Agreement to Impose Licensing Restrictions Would Not Amount to Patent Misuse

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

The U.S. Court of Appeals for the Federal Circuit, sitting en banc, has decided that an alleged agreement between potential competitors to impose licensing restrictions that suppressed an alternative technology for recordable and rewritable compact discs (CDs) would not amount to patent misuse.

A CD maker that admitted to infringement appealed an International Trade Commission (ITC) decision that banned the company from importing recordable and rewritable CDs, following a complaint from patent holder U.S. Philips Corporation. The divided appellate court sustained the ITC’s decision that the patent misuse doctrine did not bar Philips from enforcing its patent rights against the CD maker.

Patent Misuse Doctrine

The majority opinion explained that the patent misuse doctrine limited a patentee’s right to impose conditions on a licensee that exceeded the scope of the patent right. The court ruled that even if an agreement existed between Philips and potential rival Sony Corporation to suppress the technology embodied in a Sony patent, such an agreement would not constitute patent misuse and would not be a defense to Philips’s claim of infringement against the CD maker.

Such an agreement would not have had the effect of increasing the physical or temporal scope of the patent in suit, which was prohibited under the patent misuse doctrine, the court explained.

The assertion of misuse arose not from the terms of the license itself but rather from an alleged collateral agreement between the competing developers. Moreover, the agreement did not have the effect of suppressing potentially viable technology that could have competed with the chosen standards.

Noting that “courts and commentators have questioned the continuing need for the doctrine of patent misuse, which had its origins before the development of modern antitrust doctrine,” the court said that proof of an antitrust violation “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.”

Dissent

The dissent framed the question at issue as whether the existence of an antitrust violation—in the form of an agreement to suppress an alternative technology designed to protect a patented technology from competition—constitutes misuse of the protected patents. The dissent contended that the majority's holding that it did not constitute patent misuse seemed “directly contrary to the Supreme Court’s view of patent misuse in its recent Illinois Tool Works decision [2006-1 Trade Cases ¶75,144, 126 S.Ct. 1281], where the Court concluded that `[i]t would be absurd to assume that Congress intended to provide that the use of a patent that merited punishment as a felony [under the Sherman Act] would not constitute “misuse.’”

Federal Trade Commission Amicus Brief

The Federal Trade Commission had filed an amicus brief in the case, stating that, to the extent the court draws on antitrust law to resolve the patent misuse claim, it should recognize that pro-competitive efficiencies could justify some competitive restraints, but only if they were reasonably necessary to facilitate a productive collaboration between companies, such as a joint venture to invent, develop, and commercialize new technologies.

The brief also emphasized that, under the flexible rule of reason framework, some inherently suspect business practices may be deemed anticompetitive without any elaborate analysis of market power or proof of actual harm to competition. The agency did not side with any party and did not take a position on whether other patent law considerations might warrant applying different standards than those used in antitrust law.

A copy of the February 16 filing can be found here on the FTC website.

American Antitrust Institute Amicus Brief

In its January 2010 amicus brief, the American Antitrust Institute (AAI) urged the Federal Circuit to treat agreements by potential competitors in a patent pool not to license their patents outside the pool as “inherently suspect” and therefore grounds for patent misuse. AAI contended that Philips failed to rebut the presumption that its agreement with Sony to include the Sony patent in the pool was unreasonable.

A copy of the brief appears here on the AAI website.

The August 30 decision in Princo Corporation v. International Trade Commission, 2007-1386, will appear at 2010-2 Trade Cases ¶77,147.