IP Insight

Sarah Osborn Hill Limitations on the Right: The Patent Misuse Doctrine

n the important recent decision Princo Corp. v. In many instances when the licensed technology Int’l Trade Comm., narrowly construing the pat- is covered by several , package licenses are Ient misuse doctrine, the Federal Circuit, sitting necessary in order to avoid infringement. Indeed, in en banc, held that the patent misuse defense did not today’s world of complex, quickly changing technol- bar infringement claims in which two competitors ogy and in light of the high cost of patent litigation, joined forces to develop a standard technology, then licensees may desire package licenses, because they pooled their patented technology and made it avail- remove the uncertainty associated with selecting only able to the industry via a package license.1 The doc- certain patents for a license for a new technology.6 trine of patent misuse, which lies at the intersection Perhaps recognizing this need, Congress provided in of patent law and antitrust law, is an affir- the Patent Misuse Act of 1988 that the misuse defense mative defense to acts of infringement and cannot be used to avoid infringement when the pat- breach of license agreements and is available ent owner has when the patent holder has exceeded the scope of the monopoly right granted by his conditioned the license of any rights to the pat- or her patent. ent or the sale of the patented product on the Patent misuse is a complex doctrine that acquisition of a license to rights in another pat- is essential to understand when negotiat- ent or purchase of a separate product, unless, ing licensing agreements. Most frequently, in view of the circumstances, the patent owner patent misuse arises in instances when the has in the for the patent holder has “requir[ed] the purchase patent or patented product on which the license of unpatented goods for use with patented or sale is conditioned.7 apparatus or processes, prohibit[ed] production or sale of competing goods, or condition[ed] the grant That brings us to Princo. U.S. Philips Corporation of a license under one patent upon the acceptance of and Sony Corporation, as part of a joint venture, another and different license.”2 The first patent mis- developed the majority of the technology related to use cases related to patentees who, through licensing recordable and rewriteable compact discs (hereinaf- arrangements, had improperly conditioned the use of ter referred to as CD-R/RW technology). This tech- their patented equipment on the purchase of some nology included patents owned by Philips, Sony, unpatented material to be used with the and others. In order to ensure that these compact .3 These types of arrangements discs would be compatible with all machines avail- are referred to as improper “” able to read these discs, Philips and Sony published of unpatented materials to patented the CD-R/RW technology as a group of standards for equipment or methods. When a patent all manufacturers of this type of equipment to fol- holder enters into such an arrange- low in a publication known as the “Orange Book.” ment, his or her patent is unenforce- Philips and Sony offered several different package able. The patent holder’s rights are licenses to the CD-R/RW technology, which enabled restored by abandoning the abusive the licensee to produce discs in accordance with the practice and dissipating its harm- standards. ful consequences.4 Several of the patents covered the technology It is the third scenario that needed to encode a disc so that a CD reader or is the focus of the Princo writer could maintain its position when writing data case, which involved improper to a disc. Philips owns the Raaymakers patents, licensing arrangements—a form which offered one solution; Sony owns the Lagadec of tying. A patent owner is not patent, which offered an alternative approach. The misusing the patent merely by two entities decided that the in the Lagadec packaging it with other patents patent would be difficult to implement and prone for licensing; however, generally, the to error, therefore, they selected the solution in the patent holder cannot use the existence of one Raaymakers patents and established that technol- patent to coerce the licensee into licensing another.5 ogy as the CD-R/RW standard to be included in the

