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Princo Corp. v. International Trade Commission: Federal Circuit Addresses Patent Pools and Antitrust Violations

Antitrust Patent

Princo Corp. v. International Trade Commission, April 20, 2009, No. 07-1386

Slip Opinion

On April 20th, the Federal Circuit affirmed in part and vacated in part a decision by the International Trade Commission in a suit regarding a patent pool for the "Orange Book" technology used to produce recordable and rewritable CDs. At the ITC, Princo conceded that it violated six patents owned by Philips Corp, but it claimed those patents were unenforceable due to patent misuse. Writing for the Federal Circuit, Judge Dyk affirmed the ITC's findings that Princo failed to demonstrate that Philips committed patent misuse due to unlawful tying. However, the court remanded the case to determine whether Philips misused its patents by allegedly violating antitrust laws by agreeing not to compete with Sony.

The ITC originally ruled in Certain Recordable Compact Discs & Rewritable Compact Discs (Inv. No. 337-TA-474) that CD-R and CD-RWs imported by Princo infringed on six of Philips' patents, all of which relate to industry standard "Orange Book" CD technology. The patents at issue were jointly developed by Philips and Sony in the 1980s and early 1990s.  When developing the technology and industry standards, Philips, Sony, and other companies pooled their patents and allowed Philips to grant package licenses to each company, with all of the patent owners sharing in the royalties.

Barry Herman and Alex Englehart of the ITC Law Blog summarize the decision.  Patently-O explains the relevant case law and antitrust theories. The Patent Prospector recaps the case's background, providing excerpts from both the ITC and the Federal Circuit opinions.

On appeal at the ITC, Princo conceded infringement but made two distinct claims of patent misuse by Philips that would render the patents unenforceable. First, Princo argued that Philips misused its patents by tying a non-essential technology, the "Lagadec patent," into a bundle within the patent pool. Princo asserted that Philips thereby "improperly used its market power" to force manufacturers interested in Orange Book technology to also acquire a license to the non-essential Lagadec patent. However, the Federal Circuit affirmed the ITC's finding that this did not qualify as misuse since a reasonably broad claim construction of the Lagadec patent could make it essential to the technology. The Federal Circuit agreed that that this kind of tying is not misuse so long as "it would have been reasonable for a manufacturer to believe a license... was necessary."

Princo put forth a second misuse claim alleging that Philips violated antitrust laws by improperly colluding with Sony. According to Princo, "Philips bribed Sony not to use . . . Lagadec to compete against the [Philips dominated standard]." Princo alleged that Phillips and Sony agreed never to license the Lagadec patent without also licensing the rest of the patent pool. The court agreed with this argument, but it remanded to determine "(1) whether Lagadec was a potentially workable alternative to the Orange Book technology and (2) whether Princo has established that Sony and Philips agreed that Lagadec would not be licensed in a manner allowing its development as competitive technology."

Judge Bryson, who dissented in part, would have fully affirmed the ITC's findings. Judge Bryson concluded that this is not the rare case of patent misuse; the safe harbor of 35 USC 271(d) did not apply because the ITC found that Philips did have market power in the relevant market.

A news release on the website of the international firm Troutman Sanders LLP cautions patent holders, licensees, and technology manufacturers of possible implications that may arise from the decision, advising them not to enter hastily into patent pools: "As Princo reflects, such a pool needs to be set up carefully because various aspects of the negotiation or terms of a patent pool can give rise to antitrust allegations, patent disputes, or both." This case indicates the inherent tension between protecting patent holders' exclusive rights to their technology and the larger public policy considerations encouraging the development of competing technologies.