The Misuse Defense after Princo

By Timothy J. Barron and Olivia T. Luk

he president of your best client, ucts made. Genius and Smartie also agreed in a 1917 U.S. Supreme Court decision, Genius Gel, Inc., calls seeking that Smartie would not separately license Motion Picture .1 There, the patentee Temergency legal advice. Genius the Smartie patent to any company outside owned a patent on projector technology is a leading cosmetics manufacturer that the standard license agreement. that it was willing to license, but it refused makes high-end anti-aging creams. A com- About a year ago, Beauty entered into to do so unless the licensee also agreed petitor, Beauty & Brains Co., which had a standard license with Genius. Under the to purchase unpatented film the patentee been faithfully paying Genius lucrative license, Beauty used the Genius technol- manufactured. The Supreme Court held that royalties under a patent license agreement, ogy to manufacture its balm in France, the license’s requirement that all licensees abruptly stopped paying. Beauty asserts which it then imported into the United purchase the patentee’s unpatented film was that it owes no royalty because several States. Now, however, Beauty continues an improper broadening of the patentee’s Genius licensing practices constitute “pat- to import the product without paying rights under the projector patent. ent misuse.” royalties, based on its belief that the In subsequent decisions, the Supreme The dispute arose out of a business license is illegal. According to Beauty’s Court explained that the doctrine of patent arrangement between Genius and another president, two of Genius’s practices misuse bars a patent owner from using competitor, Smartie Serum, Inc. Responding constitute patent misuse: forcing licensees the “patent’s leverage” to “extend the to consumer demand, Genius and Smartie who wanted the Genius technology to of his patent to derive a benefit joined forces to develop anti-aging creams also license the inferior Smartie technol- not attributable to the use of the patent’s that also increase brain power. The joint ogy and agreeing with Smartie to refuse teachings.”2 The Federal Circuit has since venture resulted in several patents, including licensing the Smartie patent outside of the indicated that the “key inquiry is whether, Genius patents covering various aspects of standard package license. Genius wants by imposing conditions that derive their the manufacturing process for a cream that to sue Beauty for patent infringement, but force from the patent, the patentee has uses only organic ingredients and increases its president is concerned about Beauty’s impermissibly broadened the scope of the test patients’ IQ scores and a Smartie patent contention that no royalty is due because patent grant with anticompetitive effect.”3 covering a manufacturing process for a cream Genius is guilty of “patent misuse.” In 1986, the Federal Circuit identified using artificial and synthetic ingredients with You explain to your client that patent a few “specific practices as constituting an inconsistent effect on IQ scores. Only the misuse is a defense related to antitrust law per se patent misuse, including so-called Genius cream received FDA approval. that can be used in a patent infringement ‘ arrangements’ in which a patentee Genius and Smartie licensed the action. Luckily, the U.S. Court of Appeals conditions a license under the patent on technology to industry competitors, using for the Federal Circuit recently clarified the purchase of a separable, staple good, the scope of the defense in its en banc and arrangements in which a patentee ef- decision in Princo Corp. v. Int’l Trade fectively extends the term of its patent by Comm’n, ___F.3d ___, No. 2007-1386, requiring post-expiration royalties.”4 Price- Recently, the scope 2010 WL 3385953 (Fed. Cir. Aug. 30, fixing has also been considered misuse per 2010). Indeed, Princo extended the recent se, requiring no further analysis of com- trend of decisions that have significantly petitive effect.5 of actions that narrowed the circumstances in which a defendant in a patent case can prevail on a The State of Patent Misuse Before constitute misuse misuse defense. Princo Recently, the scope of actions that constitute What Is Patent Misuse? misuse per se has narrowed markedly. For per se has narrowed The doctrine of patent misuse, which usu- example, under the 1988 revision to 35 U.S.C. ally concerns a patent owner’s licensing § 271(d), a tying arrangement in which a markedly. practices, is a defense available to a party patentee conditions a license under the patent accused of patent infringement. Generally, on the purchase of a