Princo v. ITC and U.S. Philips (CAFC 2007-1386) precedential

Corporate patent push becomes shove when it moves off the square of ground the patent covers.

Patent misuse developed as a non-statutory defense to claims of patent infringement. In the licensing context, the doctrine limits a patentee's right to impose conditions on a licensee that exceed the scope of the patent right. Because patent misuse is a judge-made doctrine that is in derogation of statutory patent rights against infringement, this court has not applied the doctrine of patent misuse expansively. In this case, we adhere to that approach, and we sustain the decision of the International Trade Commission that the doctrine of patent misuse does not bar the intervenor, U.S. Philips Corporation, from enforcing its patent rights against the appellants Princo Corporation and Princo America Corporation (collectively, "Princo").

Patent misuse has been before the Supreme Court numerous times, many times finding patent misuse for improperly trying to restrict unrelated commercial activity by tying it to a patent license. In other words, companies trying for a monopoly beyond the scope of granted patent protection.

The doctrine of patent misuse has its origins in a series of Supreme Court cases, beginning with the 1917 decision in Motion Picture Patents Co. v. Universal Film Manufacturing Corp., 243 U.S. 502 (1917)... Since the Court regarded the requirement to use particular films as beyond the legitimate scope of the patent [for a film projector], it held that the patent could not be enforced against a purchaser who used the patented projector with unsanctioned films.

Fourteen years later, in Carbice Corp. of America v. American Patents Development Corp., 283 U.S. 27 (1931), the Court held that it was improper for the owner of a patent on "refrigerating transportation packages" for transporting and storing dry ice to insist that licensees of that patent purchase their dry ice from the patent owner or its affiliates.

In a third case, Morton Salt Co. v. G.S. Suppiger Co., 314 U.S. 488 (1942), the patentee owned a patent on a machine used to add salt to canned foods. The patented machines were leased to canners on the condition that the canners would use salt tablets purchased from the patentee. When one of the patentee's lessees used the machine with its own salt tablets, the patentee sued for infringement. The Supreme Court held that the patent was unenforceable on the ground that the patentee had unlawfully used the patent "to secure an exclusive right or limited monopoly not granted by the Patent Office and which it is contrary to public policy to grant." Id. at 492.

In those cases, and several others in the same line of authority, the Supreme Court established the basic rule of patent misuse: that the patentee may exploit his patent but may not "use it to acquire a monopoly not embraced in the patent." Transparent-Wrap Mach. Corp. v. Stokes & Smith Co., 329 U.S. 637, 643 (1947). As for the most common form of patent misuse--requiring the purchase of an unpatented product as a condition for obtaining a license to the patent, the Court observed, "He who uses his patent to obtain protection from competition in the sale of unpatented materials extends by contract his patent monopoly to articles as respects which the law sanctions neither monopolies nor restraints of trade." Id. at 644.

The Court applied the same reasoning to licenses requiring the payment of licensing fees after the expiration of the licensed patent and thus having the effect of extending the life of the patent beyond the statutory period. In Brulotte v. Thys Co., 379 U.S. 29 (1964), the Court explained that a patent "empowers the owner to exact royalties as high as he can negotiate with the leverage of that monopoly. But to use that leverage to project those royalty payments beyond the life of the patent is analogous to an effort to enlarge the monopoly of the patent by tieing the sale or use of the patented article to the purchase or use of unpatented ones." Id. at 33.

As applied to patent licensing agreements, the Supreme Court put the matter succinctly in Zenith, 395 U.S. at 136:

[T]here are established limits which the patentee must not exceed in employing the leverage of his patent to control or limit the operations of the licensee. Among other restrictions upon him, he may not condition the right to use his patent on the licensee's agreement to purchase, use, or sell, or not to purchase, use, or sell, another article of commerce not within the scope of his patent monopoly.

As is its wont, while adhering to the guideline of restrictive business practices unrelated to the scope of patented protection, the CAFC put its own twist on Supreme Court precedent by wandering into the weeds of "anticompetitive effect." This superfluous swagger mangles the thrust of determining patent misuse, creating complexity and convolution which the CAFC wrapped itself in, as herein.

