete against their joint venture, and the Lagadec technology was not a realistic competing product.

Princo argued that the court should overrule its cases holding that patent misuse requires that the patent owner’s conduct has an anticompetitive effect. The court declined. In analyzing the alleged agreement under the rule of reason, the court held that a research joint venture, such as that between Philips and Sony, has many procompetitive effects. 

The court held that the alleged agreement was not a sham or a naked restraint, especially because the agreement was intended to further the ability of Philips and Sony to set industry standards. Moreover, because the Lagadec technology was not viable, Princo had failed to show that the agreement had any effect on the market.