separable, staple good the doctrine limits a patent owner’s abil- does not amount to patent misuse “unless in a single standard license agreement that ity to include provisions in a license that view of the circumstances, the patent owner required a license to several patents in a impermissibly broaden the owner’s rights has in the .”6 pool of Genius patents and the Smartie under a patent. The defendant itself need Section 271(d) codifies this and other restric- patent, although it did not require licensees not have been a licensee or prospective tions on relief for infringement or contributory to practice the Smartie technology. Royalty licensee to raise the defense. infringement when the patent owner has done payments to Genius under a license are not one or more of the following: calculated based on the number of patents Development of the Misuse Defense licensed, but rather on the number of prod- The principle of patent misuse originated (1) derived revenue from acts which

Published in Intellectual Property Litigation, Volume 22, Number 2, Winter 2011. © 2011 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. if performed by another without his for the bottom line: “Will Beauty be able royalty payments. consent would constitute contributory to successfully assert that we committed infringement of the patent; (2) licensed patent misuse?” You explain that the Fed- The First Trial and Appeal or authorized another to perform acts eral Circuit’s recent Princo decision sheds Philips sued Princo for patent infringement which if performed without his consent some light on the situation. in the U.S. International Trade Commis- would constitute contributory infringe- sion (ITC), where the administrative law ment of the patent; (3) sought to enforce The Federal Circuit’s Princo judge (ALJ) ruled that although Princo’s his patent rights against infringement or Decision recordable compact discs infringed the contributory infringement; (4) refused to The facts of the Princo case are very Philips patents at issue, all of the patents license or use any rights to the patent; or similar to those of Genius’s predicament, were unenforceable due to per se patent (5) conditioned the license of any rights although the case had a rather tortuous misuse. The ITC affirmed the ALJ’s ruling to the patent or the sale of the patented procedural history. In Princo, Sony and that the Philips-Sony package licensing product on the acquisition of a license Philips competed in manufacturing record- arrangements were illegal “tying” arrange- to rights in another patent or purchase able and rewritable compact discs. Howev- ments because they were patent misuse per of a separate product, unless in view of er, several years ago, they were concerned se and there was also patent misuse under the circumstances, the patent owner has about adopting competing technologies market power in the relevant market for that would limit the growth of both par- the patent or patented product on which ties’ technology. Thus, they agreed to the license or sale is conditioned. work together to develop a standard tech- The Federal Circuit nology for compact discs that consumers With the constriction of the circumstanc- could use to record information. es in which licensing practices are deemed At the time, both companies owned pat- applied the doctrine of per se patent misuse, these practices are ents covering methods of writing on discs. now commonly analyzed under the “rule Philips’s patent used an analog , patent misuse narrowly of reason.” The U.S. Supreme Court de- while Sony’s patent employed digital tech- scribed this analysis as follows: nology. For various reasons, they agreed and upheld the ITC’s that Philips’s patented technology was When a practice alleged to constitute pat- more suitable for the market, and thus, ent misuse is neither per se patent misuse the companies decided to pursue only the decision. nor specifically excluded from a misuse technology covered in Philips’s patents. analysis by § 271(d), a court must deter- In so doing, they developed and published mine if that practice is reasonably within technical standards—the Recordable CD the “” analysis. the patent grant, i.e., that it relates to sub- Standard—which the industry dubbed the On appeal, the Federal Circuit reversed, ject matter within the scope of the patent “Orange Book.” Companies manufactur- finding that Philips’s license agreement did claims. If so, the practice does not have ing the machines used by consumers to not constitute patent misuse because it did the effect of broadening the scope of the record on compact discs followed the not broaden the scope of Philips’s patents patent claims and