Antitrust Alert: Federal Circuit Decision Highlights Possible Antitrust Risks in Patent Pools
Earlier this week, the U.S. Court of Appeals for the Federal Circuit issued a decision that could have significant implications with respect to the formation and operation of patent pools. Princo Corp. v. International Trade Commission, 2007-1386 (Fed. Cir., April 20, 2009). The decision expands on the court's landmark 2005 decision, Philips Corp. v. International Trade Commission, 424 F.3d 1179 (Fed. Cir. 2005), by acknowledging flexibility in the definition of essential patents for purposes of inclusion of patents in a pool. However, the decision also holds that restraints on the ability of pool members to license competing patents outside the pool for separate uses may constitute patent misuse.
The decision arises out of the same long-running litigation as Philips. In that decision, the Federal Circuit overturned an ITC decision holding unlawful the formation of patent pools by Philips, Sony, Taiyo Yuden and Ricoh, to combine and license patents for use in the manufacture of CD-Rs and CD-RWs. The Philips decision was based on two alternative grounds: (1) the likelihood of net procompetitive benefits associated with bundled licensing and patent pools; and (2) the absence of evidence showing that any of the patents in the pool were not essential. In Philips, the Federal Circuit made a strong statement that bundling and pooling of patents must be evaluated under the rule of reason, and thereby set a fairly high threshold for establishing anticompetitive harm with respect to the combination and licensing of patents within a patent pool.
On remand after Philips, the ITC considered, and rejected, two arguments of patent misuse. First, the ITC found that Philips did not include non-essential patents in the pool; it therefore rejected the argument that Philips conditioned a license to essential patents on agreeing to license non-essential patents. Second, the ITC found that Philips's alleged agreement with Sony not to license Sony's patent for competing uses outside the pool did not constitute patent misuse. In its Princo decision, the Federal Circuit upheld the first of these ITC decisions but overturned the second.
Essentiality of Patents in the Pool
To determine whether Philips and others had included a non-essential patent in the pool, the Federal Circuit applied a flexible standard of essentiality. The pool was formed to license patents necessary to comply with the "Orange Book,” which set forth the technical standards agreed to by the parties for CD-Rs and CD-RWs. The court held that a patent could qualify as essential to the manufacture of Orange-Book-compliant CD-Rs and CD-RWs if, at the time of the license, an objective manufacturer would have believed that a license to the patent "reasonably might be necessary” to practice the Orange Book technology. The fact that the patent ultimately might be proved non-essential would not affect this determination.
The Federal Circuit's decision is a welcome acknowledgement of the difficulties of predicting, at the time a patent pool is formed, which patents ultimately may be found necessary to manufacture the underlying standard. The approach adopted by the Federal Circuit protects pool members against second-guessing if one or more patents reasonably included in a pool ultimately are found not to be essential. But the court's focus on essentiality is somewhat disappointing. The Philips court had made clear its view that patent pools are likely to be procompetitive, regardless of whether they include non-essential patents. One unfortunate consequence of Princo is that it might weaken the antitrust position of patent pools that contain patents ultimately deemed to be non-essential.
Agreement Restricting Competing Uses
By a 2-1 majority, the Princo court overturned the second aspect of the ITC decision and remanded to determine whether Philips and Sony agreed not to license a Sony patent for potential competing uses. Princo alleged that Sony's patent covered a competing technology to that used in the Orange Book standard. Specifically, a Philips patent covered an analog solution for determining the "absolute time position” on a CD, whereas the Sony patent applied to the digital solution. The analog method (subject to Philips' patent) was selected for the Orange Book standard, but the Sony patent was also included in the patent pool as a potentially necessary patent. Princo alleged that Philips and Sony agreed not to license Sony's patent to any third party to create a product that would compete with Orange-Book-compliant CD-Rs and CD-RWs.
The Federal Circuit panel majority held that an agreement not to license Sony's patent for a competing use could constitute patent misuse. The court stated that the inclusion of a patent in a patent pool, which exists to facilitate licensing patents needed for a particular standard, "cannot justify the refusal to allow [that patent] to be licensed” for other uses that compete with that standard. "It is one thing to offer a pooled license to competing technologies; it is quite another to refuse to license the competing technologies on any other basis.”
The Federal Circuit acknowledged that the alleged agreement would be unlawful only if Philips and Sony had competing technologies, and the Sony alternative could not be considered to be a competing technology if it was not commercially viable. However, the court stated that the Sony alternative might have been a competing technology even if it had not developed to the point of commercial viability at the time of the alleged agreement. The court remanded to the ITC to determine whether the Philips and Sony technologies in fact competed and whether Philips and Sony had reached an agreement not to license the Sony patent for other uses.
The Federal Circuit's Princo decision provides an important reminder that there are limits with respect to the restraints that may accompany patent pools. In Philips, the Federal Circuit held that a refusal to license essential patents independently of the patent pool for the purpose of implementing the underlying standard was not per se unlawful. By contrast, Princo held open the possibility that an agreement not to license an essential patent independently of the patent pool for the purpose of developing a product that competed with the standard could constitute patent misuse. The analysis is similar to that sometimes applied with respect to joint ventures, in which a restraint within the scope of the joint venture (here, the patent pool and the underlying product standard) is more likely to be justified than a restraint that extends outside the scope of the joint venture.
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