Tuesday, August 31, 2010

En banc CAFC discusses "patent misuse" in Princo case

In an en banc group of ten CAFC judges, 6 votes rule and the beginning of the majority decision in Princo noted:

This case requires us to consider the scope of the doc-
trine of patent misuse. Patent misuse developed as a non-
statutory defense to claims of patent infringement. In the
licensing context, the doctrine limits a patentee’s right to
impose conditions on a licensee that exceed the scope of
the patent right. Because patent misuse is a judge-made
doctrine that is in derogation of statutory patent rights
against infringement, this court has not applied the
doctrine of patent misuse expansively. In this case, we
adhere to that approach, and we sustain the decision of
the International Trade Commission that the doctrine of
patent misuse does not bar the intervenor, U.S. Philips
Corporation, from enforcing its patent rights against the
appellants Princo Corporation and Princo America Corpo-
ration (collectively, “Princo”).

The case includes "industry standard" matters:

The standards that were
generated for CD-Rs and CD-RWs were collected in a
publication entitled “Recordable CD Standard,” informally known as the “Orange Book.”

There were two proposed standards, EACH covered by patents:

In the course of their work, the Sony and Philips
engineers had to address the problem of how to encode
position information in the disc so that a consumer’s CD
reader/writer could maintain proper positioning while
writing data to the disc. Philips and Sony proposed
different solutions to that problem. Philips’s solution was
to use an analog method of modulating the frequency of
the “groove” on the disc so as to add location codes to the
disc. One of Sony’s proposed solutions was to use a digital
method to encode location codes into the disc groove.
Philips’s approach was later set forth in two of the pat-
ents at issue in this case, referred to as the “Raaymakers
patents.” Sony’s approach was set forth in one of its own
patents, referred to as the “Lagadec patent.”
After reviewing the competing solutions, the Sony and
Philips engineers agreed that they would use the Raay-
makers approach to solving the problem, not the Lagadec
approach. The engineers from both companies agreed
that the Raaymakers approach “was simple and . . .
worked very well.” By contrast, as the Commission found
in the course of this litigation, the Lagadec approach was
“prone to error” and would have been “very difficult” to
implement. Philips and Sony therefore incorporated the
Raaymakers approach in the Orange Book as the standard
for manufacturing CD-R/RW discs.

The available patent license came in a bundled form,
and Princo talked about tying:

The administra-
tive law judge found, inter alia, that the package licensing
agreements offered by Philips constituted impermissible
tying arrangements because they forced manufacturers to
license extraneous patents in addition to the patents that
the manufacturers wanted to license
. That tying ar-
rangement, according to the administrative law judge,
rendered all of Philips’s patents in suit unenforceable.
The administrative law judge also held Philips’s patents
unenforceable based on price fixing, price discrimination,
and restraint of trade.

The CAFC rejected this theory in 2005:

Philips appealed to this court, and we reversed. U.S.
Philips Corp. v. Int’l Trade Comm’n (Philips I), 424 F.3d
1179 (Fed. Cir. 2005). We rejected the Commission’s
theory that Philips’s package licensing practice consti-
tuted patent misuse by improperly tying nonessential
patents to essential ones. We explained that Philips gave
its licensees the option of using any of the patents in the
package at the licensee’s option, and that Philips charged
a uniform fee to permit the manufacture of discs covered
by the patented technology regardless of which patents
the licensee used in its manufacturing process. Philips
did not require the licensee to use any particular technol-
ogy in any of the patents, including the patents that
Princo complained were “nonessential.” In effect, we
concluded, Philips was simply charging a fixed licensing
fee for licensees to manufacture discs under the Orange
Book standard.

Further, the patent misuse defense got no traction:

On remand, the Commission rejected Princo’s remain-
ing theories of patent misuse. The Commission first
rejected Princo’s argument that Philips committed patent
misuse by combining with its horizontal competitors to fix
the price of patent licenses in the relevant market, i.e.,
the market for licensing CD-R/RW patents. The Commis-
sion found that there was no evidence in the record that
the patents in the joint package licenses covered tech-
nologies that were close substitutes, or that the pool
licensors would have competed in the technology licensing
market absent the pooling arrangements. Consequently,
the Commission found that the joint package licenses had
not been shown to constitute horizontal price fixing.