thus cannot constitute Orange Book standard to be compatible. or involve an illegal tying arrangement. In patent misuse. If, on the other hand, the Sony and Philips licensed their patents, addition to citing other errors, the Federal practice has the effect of extending the among others, as a group in a “package li- Circuit held that even though the package patentee’s statutory rights and does so cense” agreement. Companies who wanted license tied different patents together, the with an anti-competitive effect, that prac- to make and sell such recordable compact license was not illegal because it did not tice must then be analyzed in accordance discs entered into a package license agree- charge the licensee extra for the nonprac- with the “rule of reason.” . . . Under the ment with Philips that included a “patent ticed patent, but rather, charged a fixed fee.9 rule of reason, the finder of fact must pool” of patents. The Philips patents that Therefore, including additional patents decide whether the questioned practice were actually adopted as the standard were in the license program may actually have imposes an unreasonable restraint on in the patent pool, as was the Sony patent pro-competitive effects such as minimiz- , taking into account a variety on the digital writing method, even though ing transaction costs and ensuring against of factors, including specific information that technology was incompatible with the risk of post-agreement disputes. The about the relevant business, its condition the Orange Book standard. The licenses Federal Circuit remanded the case back to before and after the restraint was im- required the manufacturers to pay a roy- the ITC for further “rule of reason” analysis posed, and the restraint’s history, nature alty of one half to two thirds of the selling on issues including whether there had been and effect.7 price per disc. , whether the licenses covered Like many others in the industry, technologies that were close substitutes, Naturally, a rule of reason inquiry typi- Princo wanted to make recordable com- and whether the pool licensors would have cally involves a detailed analysis of the pro- pact discs that were compatible with the competed in the technology-licensing mar- competitive benefits as well as the anticom- industry standard. Accordingly, Princo ket absent the pooling arrangements. petitive harms of any challenged practice.8 entered into the standard package license The Second Trial and Appeal After you explain this general back- agreement with Philips. Shortly thereafter, On remand, the ITC determined that ground of patent misuse, your client asks however, Princo stopped making the steep “there has been no showing that the [tied]

Published in Intellectual Property Litigation, Volume 22, Number 2, Winter 2011. © 2011 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. patent competes with another patent in the ment would not constitute patent misuse Despite the dissent’s misgivings, in the pool, no showing that the pool licensors and would not be a defense to Princo’s end, the majority opinion in Princo does would have competed in the technology patent infringement. The court based its provide clear guidance on two points: licensing market absent the pooling ar- ruling on the fact that the activity that rangement, and no showing of the anti- forms the basis of the defense of patent • There is no patent misuse when a competitive effect required under a rule of misuse must involve the patent that the license agreement that ties a nones- reason analysis.” Thus, the ITC concluded defendant is accused of infringing, which sential, or nonpracticed, patent to an there was no patent misuse.10 Princo again were Philips’s patents. Because the alleged essential, or practiced, patent results appealed to the Federal Circuit, in Princo misuse related only to Sony’s patent, in procompetitive effects, including II, focusing on an alleged side agreement which was not at issue in the infringement decreased post-agreement disputes, between Sony and Philips barring Sony case, Princo could not prove the defense of that outweigh any anticompetitive from licensing its patent on digital disc patent misuse.12 effects such as restraint on trade or writing methods outside of the package li- The Federal Circuit also held that Princo competition. cense. Princo argued that this arrangement failed to establish that the alleged horizon- • There is no patent misuse if the anti- was a “horizontal agreement” between tal agreement had anticompetitive effects. competitive activity in a “horizontal Sony and Philips that illegally suppressed To the contrary, the court reasoned that agreement” involves a licensed