Federal Circuit Holds-Line on Patent Misuse Defense

By Dennis Crouch

In a split decision, an en banc Federal Circuit has held that the non-statutory equitable doctrine of patent misuse should be narrowly applied. Here, the court held that an anticompetitive agreement between companies to suppress a given technology would not constitute misuse of a patent covering an alternative technology being promoted by the companies. Thus, the patents can still be enforced. Of course, companies following this pathway could still be liable for antitrust violations.

Princo Corp. v. International Trade Commission and U.S. Philips Corp. (Fed. Cir. 2010) (en banc)

The alleged patent misuse was associated with a CD-R/RW patent-pool arrangement between Philips and Sony. The two companies chose a particular method (Raamaker) of encoding location information on the CD to serve as the standard and then allegedly suppressed another method (Lagadec). (Both methods were covered by patents held by the companies.)

Princo argued here that creation of the patent pool licensing the Raamaker method and the suppression of the Lagadec method constituted patent misuse and should render the patents undenforceable.

Patent Misuse:     

The doctrine of patent misuse is … grounded in the policy-based desire to 'prevent a patentee from using the patent to obtain market benefit beyond that which inheres in the statutory patent right.' Mallinckrodt, 976 F.2d at 704. It follows that the key inquiry under the patent misuse doctrine is whether, by imposing the condition in question, 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. B. Braun, 124 F.3d at 1426. Where the patentee has not leveraged its patent beyond the scope of rights granted by the Patent Act, misuse has not been found. See Monsanto, 363 F.3d at 1341 ("In the cases in which the restriction is reasonably within the patent grant, the patent misuse defense can never succeed."); Virginia Panel, 133 F.3d at 869 (particular practices by the patentee "did not constitute patent misuse because they did not broaden the scope of its patent, either in terms of covered subject matter or temporally"). . . .

Given that the patent grant entitles the patentee to impose a broad range of conditions in licensing the right to practice the patent, the doctrine of patent misuse "has largely been confined to a handful of specific practices by which the patentee seemed to be trying to 'extend' his patent grant beyond its statutory limits." USM Corp. v. SPS Techs., Inc., 694 F.2d 505, 510 (7th Cir. 1982).

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 (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 (6th Cir. 1971) (There is no such thing as "misuse 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 (10th Cir. 1968) (the defense of patent misuse has been allowed "only where there had been a misuse of the patent in suit"). While proof of an antitrust violation shows that the patentee has committed wrongful conduct having anticompetitive effects, that does not establish misuse of the patent in suit unless the conduct in question restricts the use of that patent and does so in one of the specific ways that have been held to be outside the otherwise broad scope of the patent grant.

On appeal, the en banc Federal Circuit held that this case does not fit with other misuse precedent. "This case presents a completely different scenario from the cases previously identified by the Supreme Court and by this court as implicating the doctrine of patent misuse." In particular, the alleged misuse was alleged agreement to suppress "an entirely different patent that was never asserted." "Even if such an agreement were shown to exist, and even if it were shown to have anticompetitive effects, a horizontal agreement restricting the availability of Sony's Lagadec patent would not constitute misuse of Philips's Raaymakers patents or any of Philips's other patents in suit."

Reduced to its simplest elements, the question in this case comes down to this: When a patentee offers to license a patent, does the patentee misuse that patent by inducing a third party not to license its separate, competitive technology?

The court answered this question with a resounding "no" – such an action "would not fall within the rationale of the patent misuse doctrine as explicated by the Supreme Court and this court." In particular, the patent-in-suit there must be a direct connection between the patents-in-suit and the alleged misconduct.

Dissent: Judge Dyk (joined by Judge Gajarsa) wrote a 32-page dissent arguing that the patent misuse doctrine should be given teeth:

Evidently the majority thinks it appropriate to emasculate the doctrine so that it will not provide a meaningful obstacle to patent enforcement. . . . Indeed, the majority goes so far as to suggest that the misuse doctrine be eliminated entirely. I read the relevant Supreme Court cases and congressional legislation as supporting a vigorous misuse defense, clearly applicable to agreements to suppress alternative technology. The majority cabins the doctrine in contravention of this Supreme Court authority. I respectfully dissent.

17 thoughts on “Federal Circuit Holds-Line on Patent Misuse Defense

  1. I must agree with the majority in this case. The problem with Dyk’s dissent is that giving the doctrine teeth will cause companies in the same field to promote one particular alternative and allow another to languish – companies will have to craft their agreements so that they don’t explicitly agree to “suppress” the alternative technology.

    What nonsense…what’s wrong with agreeing in writing that you have decided to be a patent troll?

  2. All the other patents bundled with it are “bonus footage”.

    I just skimmed the decision. In essence, that appears to be the underlying rationale.

    The key question, however, was whether licensing the non-standard technology alone would have led to the creation of a competing standard. But, “Princo failed to demonstrate that any agreement not to license Lagadec would have had the anticompetitive effects necessary to condemn that agreement under rule-of-reason analysis”

  3. The pool licensed both technologies as a package, but only one of the technologies complied with the standard.

    Well then, if we’re okay with companies establishing standards, we’re really only haggling on price at this point.