In our cases applying the Supreme Court's patent misuse decisions, we have characterized patent misuse as the patentee's act of "impermissibly broaden[ing] the 'physical or temporal scope' of the patent grant with anticompetitive effect." Windsurfing Int'l, Inc. v. AMF, Inc., 782 F.2d 995, 1001 (Fed. Cir. 1986). When the patentee has used restrictive conditions on licenses or sales to broaden the scope of the patent grant, we have held that an accused infringer may invoke the doctrine of patent misuse to defeat the patentee's claim. See Monsanto Co. v. McFarling, 363 F.3d 1336, 1341 (Fed. Cir. 2004); Va. Panel Corp. v. MAC Panel Co., 133 F.3d 860, 870 (Fed. Cir. 1997); Senza-Gel Corp. v. Seiffhart, 803 F.2d 661 (Fed. Cir. 1986).

In B. Braun Medical, Inc. v. Abbott Laboratories, 124 F.3d 1419 (Fed. Cir. 1997), and Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992), we explained the rationale underlying the doctrine. As a general matter, the unconditional sale of a patented device exhausts the patentee's right to control the purchaser's use of the device thereafter, on the theory that the patentee has bargained for, and received, the full value of the goods. That "exhaustion" doctrine does not apply, however, to a conditional sale or license, where it is more reasonable to infer that a negotiated price reflects only the value of the "use" rights conferred by the patentee. Thus, express conditions accompanying the sale or license of a patented product, such as field of use limitations, are generally upheld. See Gen. Talking Pictures Corp. v. W. Elec. Co., 304 U.S. 175, 181 (1938) ("Patent owners may grant licenses extending to all uses or limited to use in a defined field."). When those contractual conditions violate public policy, however, as in the case of price-fixing conditions and tying restraints, the underlying patents become unenforceable, and the patentee loses its right to sue for infringement or breach of contract. B. Braun, 124 F.3d at 1426; Mallinckrodt, 976 F.2d at 706.

The doctrine of patent misuse is thus grounded in the policy-based desire to "prevent a patentee from using the patent to obtain market benefit beyond that which inheres in the statutory patent right." Mallinckrodt, 976 F.2d at 704. It follows that the key inquiry under the patent misuse doctrine is whether, by imposing the condition in question, the patentee has impermissibly broadened the physical or temporal scope of the patent grant and has done so in a manner that has anticompetitive effects. B. Braun, 124 F.3d at 1426. Where the patentee has not leveraged its patent beyond the scope of rights granted by the Patent Act, misuse has not been found. See Monsanto, 363 F.3d at 1341 ("In the cases in which the restriction is reasonably within the patent grant, the patent misuse defense can never succeed."); Virginia Panel, 133 F.3d at 869 (particular practices by the patentee "did not constitute patent misuse because they did not broaden the scope of its patent, either in terms of covered subject matter or temporally").

In determining whether a particular licensing condition has the effect of impermissibly broadening the patent grant, courts have noted that the patentee begins with substantial rights under the patent grant--"includ[ing] the right to suppress the invention while continuing to prevent all others from using it, to license others, or to refuse to license, . . . to charge such royalty as the leverage of the patent monopoly permits," and to limit the scope of the license to a particular "field of use." United States v. Studiengesellschaft Kohle, m.b.H., 670 F.2d 1122, 1127, 1133 (D.C. Cir. 1981). Given that the patent grant entitles the patentee to impose a broad range of conditions in licensing the right to practice the patent, the doctrine of patent misuse "has largely been confined to a handful of specific practices by which the patentee seemed to be trying to 'extend' his patent grant beyond its statutory limits." USM Corp. v. SPS Techs., Inc., 694 F.2d 505, 510 (7th Cir. 1982).

Recognizing the narrow scope of the doctrine, we have emphasized that the defense of patent misuse is not available to a presumptive infringer simply because a patentee engages in some kind of wrongful commercial conduct, even conduct that may have anticompetitive effects. See C.R. Bard, Inc. v. M3 Sys., Inc., 157 F.3d 1340, 1373 (Fed. Cir. 1998) ("Although the defense of patent misuse . . . evolved to protect against 'wrongful' use of patents, the catalog of practices labelled 'patent misuse' does not include a general notion of 'wrongful' use."). Other courts have expressed the same view. See Kolene Corp. v. Motor City Metal Treating, Inc., 440 F.2d 77, 84-85 (6th Cir. 1971) (There is no such thing as "mis-use in the air. 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." (citations omitted)); McCullough Tool Co. v. Well Surveys, Inc., 395 F.2d 230, 238-39 (10th Cir. 1968) (the defense of patent misuse has been allowed "only where there had been a misuse of the patent in suit"). While proof of an antitrust violation shows that the patentee has committed wrongful conduct having anticompetitive effects, that 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.

