Federal Circuit Remands Patent Pool Misuse Case: Issue of Improperly Sequestering Alternative Technology

Princo v. ITC200904211316.jpg (Fed. Cir. 2009) Read the Decision

The ITC found that the CD-R and CD-RW disks imported by Princo violate a handful of Philips patents that cover industry standard compact disk technology. On appeal, the adjudged infringer argued that the patents should be unenforceable under the equitable doctrine of patent misuse. Giving some credence to the argument, the Federal Circuit vacated-in-part and remanded for further proceedings to determine whether Philip’s misused its patents by allegedly agreeing with a competitor not to license-out would-be competing technology.

Misuse is an antitrust theory that attempts to restrain a patentee from over-extending the anticompetitive strength of the patent rights in ways “contrary to public policy.” In some situations the antitrust authorities allow multi-company patent pooling as a way to promote foundational development and convergence. See Herbert Hovenkamp, Mark. D. Janis & Mark A. Lemley, IP and Antitrust § 34.4, at 34-20.1 (2009) (“Typical procompetitive benefits [of patent pools] include the clearing of blocking positions, the advantages flowing from integration of complementary technologies, and the cost savings from avoiding litigation.”). These agreements may be reviewed under the rule of reason for pro-competitive benefits.

In the early 1990’s Philips, Sony, and others formed a patent pool to cover CD-R and CD-RW technology and – in the process – defined the industry standard. Philips licenses the pools (but not individual patents) — charging a per disk royalty and requiring that the licenses be used only to make CD’s that comply with the defined “Orange Book compliant” standards. When Princo refused to pay the royalty, Philips sued for infringement in the ITC.

This appeal focuses on one particular patent in the pool – Sony’s U.S. Patent No. 4,942,565 (“Lagadec”). Lagadec claims a digital process for identifying the laser position. The patent pool also includes a patent covering a similar analog process for identifying the laser position developed by Philips. And, in fact, the defined standard requires that the analog process (not the digital process) be used.

Tying Non-Essential or Non-Used Patent: Princo argued that Lagadec is a non-essential patent and that Philips “improperly used its market power to force manufacturers seeking patents essential to the production of Orange Book compliant discs to also take a license to Lagadec, an allegedly-nonessential and Non-used Sony patent.” The Supreme Court saw this type of tying as problematic in Zenith v. Hazeltine, 395 US 100 (1968). In Zenith, the court held that “conditioning the grant of a patent license upon payment of royalties on products which do not use the teaching of the patent [is] misuse.”

Reasonable Claim Construction: Although the final claim scope was not clear, Philips argued under a reasonable broad claim construction, the standard analog process would infringe one of the claims in the Lagadec patent — thus making that patent “essential” to the pool and immunizing the pool from the tying challenge. Without determining the specific claim construction, the Federal Circuit agreed that misuse may be avoided if at the time of the licensing “it would have been reasonable for a manufacturer to believe a license … was necessary.”

We thus think that perfect certainty is not required to avoid a charge of misuse through unlawful tying. Rather, in this context 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.

The Federal Circuit’s “reasonable” approach meshes with the Hovenkamp Antitrust-IP treatise which states:

Indeed, even if the patents are only arguably conflicting, there are strong reasons to permit the settlement of patent disputes by means of a cross-licensing agreement. Not only will judicial economy be served and litigation costs reduced by settling such disputes, but the delay and uncertainty associated with blocking patent disputes may prevent either party from going forward with a commercial product for years while litigation is pending. Where two or more patents are arguably blocking, therefore, settling the dispute by means of cross-licensing is likely to be procompetitive.   

Here, for instance, by licensing Lagadec, a manufacturer has more certainty that licensing the pool will avoid later allegations of infringement — a major goal of the standard setting operation.

Cutting-off Alternatives: By including Sony’s Lagadec patent in the pool but then preventing manufacturers from using the digital process, Princo argued that Philips improperly colluded to sequester the work-around technology from competitive development. In Princo’s words “Philips bribed Sony not to use . . . Lagadec to compete against the [Philips dominated standard].” On appeal, the Federal Circuit agreed with Princo that such collusion could be misuse even if the patent included “essential” claims.

It is one thing to offer a pooled license to competing technologies; it is quite another to refuse to license the competing technologies on any other basis. In contrast to tying arrangements, there are no [pro competitive] benefits to be obtained from an agreement between patent holders to forego separate licensing of competing technologies, as counsel for Philips conceded at oral argument. . . . Agreements between competitors not to compete are classic antitrust violations. . . . Agreements preventing patent licensing of competing technologies also can constitute such violations.

On remand, the ITC must determine whether Princo has provided sufficient evidence to show that Sony and Philips agreed not to separately license Lagadec as competing technology and that the digital technology could have been a viable alternative.

Dissent in Part: Dissenting in part, Judge Bryson would have fully affirmed the ITC’s findings.

