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Scope of Patent Misuse Doctrine Sparks Debate In Federal Circuit

By Jason Hicks, Esq.

On August 30, 2010, the Federal Circuit issued an en banc decision in Princo Corporation v. International Trade Commission --- F.3d ---, 2010 WL 3385953 (C.A. Fed. 2010). As described in the concurring opinion, "[t]his case arises at the uneasy intersection of antitrust and patent law, in essence posing the novel question of whether (and if so, to what extent) patentee competitors may enter an agreement regarding the licensing of their patents."

The case involved a patent pool licensed by Philips relating to "Orange Book" standards for encoding data on recordable CDs. Princo licensed these patents from Philips, but then stopped paying license fees and was sued. As a defense, Princo claimed that Philips misused its patents by agreeing with Sony not to license a different patent that would have allowed for the development of an alternate method of encoding data.

The original Federal Circuit panel held that Princo could proceed with its misuse defense. The majority en banc decision, however, held that Princo's patent misuse theory failed for two reasons. First, the majority held that the alleged wrongdoing (suppressing the patents for the potential alternative technology) did not involve the misuse of patents at issue, but rather involved an agreement not to license other patents. The majority viewed the agreement to suppress the competing technology as "unrelated antitrust violation" because it did not involve the use (or leveraging) of the patents at issue. The majority explained:

The misuse must be of the patent in suit. An antitrust offense does not necessarily amount to misuse merely because it involves patented products or products which are the subject of a patented process....

Reduced to its simplest elements, 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?

The majority concluded that it would not constitute misuse because "[s]uch an agreement would not have the effect of increasing the physical or temporal scope of the patent in suit, and it therefore would not fall within the rationale of the patent misuse doctrine as explicated by the Supreme Court and this court."

Second, the majority held that Princo bore the burden of proving that the agreement to suppress the competing patents had an adverse effect on competition under the rule of reason. The majority declined to apply the "quick-look" analysis, which applies to "naked restraints" where the arrangement is "so plainly anticompetitive that courts need undertake only a cursory examination before imposing antitrust liability." Instead, the majority concluded that agreements not to compete among joint venturers is not a "naked restraint" -- "[p]articularly when the purpose of the joint venture is to set standards for an industry." Princo failed to meet its burden of proving anticompetitive effects under the rule fo reason because Princo had not demonstrated there was a reasonable probability that the competing technology, if available for licensing, would have matured into a competitive force in the data storage technology market.

While the majority opinion takes a narrow view of the patent misuse doctrine, Judges Dyk and Gajarsa wrote a 13 page dissenting opinion which takes a much broader view. The dissent argues that agreements to suppress competing technology may constitute patent misuse if the agreement protected the asserted patents from competition. In other words, patent leveraging is not the only type of patent misuse.

The dissent argued that antitrust laws do not provide an adequate remedy for such an agreement given the undeveloped nature of the competing technology that was suppressed and the strictures of the indirect purchaser rule which limit who has standing to assert an antitrust claim. "Unless the protected patents are held to be unenforceable" under the patent misuse doctrine, the dissent argues, "there will be no adverse consequences to the patent holder for its misconduct nor will the patent misuse be remedied."

The dissent also objected to the majority's application of the rule of reason. The dissent argued that patent misuse is broader than an antitrust violation, but that if there was an antitrust violation, then it will also constitute misuse. Under antitrust analysis, the dissent argued that Princo had satisfied its initial burden of proof by proving an agreement to suppress competing technology. Since this type of agreement is inherently suspect, the dissent would have applied the "quick look" rule of reason. "Competitive harm is thus presumed, and the burden falls on Phillips to come forward with some plausible" justification for the restraint.

The dissent also objected to the majority's requirement that Princo prove a "reasonable probability" that the competing technology would have been commercially viable if it had not been suppressed. The dissent argued:

[T]here is ... no procompetitive benefit from the suppression of potential competition, no matter how remote the possibility of success... [T]he antitrust laws are designed to protect not only full-fledged competition but also nascent competition. It is vitally important to protect competition from being stifled in its infancy. There is great difficulty in predicting commercial viability in the early stages of technological development, and indeed the patent system itself recognizes the importance of protecting technologies that have not yet reached the stage of commercial viability.... In short, it would be inimical to the purposes of the Sherman Act to allow monopolists free reign to squash nascent, albeit unproven, competitors at will--particularly in industries marked by rapid technological advance and frequent paradigm shifts.

The vast difference between the majority and dissenting opinions demonstrates the uncertain nature and scope of the patent misuse doctrine. The majority says not all antitrust violations constitute misuse; the dissent says patent misuse is broader than antitrust law. The majority says the accused infringer (or antitrust plaintiff) bears the burden of proving anticompetitive effects under the rule of reason; the dissent says the patentee (or antitrust defendant) bears the burden of proving procompetitive effects under the quick look analysis. There is supporting caselaw for both positions. The scope of the patent misuse doctrine is sometimes in the eye of the beholder.

The majority's narrow view of patent misuse, however, may not be the last word on this issue. Given the vigorous dissenting opinion (and the vagaries of the patent misuse doctrine in existing caselaw), this is an inviting case for the Supreme Court to review.

Full post as published by Antitrust and Distribution Law Blog on September 02, 2010 (boomark / email).