Princo Corp. v. ITC, 616 F.3d 1318 (Fed. Cir. 2010) was a 2010 decision of the United States Court of Appeals for the Federal Circuit, that sought to narrow the defense of patent misuse to claims for patent infringement. Princo held that a party asserting the defense of patent misuse, absent a case of so-called per se misuse, must prove both "leveraging" of the patent being enforced against it and a substantial anticompetitive effect outside the legitimate scope of that patent right. In so ruling, the court emphasized that the misuse alleged must involve the patent in suit, not another patent.
The majority opinion substantially "entangle[d] patent misuse jurisprudence with antitrust concepts."Saami Zain, , 13 N.C.J.L. & . 95 (2011). The Supreme Court's subsequent opinion in Kimble v. Marvel Entertainment, LLC,576 U.S. 446, 135 S. Ct. 2401 (2015) however, points strongly in the opposite direction, rejecting the conflation of misuse and antitrust and insisting that they embody different policies.
Background
The US International Trade Commission (ITC) conducted an investigation of Princo's alleged infringement of U.S. Philips Corporation's patents by the importation of optical discs—recordable compact discs ("CD-Rs") and rewritable compact discs ("CD-RWs") (collectively "CD-R/RWs"). Those devices and related technology were developed in the 1980s and 1990s, principally by Philips and Sony, working in collaboration. These companies also developed technical standards to ensure that CD-R and CD-RW discs made by different manufacturers would be compatible and playable on new machines and also preexisting machines that were designed to read the earlier generation of compact discs ("CDs") and "read-only" compact discs ("CD-ROMs"). The standards for CD-Rs and CD-RWs were collected in a publication known as the "Orange Book."616 F.3d at 1322.
In developing the CD-R/RW standards, Sony and Philips engineers developed different solutions for 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, which were claimed in their respective patents—Sony's Lagadec patent and Phillips's Raaymakers patents. The engineers from both companies agreed that the Raaymakers approach "was simple and . . . worked very well." The ITC found that by contrast the Lagadec approach was "prone to error" and would have been "very difficult" to implement. Philips and Sony therefore agreed to incorporate the Raaymakers approach in the Orange Book as the standard for manufacturing CD-R/RW discs.
Sony and Phillips pooled the patents needed to implement the standards, and Phillips was designated the administrator to make licenses available to the industry. Philips offered several different "package" licenses to the Philips and Sony patents (and those of several other patent holders). Philips included in the patent packages those patents that it regarded as potentially necessary to make Orange-Book-compliant CD-R or CD-RW discs, including the Raaymakers and Lagadec patents. The package licenses contained a "field of use" restriction, limiting the licensees to using the licensed patents to produce discs according to the Orange Book standards. After 2001, Philips offered additional package options, grouping the patents into two categories, denominated "essential" and "nonessential," for producing CDs.
In the late 1990s, Princo (a Taiwanese manufacturer, also known as Princo Corp or Princo Corporation) sought to manufacture discs and import them into the US, and it entered into a package license agreement with Philips. Soon afterwards, however, Princo stopped paying the licensing fees required by the agreement. Philips then filed a complaint with the ITC, alleging that Princo was violating section 337 of the Tariff Act of 1930, 19 U.S.C. § 1337, by importing CD-Rs and CD-RWs that infringed Philips's patents.616 F.3d at 1323.
Princo asserted patent misuse as an infringement defense. The ITC rejected the theory that Philips improperly tied the Lagadec patent to the pool license because that patent was not essential to Orange Book-compliant discs. It also rejected the theory that the Lagadec and Raaymakers patents covered potentially competing technologies, and that Philips and Sony foreclosed potential competition between them by agreeing that the Lagadec patent would be available only through package licenses for Orange Book-compliant discs.
Federal Circuit ruling
After several preliminary decisions, the case came before the Federal Circuit en banc. The court concluded (6–2–2) that the conduct alleged was not patent misuse and therefore affirmed the ITC's orders granting relief against Princo. Two judges concurred in the judgment; two judges dissented.
Majority opinion
Judge Bryson wrote for the majority. In his analysis of the patent misuse doctrine, he began by characterizing "the basic rule of patent misuse: that the patentee may exploit his patent but may not use it to acquire a monopoly not embraced in the patent." He then turned to the Federal Circuit's characterization of misuse "as the patentee's act of impermissibly broaden[ing] the physical or temporal scope of the patent grant with anticompetitive effect."616 F.3d at 1327-28. He then summarized Federal Circuit case law on misuse:
He emphasized the importance of recognizing patentees' rights to exploit their patents when determining whether a particular licensing condition has the effect of impermissibly broadening the patent grant and thus constituting misuse: "the patentee begins with substantial rights under the patent grant includ[ing] the right to suppress the invention while continuing to prevent all others from using it, to license others, or to refuse to license, . . . to charge such royalty as the leverage of the patent monopoly permits, and to limit the scope of *1329 the license to a particular field of use." Therefore, he insisted, 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."616 F.3d at 1328-29.