Prior Discussion of the Case:

9 thoughts on “Federal Circuit Remands Patent Pool Misuse Case: Issue of Improperly Sequestering Alternative Technology

  1. 9

    >> In Zenith, the court held that “conditioning the grant of a patent license upon payment of royalties on products which do not use the teaching of the patent [is] misuse.” << In Zenith, the patent owner licensed a patent used in only some radio sets and required payment of royalties on every radio set sold by the licensees. Is this meant to be a red herring? The non-compete argument seems much stronger, and the Zenith argument seems only to distract from it.

  2. 8

    David and Bob,

    Thanks for your analysis of this case relative to the 35 USC 271(d) issues. This will be the rare alleged patent misuse case where some paragraph of 35 USC 271(d) isn’t applicable.

  3. 7


    Thanks for pointing out why 35 USC 271(d)(5) wasn’t applicable; it was such a long opinion that I just scanned through it and missed the footnote (actually footnote 6 at page 10 of the slip opinion). Also, 35 USC 271(d)(5) was inappilcable because the ITC found that Philips had market power in the relevant market. But again, thanks for pointing out that there was a reason why this provision wasn’t applicable.

  4. 6

    Thanks David. I see your point. This appears to be a situtation where a first patentee (Philips) allegedly used its asserted patents to cause a second patentee (Sony) to agree not to license the Sony patent, (a non-asserted patent in the ITC proceeding). Hence, the alleged act of misuse is not Sony refusing to license the Sony patent, but Philips allegedly misusing its asserted patents by having Sony join the patent pool and agree not to license the Sony patent in a way that would permit an alternative competing technology to develop. Viewed in this way, your comment that 271(d)(4) is a non-issue seems right on point since Philips did not own the Sony patent, and Sony was not asserting its patent against the accused infringer.

  5. 5


    I don’t think that it’s an oversight. First, it appears that nobody disputed that the pooling agreement also forbade individual licensing of the pooled patents by their owners (at p. 9 “by agreeing with Sony that the Lagadec patent would not be available except through a package license that also included the Raaymakers patents…” and fn 5). That leads directly to your “Possibly…” position.

    Second, Philips is not the patent owner, but the patent pool administrator. 271(d)(4) would immunize Sony regarding the Lagadec patent, not Philips.

  6. 4

    For this particular case, the parties agreed that the patentee had market power, so any exemption provided by 271(d)(5) would not apply. This was noted in fn 5 of the opinion.

    To me the more interesting oversight is why nobody (the parties or the court) addressed the misuse exemption of 271(d)(4). That provision provides that “No patent owner … shall be … deemed guilty of misuse … by reason of his having . . . refused to license or use any rights to the patent[.]” It is not subject to the lack of market power criteria as is 271(d)(5).

    Although the parties appeared to characterize the sequestering theory as a form of price fixing, at its heart the theory was an allegation that the patentee refused to license the patent in a manner that would have permitted the development of an alternative competing technology. See p. 25 of the slip opn or 2009 WL 1035222, at *13. It would have been nice to see the court’s rationale for why it appears to have implictly concluded that the refusal to license, under the circumstances, was not exempt under 271(d)(4). The court could have considered In re Independent Service Organizations Antitrust Litig., 964 F. Supp. 1454, 1460 (D. Kan. 1997), where the district court, in denying a patentee’s motion for summary judgment that its refusal to license did not amount to patent misuse, discussed the legislative history for § 271(d)(4), and determined that: “A close look at the legislative history of section 271(d)(4) reveals that this exception merely codified existing case law regarding patent misuse and did not grant patent holders absolute immunity from the antitrust laws.”

    Possibly, the Federal Circuit could rule that 271(d)(4) did not apply on the basis that these alleged acts of misuse involved an agreement by the patentee with a horizontal competitor not to extend licenses and not just the situtation with the patentee dealing in a one-on-one setting with a hopeful prospective licensee, and opting not to grant a license, or granting a limited field of use, when the licensee wanted an unlimited field of use.

    In any event, this could make either an en banc petition or the ITC’s treatment on remand very interesting.

  7. 2

    Dear Professor Crouch,

    Life is short, and I am a slow reader.
    Moreover, as you might guess, I like writing more than reading.

    Your legal writings are superb, absolutely superb; they are crystal clear, concise, cogent and, when you voice an opinion, convincing, and, for the most part (but not always), I can tell you try to be objective in your writings (bravo, bravo).

    I have one small simple suggestion:

    When the article you post is long, please provide an outline or executive summary.

    But mostly, please keep at it – you are a hero in the IP industry, a legend in your own time. I use to be a legend in another industry, but that industry no longer exists, gone with the buggy whips, so now I am no longer.

  8. 1

    Like I asked in the Quantum Computer case, why, pray tell, does at least 35 USC 271(d)(5) not apply here, and why isn’t at least discussed by the parties? Unlike Quantum Computer, we’re at least talking about the defense of patent misuse which is what 35 USC 271 was intended to address and pretty much negate.

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