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En banc Federal Circuit to address potential patent misuse issues in license practices

October 20, 2009
Post by Blog Staff

The Federal Circuit has agreed to hear en banc an interesting issue with regard to the potential for patent misuse in licensing. The case is Princo Corp. v. ITC. At issue is the patent pool related to the technology used for CD-R and CD-RW discs. The alleged infringer, Princo, admitted infringement before the ITC, but asserted the patents unenforceable due to patent misuse. The ITC originally rejected this defense, but a divided panel of the Federal Circuit held additional factual determinations were necessary to assess the defense. Currently-available CD-R and CD-RW discs use analog technology to assist the recording device in determining where on the disc the recording laser is located at any given time. Another potential alternative (that has not been implemented in the marketplace) is using digital technology to make this determination. According to the defendant, the digital alternative was never commercialized because of an agreement between Sony and Philips (two of the owners of patents in the relevant patent pool) not to license a Sony patent covering this digital alternative for this purpose. According to the defendant, this amounted to a type of horizontal price fixing, and was therefore patent misuse. The ITC disagreed, and held no misuse occurred.A divided panel of the Federal Circuit disagreed, and remanded the case to the ITC for further factual development. The court stated the precompetitive benefits sometimes seen in the context of patent pools are completely absent in the context of an agreement not to license patents covering a potentially competing technology. The panel majority held this was at least potentially an antitrust violation under the rule of reason.The en banc Federal Circuit has now agreed to address this issue, with the briefing cycle to be completed shortly after the new year. Oral argument is not yet set (update, see below), but the case has the potential to provide some clarity on when an arguably anticompetitive licensing practice crosses over into patent misuse.Click here for the order granting rehearing en banc.

Update (10/29): The Federal Circuit has set oral argument in the case for March 3 at 2:00 PM.

Click below for a full summary of the panel decision in Princo Corp. v. Int'l Trade Comm'n.

This is the second time that the case made its way to the Federal Circuit. Philips and three other companies (Sony, Taiyo Yuden, and Ricoh) own patents relevant to the manufacture of recordable compact discs ("CD-Rs") and rewritable compact discs ("CD-RWs"). Some of the patents cover features of discs necessary to comply with the "Orange Book," a technical standard jointly developed by Philips and Sony. Manufacturers produce CD-R and CD-RW discs in accordance with the Orange Book standard in order for the discs to be compatible with CD players and CD-ROM drives in computers and home entertainment systems, which are also manufactured in accordance with the corresponding Orange Book specifications.The companies decided to pool their Orange Book-related CD-R and CD-RW patents and allowed Philips to administer the pool. Philips offered two package licenses, one for the pooled CD-R patents, and one for the pooled CD-RW patents. Licenses to individual patents were not offered, and the licensees paid a per-disc royalty on each compact disc produced using at least one patent. This royalty did not depend on how many patents were used, however. Princo, a disc manufacturer, (as well as some other licensees) initially took a license, but eventually refused to pay the royalties. Philips filed a complaint with the International Trade Commission for infringement of its patents. Princo alleged patent misuse as a defense to the infringement action, claiming that Philips tried to improperly expand the scope of its statutory patent rights in two ways: (1) the use of mandatory package licensing to force manufacturers to take licenses to "nonessential" pool patents in order to obtain licenses to pool patents that were in fact essential to the manufacture of CD-Rs and CD-RWs, and (2) agreeing with Sony not to permit licensing of a Sony patent that would have permitted development of a competing technology to Orange Book discs.The administrative law judge (ALJ) agreed with Princo, and found that Philips and committed patent misuse. The ALJ held that the patents were unenforceable due to patent misuse per se and under the rule of reason. The ITC affirmed the ALJ's misuse determination, but more narrowly held that Philips committed patent misuse per se by tying the license of nonessential patents to the licensing of essential patents. The ITC also affirmed the ALJ's conclusion that the tying arrangement constituted misuse under the rule of reason. The Federal Circuit reversed and remanded the case. The court held that the procompetitive benefits of the patent pool arrangement were enough to prevent a per se violation. The court also overturned the rule of reason determination of the Commission, holding the allegedly non-essential patents were, in fact, essential, and thus there was no anticompetitive result in requiring they be included in the patent pool license structure. However, the court did remand the case for further proceedings concerning Princo's theories of misuse that were not initially addressed by the ITC.On remand, Princo claimed that it was patent misuse to tie two patents, one essential and one nonessential, in a package licensing, and also that Philips engaged in a form of price fixing, by foreclosing competition between the technologies of the two patents.The two patents at issue are the Lagadec patent and the Raaymakers patents. Both patents cover methods for a CD-R/RW recorder to determine "absolute time" position data. Both Sony and Philips determined that there was a need for the data. Philips developed an analog solution, known as "Absolute Time in Pregroove" or "ATIP" (the Raaymakers patents), while Sony developed a digital modulation method (the Lagadec patent). The two methods were fundamentally incompatible. Philips and Sony ultimately agreed to use the Raaymakers approach to define the Orange Book standard. A license to the Lagadec patent was included along with the Raaymakers patents in the CD-RW joint license, but the license did not permit use of the patent outside the context of production of Orange Book-compliant discs, such as to develop discs using the digital modulation technology. Princo claimed patent misuse in two ways again: (1) the Lagadec patent was not essential and was unlawfully tied to essential patents according to the Orange Book standard, and (2) because the two patents essentially covered competing technologies, to limit the scope of the license granted on the Lagadec patent to only Orange Book products was a form of price fixing, i.e. foreclosing potential competition between the technologies of the two patents. The ITC, without remanding to the ALJ, found that Philips had not committed patent misuse in either respect. Princo appealed again.The Federal circuit first affirmed the holding of the ITC that the tying of the patents did not constitute patent misuse. The court, as in the context of other patents on the previous appeal, held the Lagadec patent was actually an essential patent because one of its claims was not limited to the digital modulation technology. The court reasoned further that at the time of licensing, a licensee would be unsure if this were the case. The court held that "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." Because claim 6 of the Lagadec patent reasonably might be necessary as a blocking patent to the Orange Book standard, the court held that the pool did not give rise to an illegal tying arrangement. Lagadec therefore qualified as an "essential" patent for purposes of the Orange Book pool, and was not improperly tied in the pool license scheme.Princo's second claim was that Lagadec represented an alternative technological solution to the Raaymakers patents. Princo alleged Philips committed patent misuse by agreeing with Sony to not license Lagadec in a manner allowing the further development of the Lagadec technology and the possibility of competition between that technology and its own Raaymakers technology. The ITC did not address whether there was an agreement to prevent Lagadec from being licensed as a competing technology, and instead concluded that no misuse could exist regardless of any such agreement.The Federal Circuit held the ITC erred by using the wrong standard to judge whether there was an agreement to suppress a potentially competing technology. The court rejected the suggestion that a showing of misuse in the circumstances of the case required proof that an allegedly-suppressed technology was commercially viable, as this would simply motivate bad actors to preemptively kill of potentially competing emerging technologies. However, the court did not declare what showing must be made to in


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