But, on appeal to the CAFC:

On Princo’s appeal, a divided panel of this court ruled
against the Commission and Philips. Princo Corp. v. Int’l
Trade Comm’n, 563 F.3d 1301 (Fed. Cir. 2009).
the panel rejected several of Princo’s arguments, it va-
cated the Commission’s remedial orders and remanded
the case for further proceedings on one issue.
At the outset, the panel unanimously rejected Princo’s
argument that Philips had engaged in patent misuse
through improper “tying” by including the Lagadec patent
in the Orange Book license packages. The court noted
that while grouping patents together in package licenses
has anticompetitive potential, it “also has potential to
create substantial procompetitive efficiencies” such as
clearing possible blocking patents, integrating comple-
mentary technology, and avoiding litigation. 563 F.3d at

The crux of the last issue:

On one issue, however, the panel majority ruled
against Philips. The panel noted that Philips I did not
consider whether Philips and Sony agreed to suppress the
Lagadec technology and “whether an agreement that
would prevent the development of alternatives [to the
licensed technology] would constitute misuse under a
theory of elimination of competition or price fixing.” 563
F.3d at 1314. The panel then stated that, in contrast to
package licenses, “there are no benefits to be obtained
from an agreement between patent holders to forego
separate licensing of competing technologies,” and that
such agreements are “not within the rights granted to a
patent holder” and can constitute an antitrust violation.
Id. at 1315-16. The panel recognized that “the burden of
proving misuse, and the corresponding risk of having
made an insufficient record, lies with Princo.” Id. at 1321.
Nonetheless, the panel directed the Commission to reex-
amine the record to determine whether “Philips and Sony
agreed not to license Lagadec in a way that would allow a
competitor ‘to develop, use or license the [Lagadec] tech-
nology to create a competing product,’” i.e., a product that
would compete with the technology of the Raaymakers
patents, id. at 1313, and whether, if there was such an
agreement, the suppressed technology “could not have
been viable,” which would “negate a charge of misuse,” id.at 1318-19.

Of patent misuse:

Recognizing the narrow scope of the doctrine, we have
emphasized that the 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. See C.R. Bard, Inc. v. M3 Sys., Inc., 157 F.3d
1340, 1373 (Fed. Cir. 1998) (“Although the defense of
patent misuse . . . evolved to protect against ‘wrongful’
use of patents, the catalog of practices labelled ‘patent
misuse’ does not include a general notion of ‘wrongful’
use.”). Other courts have expressed the same view. See
Kolene Corp. v. Motor City Metal Treating, Inc., 440 F.2d
77, 84-85 (6th Cir. 1971) (There is no such thing as “mis-
use in the air. The misuse must be of the patent in suit.
An antitrust offense does not necessarily amount to
misuse merely because it involves patented products or
products which are the subject of a patented process.”
(citations omitted)); McCullough Tool Co. v. Well Surveys,
Inc., 395 F.2d 230, 238-39 (10th Cir. 1968) (the defense of
patent misuse has been allowed “only where there had
been a misuse of the patent in suit”).

The six CAFC judges noted:

In sum, this is not a case in which conditions have
been placed in patent licenses to require licensees to
agree to anticompetitive terms going beyond the scope of
the patent grant. Rather, in this case the assertion of
misuse arises not from the terms of the license itself but
rather from an alleged collateral agreement between Sony
and Philips. In that setting, the doctrine of patent misuse
does not immunize Princo against the legal effect of its acts of infringement.

Of "industry standards," -->

The absence of standards for new technology
can easily result in a “Tower of Babel” effect that in-
creases costs, reduces utility, and frustrates consumers.
As a leading treatise has noted, cooperation by competi-
tors in standard-setting “can provide procompetitive
benefits the market would not otherwise provide, by
allowing a number of different firms to produce and
market competing products compatible with a single
standard.” Herbert Hovenkamp et al., IP & Antitrust §
35.2b (2010). Those benefits include greater product
interoperability, including the promotion of price competi-
tion among interoperable products; positive network
effects, including an increase in the value of products as
interoperable products become more widely used; and
incentives to innovate by establishing a technical baseline
for further product improvements. See Patrick D. Curran,
Comment, Standard-Setting Organizations: Patents, Price
Fixing, and Per Se Legality, 70 U. Chi. L. Rev. 983, 985-90


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