Congress, ever-vigilant to avoiding statute creation the gets the job done, only put backspin on patent misuse. Sticking to its patented formula of "compromise solution", Congress stirred the muddle as to what was procompetitive versus anticompetitive.

Although patent misuse has been mainly a judicially created defense, Congress has not been entirely silent about the doctrine. However, instead of saying what patent misuse is, Congress has said what it is not. Thus, section 271(d) of the Patent Act sets forth five types of conduct that may not provide the basis for finding "mis-use or illegal extension of the patent right." The last two of the five, which were added in 1988, are

(4) refus[ing] to license or use any rights to the patent; or (5) condition[ing] the license of any rights to the patent or the sale of the patented product on the acquisition of a license to rights in another patent or purchase of a separate product, unless, in view of the circumstances, the patent owner has market power in the relevant market for the patent or patented product on which the license or sale is conditioned.

35 U.S.C. § 271(d).

Importantly, Congress enacted section 271(d) not to broaden the doctrine of patent misuse, but to cabin it. See Dawson Chem. Co. v. Rohm & Haas Co., 448 U.S. 176, 201 (1980) (addressing the role of section 271(d) in narrowing the scope of patent misuse). The 1988 amendment in particular was designed to confine patent misuse, with respect to certain licensing practices, to conduct having anticompetitive effects. See Ill. Tool Works Inc. v. Indep. Ink, Inc., 547 U.S. 28, 41 (2006); S. Rep. No. 100-492, at 9 (1988) (explaining that purpose of the amendment was to narrow the patent misuse doctrine, which "punish[es] innovators engaged in procompetitive distribution and licensing practices"); id. at 14 ("The lack of clarity and predictability in application of the patent misuse doctrine and that doctrine's potential for impeding procompetitive arrangements are major causes for concern."); 134 Cong. Rec. 32,471 (1988) (statement of Sen. Patrick Leahy) ("Reform of patent misuse will ensure that the harsh misuse sanction of unenforceability is imposed only against those engaging in truly anticompetitive conduct."); id. at 32,295 (statement of Rep. Robert Kasten-meier) ("[T]he proposed modifications should have a pro-competitive effect, insofar as they require some linkage between patent licensing practice and anti-competitive conduct.").

In its ruling, the CAFC admits that §271(d) is not on point, but wanted to robe itself in Congressional intent.

Section 271(d) is not directly implicated in this case because the conduct here at issue does not fall within any of the five statutorily defined categories. Nonetheless, the statute is pertinent because, as both the text and the legislative history of the 1988 amendment to section 271(d) make clear, Congress was concerned about the open-ended scope of the doctrine and sought to confine it to anticompetitive conduct by patentees who leverage their patents to obtain economic advantages outside the legitimate scope of the patent grant.

With all that irrelevant backdrop, the CAFC angled to the Orange Book. The "Raaymakers" patents referred to were the ones covering technology adopted in the Orange Book standard, as opposed to a competing technique by Sony (the Lagadec patent) that lost out in creating the standard. Princo used the competition for Orange Book standards adoption as a wedge issue for patent misuse. It didn't work; at least, not as a majority opinion.

This case presents a completely different scenario from the cases previously identified by the Supreme Court and by this court as implicating the doctrine of patent misuse. Philips is not imposing restrictive conditions on the use of the Raaymakers patents to enlarge the physical or temporal scope of those patents.

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? ... Such 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.

Suddenly, competitive effect is shed like a skin to get back to the snake in the grass, or not, as the case may be. The CAFC whacks at nature of the snake backhanded, by what misconduct is not.

What patent misuse is about, in short, is "patent leverage," i.e., the use of the patent power to impose over-broad conditions on the use of the patent in suit that are "not within the reach of the monopoly granted by the Government." Zenith, 395 U.S. at 136-38. What that requires, at minimum, is that the patent in suit must "itself significantly contribute[] to the practice under attack." Kolene Corp., 440 F.2d at 85. Patent misuse will not be found when there is "no connection" between the patent right and the misconduct in question, see Republic Molding Corp. v. B.W. Photo Utils., 319 F.2d 347, 351 (9th Cir. 1963), or no "use" of the patent, see Virginia Panel, 133 F.3d at 870. In this case, there is no such link between the putative misconduct and the Raaymakers patents.