Not all wrongful conduct related to exploitation of patent rights is misuse, he emphasized: "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." Thus:
Judge Bryson then turned to the 1988 amendment of 35 U.S.C. § 271(d), which states that it is not misuse (i) to refuse to license a patent or (ii) to tie a license under one patent to acceptance of a license under another patent unless the patent owner has market power in the relevant market for the first such patent. Judge Bryson said that the majority in this case did not accept the dissenting judges' argument that § 271(d) failed to immunize concerted refusals to grant a license. He concluded that this section of the patent law made it clear that Congress "sought to confine it [the misuse doctrine] to anticompetitive conduct by patentees who leverage their patents to obtain economic advantages outside the legitimate scope of the patent grant."616 F.3d at 1330-31.
Turning then to the facts of this case and how the foregoing doctrinal analysis applied to them, Judge Bryson said that Philips's challenged conduct "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 this case:
Accordingly, Judge Bryson explained, "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?" No precedent so holds, he insisted, and it did not fit within the requirement for misuse that the Philips-Sony agreement "have the effect of increasing the physical or temporal scope of the patent in suit." In this case the infringement is of the Raaymakers patents while the concerted refusal to license involves the Lagadec patent. To find patent misuse, there must be "patent leverage." That patent whose infringement is the basis of the lawsuit must itself significantly contribute to the practice under attack. That is not so here, and patent misuse will not be found when there is no connection" between the patent right and the misconduct in question.616 F.3d at 1331-32.
The court rejected Princo's arguments that misuse requirements were met. First, Princo said that Philips "leveraged" its patents, because it used the proceeds of its highly successful licensing program to fund royalty payments to Sony and because those payments gave Sony the incentive to enter into the alleged agreement to suppress the Lagadec patent. The court replied that "the use of funds from a lawful licensing program to support other, anticompetitive behavior is not the kind of 'leveraging' that the Supreme Court and this court have referred to in discussing the leveraging of a patent that constitutes patent misuse."616 F.3d at 1332.
Second, Princo asserted that the Supreme Court has not required conventional "leveraging" of a patent in order to establish patent misuse. But the cases on which Princo relied, the court said, were antitrust cases and "those cases did not involve patent misuse or the enforceability of the defendants' patents." In addition, even if there is an antitrust violation with respect to Sony's Lagadec patent it does not follow that Philips is guilty of patent misuse with respect to the Raaymakers patents.
The dissent says that there is a horizontal agreement between Philips and Sony to suppress the Lagadec technology. "The dissent then characterizes that agreement as invoking the doctrine of patent misuse because it is 'part and parcel' of the licensing agreements between Philips and its licensees." That is incorrect, Judge Bryson argued: Princo's real grievance is just that "the Lagadec patent has not been made available for non-Orange-Book uses. And that is not patent misuse under any court's definition of the term." It may be an antitrust violation but it is not patent misuse.616 F.3d at 1332-33.
To sum up what is wrong with Princo's misuse claims, the court said:
In addition to the lack of a proper leveraging claim, Princo misuse arguments fail because "Princo failed to establish that the alleged agreement to suppress the Lagadec technology had anticompetitive effects." As the ITC found, "the Lagadec technology was not a viable potential competitor to the technology embodied in the Raaymakers patents." Therefore, its suppression by the Philips-Sony agreement had no effect (in any but-for sense). The court insisted that the proper rule for finding misuse is that "to sustain a misuse defense involving a licensing arrangement not held to have been per se anticompetitive by the Supreme Court, a factual determination must reveal that the overall effect of the license tends to restrain competition unlawfully in an appropriately defined relevant market."
In addition to arguing misuse, Princo argued that the "agreement between Philips and Sony not to license the Lagadec technology for non-Orange-Book purposes was a naked restraint of trade with no procompetitive justification, and that Philips's conduct in entering into that agreement should render its Orange Book patents unenforceable." The court disagreed. This all grew out of a joint venture between Philips and Sony to develop standards for and commercialize CD-R/RW technology, with "significant procompetitive features," so that it must be analyzed under the rule of reason rather than as a "naked restraint."616 F.3d at 1334-36.