competition. Princo contended that the Philips and Sony had acted legitimately in patent that is not asserted in the Sony patent was a commercially viable choosing not to compete against their own infringement action. technology and would have been fully able joint venture. And, pointing to evidence that the Sony patent was prone to errors, unreli- How Princo Affects Genius able, and unworkable, the court determined After hearing this explanation of Princo, that the alleged “suppressed” Sony technol- your client asks again for the bottom line: There is no ogy was not a viable potential competitor to How does Princo affect Genius’s situation? Philips’s technology.13 You explain that there are two separate In his dissent, Judge Dyk presented a dif- Genius activities that potentially constitute patent misuse if ferent analysis of the patent misuse doctrine misuse: the requirement that all package and explained why the majority’s narrow licenses include both Genius and Smartie the anticompetitive approach was improper. He explained that patents even though some licensees do not neither Philips nor the ITC even advanced want the inferior Smartie technology, and the position the majority ultimately adopt- the side agreement between Genius and activity in a “horizontal ed—that the failure to assert infringement of Smartie that Smartie will not license its pat- Sony’s patent in the ITC proceedings barred ent outside the package license agreement. agreement” involves a finding of patent misuse. He also pointed out that the majority’s holding—that there The Package License’s Inclusion of the could be no misuse unless the accused Smartie Patent a licensed patent that infringer shows that the technology was, or On the first issue, Princo sets forth several would probably have become, commercially factors related to whether the agreement is not asserted in the viable—contravenes established patent mis- is procompetitive or anticompetitive that use doctrine. The dissent asserted that the guides the determination of whether infringement action. majority holding contradicts the Supreme Genius’s package license agreement Court’s latest decision on patent misuse, amounts to misuse. For example, one Illinois Tool Works, in which the Court con- anticompetitive factor is whether Genius’s li- cluded that “[i]t would be absurd to assume censees have to pay more because the license to compete in the market had the technol- that Congress intended to provide that the includes the Smartie patent or if instead, ogy not been suppressed.11 The Federal use of a patent that merited punishment as a the price of the license agreement is fixed Circuit initially remanded the case again to felony [under the Sherman Act] would not regardless of whether the Smartie patent is the ITC for further fact finding regarding constitute ‘misuse.’” included. If the price of the license increases the alleged horizontal agreement. How- Judge Dyk further argued that if the hori- when it contains the Smartie patent, a finding ever, before the remand was effected, the zontal agreement and the license agreements of misuse is more probable, whereas if the Federal Circuit granted rehearing en banc. constitute misuse with respect to Sony’s price remains the same, misuse is less likely. patent, they should also constitute misuse of Another anticompetitive factor is whether The Federal Circuit’s Decision on Rehearing Philips’s patent at issue. He contended that Genius’s licensees are forced to practice the On rehearing, the Federal Circuit applied the majority decision effectively emasculates Smartie patented technology, even if they do the doctrine of patent misuse narrowly and the patent misuse doctrine and leaves the not wish to. Based on the facts your client upheld the ITC’s decision finding Philips enforcement of antitrust violations (outside related, however, neither of these factors is had committed no patent misuse. The illegal tying arrangements and patent term present, and thus, under the Princo holding, court held that even if Philips and Sony extensions) to private and government anti- the license agreement does not at first blush had agreed to suppress the technology trust proceedings, which are “likely inad- appear to be anticompetitive in nature. embodied in Sony’s patent, such an agree- equate to the task.”14 Based on the Princo decision, an ad-