The en banc decision then wades into antitrust, particularly joint ventures, as, in this case, the ultimate cooperation between Philips and Sony in creating the Orange Book standard, even though niggling competition existed in determining the standard. The CAFC paid homage to economies of scale, the God of capitalistic endeavor, sweetly cloaked as "social benefit." What government does not, in its bones, understand that might makes right?!

Collaboration for the purpose of developing and commercializing new technology can result in economies of scale and integrations of complementary capacities that reduce costs, facilitate innovation, eliminate duplication of effort and assets, and share risks that no individual member would be willing to undertake alone, thereby "promot[ing] rather than hinder[ing] competition." Dep't of Justice & FTC, Antitrust Guidelines for the Licensing of Intellectual Property §§ 5.1, at 24; 5.5, at 28 (Apr. 6, 1995); see also Herbert Hovenkamp, Antitrust Law ¶ 2115a, at 110 ("[J]oint innovation often produces significant social benefits in relation to costs."); FTC & Dep't of Justice, Antitrust Guidelines for Collaborations Among Competitors § 2.1, at 6 (Apr. 2000); Thomas A. Piraino, Jr., The Antitrust Analysis of Joint Ventures After the Supreme Court's Dagher Decision, 57 Emory L.J. 735, 767-68 (2008); Joseph Kattan, Antitrust Analysis of Technology Joint Ventures: Allocative Efficiency and the Rewards of Innovation, 61 Antitrust L.J. 937, 938 (1993).

Affirmed (what was not clear before: no patent misuse).

This en banc decision left no stone unturned in being comprehensively boring, in the process reaching far beyond the merits of this case to expansive discussion of antitrust most unbecoming, as patent misuse and antitrust, though not unrelated, are two distinct issues. Patent misuse is rather straight-forward compared to the jurisprudential swamp of antitrust. Apparently, en banc is Latin for "take the bait." But we find the reason for cutting such a wide swath by what the outlier judges thought out loud.

Judge Prost, joined in part by Judge Mayer, pondered murk without thinking clearly.

This case arises at the uneasy intersection of anti-trust 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.

While I find it significant that the putative agreement concerned patents rather than unpatented technology, I do not share the majority's apparent view that antitrust considerations are an entirely "different issue," separate and apart from the question of whether there has been patent misuse.

Off-kilter to the nth degree, Judge DYK, joined by Judge Gajarsa made no bones about where they stood, on a 32-page tear to do so.

The majority's strict standard fails to provide adequate protection against the suppression of nascent technology, and allows patent holders free rein to prevent the development of potentially competitive technologies except in the most extreme and unlikely circumstances. I respectfully dissent.

One wonders whether the dissent drove the majority opinion in covering antitrust ground that was off-point to patent misuse. More than perhaps.

The majority pointed out how the dissent was akimbo.

The dissent does not find fault with the terms of the licensing agreements between Philips and its licensees, but instead focuses its full attention on the purported horizontal agreement between Philips and Sony to suppress the Lagadec technology. The dissent then characterizes that agreement as invoking the doctrine of patent misuse because it is "part and parcel" of the licensing agreements between Philips and its licensees. That characterization, however, is incorrect. The Orange Book licensing agreements control what the licensees may do; the purported agreement between Philips and Sony controls what Sony may do. At bottom, Princo's complaint is not that its license to the Raaymakers patents is unreasonably conditioned, but that the Lagadec patent has not been made available for non-Orange-Book uses. And that is not patent misuse under any court's definition of the term.

The doctrine of patent misuse goes to whether a patent holder forces patent licensee behavior beyond what the patent covers. Antitrust is different, larger minefield - whether, by market power, a company stifles competition.

Princo succeeded, to some degree, in confusing those issues, thereby causing consternation at the CAFC, though ultimately failed to demonstrate patent misuse that did not occur. The practical problem for Princo was that antitrust cases are incredibly complex and expensive to prosecute. Princo decided to have a try at an antitrust case on the cheap by parading it as a patent misuse case. A few judges at least liked the show.