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Federal Circuit Mulls Diving Into Patent Pool Case With Antitrust Analysis

Posted  March 10, 2010

Will a federal court of appeals send modern antitrust analysis diving into the deep end of a patent pool case to determine whether a jointly-developed standard should be considered patent misuse?

On March 3, the U.S. Court of Appeals for the Federal Circuit sat en banc to consider how to apply the patent misuse doctrine to patent pooling arrangements for standardized technologies, including the significance of evidence of anticompetitive effects such as the blocking the development of new technologies.

At issue in Princo v. U.S. International Trade Commission is whether it was patent misuse for a patent pool established by Philips, Sony and others to both include a potentially blocking patent that was not actually used in the standard and preclude that patent from being licensed outside the pool.

Philips and Sony agreed to jointly develop a standard for recordable and rewritable compact discs (known as the “Orange Book”).  In developing the standard, they did not jointly develop any technology.  Rather, they used technologies each independently had developed.  In one instance, they chose one of two competing methods.  The Sony patent not chosen was, by some accounts, not commercially feasible.  However, an independent patent analyst believed one claim of the Sony patent could read more generally on the standard and, thus, block Orange Book adopters from practicing the standard.  Therefore, Philips determined to include the Sony patent in the pool, and subjected Sony to the pool’s requirement not to license the patent for use outside the Orange Book standard.

The Commission found Philips’s conduct not to constitute misuse, but a panel of the Federal Circuit reversed that finding, 2-1.  The majority held that an agreement to preempt further development of a competing technology by prohibiting separate licensing of the Sony patent, could constitute patent misuse.  While the alleged agreement may have promoted marketing of the Orange Book, it could have precluded development of the Sony approach in competition to the Orange Book.

From the wide-ranging sprawl of the en banc argument before the 11 judges, it was impossible to divine which way the judges may rule.  But, several key questions emerged:

Should patent misuse rule of reason analysis follow modern antitrust analysis?  Past Federal Circuit cases define misuse as an effort to extend the physical or temporal scope of a patent with anticompetitive effect.  Those cases required a showing of actual anticompetitive effect.  The FTC, as amicus curiae, urged the Federal Circuit to adopt its “quick look” procedure where activities could be considered inherently suspect in their anticompetitive impact and, so, shift the burden of proof to the patent owner to prove countervailing pro-competitive benefits.

But, as the Supreme Court noted in its 2006 decision in Illinois Tool Works v. Independent Ink, patent misuse and antitrust law have become “untwined” over the course of congressional action and recent decisions, and the FTC’s efforts to “re-entwine” the two may not be accepted by the Federal Circuit.  Indeed, one judge suggested that a valid Sherman Act claim based on an agreement to suppress technology may not equate to misuse of the patent.

Must the alternative technology be commercially viable to support a misuse claim?  The parties disputed factually whether testimony indicated that the withheld Sony method could have succeeded in the market.  Some on the en banc court appeared to disagree with the prior panel decision, and asserted that there could be no anticompetitive effect unless the alternative technology was viable.  However, the FTC brief asserted that such proof should not be necessary, and that an agreement to suppress an alternative technology should be deemed anticompetitive in the absence of pro-competitive justifications.

Must an alleged infringer show individual injury from the anticompetitive effect in order to assert misuse? Several questions focused on whether Princo had actual interest in the withheld Sony patent or had asked Sony for a license.  This raises questions whether misuse should be based on the public interests vested in patents, or concepts more akin to antitrust standing and injury.

From the hour-long argument, it also appeared possible that procedural pitfalls could avert a decision on the merits.  Questions as to whether the issue had been properly presented to the Commission, and whether the state of the record permitted a decision on the merits or required a remand, intimated that the real underlying questions may need to be decided another day.

However, the active tenor of the debate suggests that any opinion will have serious implications both with respect to the future analytical construct for misuse cases, and the potential impact on patent pooling agreements.  As to the former, companies should watch closely to see whether pro-plaintiff burden-shifting approach favored by the FTC prevails, or whether proof of actual anticompetitive effect will continue to be the defendant’s burden.  As to the latter, as a matter of policy, there may be less incentive to create and promote standard technologies through pooling arrangements if pool participants potentially are subject to an obligation to compete against the standard or to allow others to do so through licensing.

Tagged in: Antitrust Enforcement, Antitrust Legislation,