14 | The Federal Lawyer | November/December 2010 copyright, unfair , trade secret, and adver- “Orange Book.” Both the Raaymakers and Lagadec tising matters. Hill also prosecutes patent and trade- patents are included in the CD-R/RW technol- 8 mark matters. She is based in the firm’s Louisville office ogy package licenses offered to licensees. Princo and can be reached at [email protected].© 2010 Corporation, which manufactured discs using the Sarah Osborn Hill. All rights reserved. CD-R/RW technology, entered into a package license for the technology but stopped paying the licens- ing fees. Philips, as administrator of the package Endnotes licenses, filed suit for infringement of the Raaymak- 1Princo Corp. v. Int’l Trade Comm., 2010 WL ers patents. 3385953 (Fed. Cir. Aug. 30, 2010). Princo’s remaining contention in this case on 26 Donald S. Chisum, Ch i s u m o n Pa t e n t s § 19.04[3] appeal is that Philips misused its patents by agree- (Matthew Bender). ing with Sony to suppress the competing Lagadec 3See Motion Picture Patents Co. v. Universal Film method.9 Noting the narrow scope of the patent Manufacturing Corp., 243 U.S. 502 (1917) (A patentee misuse doctrine, the Federal Circuit commented that cannot restrict the purchaser of a patented film pro- wrongful commercial conduct by the patentee does jector to showing only certain films when its patent not equate to patent misuse, even if the conduct has rights are limited to the machine.); Carbice Corp. of an anticompetitive effect.10 America v. American Patents Development Corp., 283 Rather, more specifically, patent misuse occurs U.S. 27 (1931) (Conditioning a license for a patent when the patentee impermissibly broadens the on refrigerating transportation patents on the use of “physical or temporal scope” of the patent in suit patentee’s unpatented dry ice is improper.); Morton in a way that has an anticompetitive effect.11 Here, Salt Co. v. G. S. Suppiger Co., 314 U.S. 418 (1942) Princo does not complain about the patent in suit or (Conditioning a lease of a patented canner on the the package license. Its complaint relates to a third leasee purchasing unpatented salt tablets for use with party agreement between Phillips and Sony and the the canner from the patentee is improper.). Lagadec patent, a patent that Phillips does not allege 4Chisum, supra, note 2. it infringes. It complains that Phillips uses the license 5See American Security Co. v. Shatterproof Glass fees from the lawful package licenses to fund its Corp., 268 F.2d 777 (3d Cir. 1959), cert. denied, 361 alleged unlawful agreement with Sony, but this is U.S. 902 (1959) (holding that a package license con- not patent misuse. This conduct does not increase stituted impermissible tying where the licensor offered the physical or temporal scope of the Raaymakers the same royalty rate for its package license as for a patents. The patents in suit, the Raaymakers pat- license to only four of the patents within the pack- ents, do not “significantly contribute to the practice age). under attack;” therefore, absent a link between the 6See Princo supra, note 1 at *4. patent right and the misconduct, there can be no 735 U.S.C. § 271(d)(5). patent misuse.12 Additionally, the court found no 8In the proceedings below, the court found that anti-competitive effect. Philips and Sony chose not the Lagadec patent was necessary to the technology to compete against their own joint venture—conduct included in the “Orange Book”; therefore, there was that is “legitimate” under both antitrust and patent no impermissible tying in grouping it with the other misuse theories.13 “Orange Book” patents in a package license. Princo The majority of the court applied the patent mis- supra, note 1 at *4. use doctrine, as it was established, as an affirmative 9Id. at *10. defense. In its view, the doctrine is narrowly applied 10Id. at *8. to render an offender’s patent unenforceable. In this 11Id. at *7. instance, Philips and Sony were not acting as com- 12Id. at *10. petitors to suppress a patent and broaden their pat- 13Id. at *12. ent rights. Rather, they were acting for the good of their joint venture by choosing the more developed Editorial Policy technology that their designers felt was more likely to The Federal Lawyer is the magazine of the Federal accomplish their design objectives. Under this prec- Bar Association. It serves the needs of the association edent, licensing arrangements should be evaluated and its members, as well as those of the legal profes- for the effect on the patent at issue in the suit. Larger sion as a whole and the public. issues with possible anti-competitive effects—issues The Federal Lawyer is edited by members of its edi- that are ancillary to the patent in question—should be torial board, who are all members of the Federal Bar examined under antitrust law. TFL Association. Editorial and publication decisions are based on the board’s judgment. Sarah Osborn Hill is a registered patent attorney and a The views expressed in The Federal Lawyer are those member of the Intellectual Property and Technology Li- of the authors and do not necessarily reflect the views censing Group of Wyatt, Tarrant, & Combs LLP, where of the association or of the editorial board. Articles and she counsels clients and litigates in patent, trademark, letters to the editor in response are welcome.

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