    Let’s take an extreme case. What if Phillips and Sony only let companies license the standard technology if they also took a license to every single other Phillips and Sony patent? Problematic? Not necessarily. The real question is whether the royalty was appropriate for practicing the standard technology. All the other patents bundled with it are “bonus footage”.

  4. If there are competing technologies, you presumably will go with the one with the lowest overall cost.

    However, in this case there is a slight wrinkle. The pool licensed both technologies as a package, but only one of the technologies complied with the standard.

  5. What difference does it make whether you’re paying them for the one or the other?

    Typically a lower price. If there are competing technologies, you presumably will go with the one with the lowest overall cost. If only one technology is available you have little choice but to use the one available.

    Thus, if Phillips and Sony would not have agreed to support only a single technology, each of them would likely try to best market its own technology against the other’s, arguably by lowering the price to the bare minimum.

  6. Basically, by controlling the one patent pool they leveraged it in such a way to control techs that weren’t covered by their patents, ala the definition of patent misuse.

    My understanding is that they also had patents on the competing technology. What difference does it make whether you’re paying them for the one or the other?

  7. could make for a primary reference on one of their most broad ind’s in a 103 if I find the only thing that is basically the crux of their ind’s somewhere else.

    Hindsight, anyone?

  8. “There is no general obligation for a patentee to licence out a patent covering a competing technology.”

    No, but apparently there is a “patent misuse” defense available to patent infringement allegations. And this here is the very definition of the term. I’d like to see what the Supremes say.

    I might agree with you that this might be a misuse of the patent misuse doctrine, but, either way, technicality or not, how this should have gone down is quite clear. The decision appears to be nothing more than a white wash for the court protecting the pool.

    But you’re right about one thing, nobody legitimately wants to use a competing tech. Why on earth they would make this agreement (maybe it made sense 15 years ago?), or at least why they would keep it in force today is a mystery to me. Just drop the agreement, o noes one company loses the ability to argue it has no other choice but to infringe and you misused your patents in making it that way!!! Nothing else is going to happen.

  9. Ah, I wish there were an edit feature. For the strong hint I see in Judge Prost’s concurrence, I meant agreement with the *dissenters* on whether the horizontal agreement could be misuse.

  10. This action by Princo was just another attempt (among many) to “break” the CD patent pool.

    Nobody really wants to exploit a technology that competes with an established industry standard and is incompatible with every single existing CD/DVD drive and blank media disc on the planet.

    The objective behind this action was to find a “back door” way to establish the illegality of a patent pool that has already been approved by various courts and authorities around the world. As Ned has pointed out, there is a net benefit in the pool in this case, in providing the public with a consistent standard to which numerous competing suppliers adhere. The pool enables all of those competitors to access the necessary patents (and there are many more patentees involved than just Philips and Sony) on FRAND terms. Nobody (including Princo) is excluded, so long as they are willing to pay the same fees as everyone else.

    There is no general obligation for a patentee to licence out a patent covering a competing technology. Only in a most extreme case might a different “rule” apply because access to the existing technology happens to require licences to a pool of patents owned by multiple licensors rather than a single proprietor.

    This is not such a case. The majority decision is, in my view, absolutely correct.

  11. It looks like the vacancies on the court might have affected the en banc outcome here. I read this as a 6-4 decision on the main point about whether the alleged horizontal agreement could constitute misuse. In her concurrence, Judge Prost (joined by Judge Mayer) left open the possibility that it could. It looked to me like more than just leaving the door open, but rather a strong hint that they agreed with the majority on that point.

    With no vacancies and 12 active judges, it would have taken seven judges to disturb the 2-1 panel decision reversing the ITC. Thus, the six judges in today’s majority would have needed one of the two most junior judges to reach this result.

    Our Dennis previously noticed that a vacancy would make it a little easier for the en banc petitioner to win. Sure enough…
    link to patentlyo.com

  12. “I fail to see the problem.”

    The licensing fees where apparently up to 50% of the sale price of the disk. One manufacturer didn’t see that as reasonable. They filed patent infringment suit. He argued that he had no other choice since the other techs are locked up by an agreement, essentially allowing the patent holders on the standard CD tech to control the other tech thus stopping him from going with a potentially competitive tech rather than their standard CD tech. Basically, by controlling the one patent pool they leveraged it in such a way to control techs that weren’t covered by their patents, ala the definition of patent misuse.

    Quick update guys, one more IDS done. Only a single reference. This one is barely relevant to the claims, could make for a primary reference on one of their most broad ind’s in a 103 if I find the only thing that is basically the crux of their ind’s somewhere else. Pretty much this reference is cumulative with about 900 others in the subclass which is relevant.

    Either way, I’d say that this was a well-filed IDS. Other than some newbie mistakes in the claim drafting this is a quality application and will likely end up a patent.

  13. Two companies agree to establish a standard interface for CD/RW. This arguably advantages the public in a number of way. I don’t even see it as a antitrust violation.

    Typically, such agreement authorize the public to participate through reasonable, non discriminatory licenses to pool technology. I see no competitor locked out.

    I fail to see the problem.

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