Published in Intellectual Property Litigation, Volume 22, Number 2, Winter 2011. © 2011 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. ditional factor to investigate is whether technology. If Genius entered into the joint Endnotes Genius believed the Smartie patent was venture to share royalties with Smartie in 1. Motion Picture Patents Co. v. Universal reasonably necessary to practice anti-aging exchange for Smartie’s agreement not to com- Film Mfg. Co., 243 U.S. 502 (1917). intelligence cream manufacturing accord- pete against the Genius technology, the action 2. Zenith Radio Corp. v. Hazeltine Research ing to FDA standards. If even one of the would likely be seen as anticompetitive. Inc., 395 U.S.100, 136 (1969); see 6 Chisum, claims in the allegedly unwanted Smartie Finally, Princo made clear that the Chisum on Patents, § 19.04[3] at 19–451. patent is arguably necessary to meet the anticompetitive behavior must concern the 3. C.R. Bard, Inc. v. M3 Sys., Inc., 157 F.3d industry standard, the patent would be patent that is the subject of the infringe- 1340, 1372 (Fed. Cir. 1998). considered a so-called blocking patent. ment action to be the basis for a misuse 4. Vir. Panel Corp. v. MAC Panel Co., 133 Under Princo, the licensing of blocking defense. Based on the Princo holding, F. 3d 860 (Fed. Cir. 1997). patents actually promotes competition by because the alleged anticompetitive acts 5. Herbert Hovenkamp et al., IP and permitting all licensees to practice indus- concern the Smartie patent, but your client Antitrust: An Analysis of Antitrust try standard technology and by preventing would only assert that Beauty infringed Principles Applied to Intellectual overlapping patent litigation.15 Thus, if the Genius patent, the misuse defense Property Law § 3.2 (2d ed. 2010). Genius believed the Smartie patent was would have little chance of success. 6. 35 U.S.C. § 271(d)(5); Ill. Tool Works necessary to practice the FDA standard, Inc. v. Indep. Ink, Inc., 547 U.S. 28, 46 (2006) including the Smartie patent in the pack- Conclusion (holding that in all cases involving tying age agreement would more likely be The Princo decision continues the trend of arrangements, the plaintiff must prove that the considered procompetitive in nature. narrowing the patent misuse doctrine. The defendant has market power in the tying product). Federal Circuit’s holding that the alleged 7. Id. The Horizontal Agreement to Restrict Licensing misuse must involve the specific patent at 8. See IP and Antitrust, at § 3.2e. the Smartie Patent issue in the infringement litigation and not 9. Id. (holding no patent misuse where a The second issue is whether the “horizon- any of the other licensed patents is another license did not force licensees to manufacture tal” agreement between Genius and Smart- clear statement that the doctrine applies in or practice the Sony patent and explaining ie to restrict licensing of the Smartie patent very limited circumstances. patent misuse is found only if there is proof to the package license agreement amounts Princo may still petition the Supreme the patentee had market power and proof to misuse. Once again, Princo lays out Court to grant certiorari, however. If the the license agreement’s effect is to restrain several relevant factors to determining Supreme Court does so, of course, you may competition in a relevant market.) whether the restriction is anticompetitive need to reconsider Genius’s actions in light 10. Princo Corp. v. Int’l Trade Comm’n, in nature. For example, one consideration of the Court’s subsequent ruling. In addi- 563 F.3d 1301, 1306 (Fed. Cir. 2009). is how well the Smartie technology works. tion, Genius must also consider its actions 11. Id. at 1315. Because your client has indicated that in light of antitrust law, because actions that 12. Princo Corp. v. Int’l Trade Comm’n, 2010 the Smartie technology has unpredictable do not rise to the level of patent misuse may WL 3385953, at *10 (“Such an agreement would results, the technology would not likely still constitute antitrust violations. l not have the effect of increasing the physical be considered a viable alternative to the or temporal scope of the patent in suit, and it Genius patent, and therefore, its restriction Timothy J. Barron is a partner at therefore would not fall within the rationale of would not be anticompetitive. Jenner & Block, LLP, Chicago, Illinois. the patent misuse doctrine as explicated by the Another factor Princo considered in the He may be reached at tbarron@jenner Supreme Court and this court.”) analysis of this issue is the reason Genius .com. Olivia T. Luk is an associate at 13. Id. at *12. and Smartie teamed up in the first place to Jenner & Block, LLP, Chicago, Illinois. 14. Id. research and develop the intelligence cream She may be reached at [email protected]. 15. See Id. at *3; see IP and Antitrust, at § 3.3g.

Published in Intellectual Property Litigation, Volume 22, Number 2, Winter 2011. © 2011 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.