Patent Misuse and Patent Pools

The Effect of Princo v. ITC

BBA Presentation 18 November 2010

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Terminology

Patents A and B are in a blocking relationship if the practice of each patent would infringe the other in the absence of a license. Patents A and B are in a one-way blocking relationship if the practice of B requires a license from A, but A does not infringe B. E.g., Improvements Research tools necessary to produce a patented product

Patents that are one-way or two-way blocking are complementary an increase in the price of one patent reduces the value of the

other patent. Patents A and B are substitutes for each other if they cover products or processes that can be made or exploited using either patented technology. Patents A and B are independent if they are neither blocking nor complementary.

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Patent Pools – A little theory

In 1838, Antoine Cournot published a theory of monopoly profits. One conclusion of his work is that society can benefit if holders of blocking or complementary patents put licensing decisions in the hands of one person. That licensing czar will be more sensitive than either

patent holder to the need to maximize sales. To do so, he will limit royalties.

Without this mechanism, the patent holders will charge too much, suppressing sales.

As a result of the pooling, both the patentees and society benefit.

This theory took quite some time to find root in US law.

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Patent Misuse

Early attempts to leverage antitrust violations into a defense to patent infringement failed Straight v. National Harrow, 51 F.819 (NDY 1892)

―“Even a gambler, or the keeper of a brothel, cannot be deprived of his property because he is an obnoxious person or a criminal; and it is no defense to the trespass upon it … that it was used in carrying out an unlawful occupation.”

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Patent Misuse – The Development of the Doctrine

Carbice Corp v. American Patents Development Corp, 283 US 27 (1931)

tying a license of a patented process to the purchase of dry ice for use in that process deemed an improper extension of the patent

Morton Salt v. GS Suppiger Co., 314 U.S. 488 (1942)

Tying lease of patented canning machines to purchase of salt for use in machine deemed improper, preventing enforcement against infringer

Violation of public policy underlying patent laws; no need to prove violation of Clayton Act

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Parameters of the Doctrine

Defense to infringement allegationBased upon equitable concept of unclean handsRemedy involves depriving patentee of ability to enforce patent until the effect of its improper behavior has been dissipated This can take years. US Gypsum v. National

Gypsum, 352 US 457 (1957) (a 7-year period of no misuse raises inference of dissipation sufficient to preclude summary judgment of misuse)

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Misuse and Contributory Infringement

A claim for contributory infringement necessarily involves suing a non-infringer E.g., Leeds & Catlin Co. v. Victor Talking Machine, 213 US

(1909) (allowing claim against maker of unpatented disks made to be used in a patented machine)

Is this an unlawful extension of patent rights? Patent misuse?

Patent Act of 1952 added Section 271, authorizing contributory infringement Supreme Court interprets this as authorizing the tying of

a patent license to a non-staple item. Dawson Chemical v. Rohm & Haas, 449 US 176 (1980)

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Market Power Added to Section 271 in 1988

The 1988 Amendment of Patent Act Section 271(d) section 271 enumerates actions that are not to be

deemed an illegal extension of patent rights New clause (5) permits tying the availability of a

patent license to a license of another patent or the sale of a commodity

―Exception: Where the seller has market power in the market for the patented article

―This appears to create immunity from antitrust laws as well as from patent misuse doctrine.

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Common Types of Misuse Tying (to a commodity item) Retaining the right to terminate patent license if patentee

purchases staple from 3d party is likewise misuse. In re Recombinant DNA Technology Patent and Contract Litigation, 40 USPQ2d 1881 (SD Ind. 1994)

Noncompetition clauses E.g., National Lockwasher v. George K. Garrett Co. (137 F.2d 255

(3d Cir. 1943)

“package licenses” (patent pools) Refusal to license patents separately can be misuse

―American Securit Co . v/ Shatterproof Glass Corp, 268 F.2d 769 (3d Cir 1959)

But - blocking patents can be packaged. International Manufacturing Co v. Landon Inc., 336 F.2d 723 (9th Cir. 1964)

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Common Types of Misuse:Computing Royalties on Total Sales

Automatic Radio Mfg. Co. v. Hazeltine Research Inc., 339 US 82 (1950) Parties to a license can, for their mutual convenience,

agree to base royalties in the licensee’s total sales Decision hinges on lack of coercion on licensee to pay

based upon total sales

Zenith Radio v. Hazeltine Research Inc., 395 US 100 (1969) Approves of license fees unrelated to sales sufficient to pay

for the cost of negotiating licenses and administering the patents

Court expresses disapproval of imposing royalties on total sales unless it is more convenient for licensee

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Common Types of Misuse (cont)

Post-Expiration Royalties and Restraints Unenforceable – Brulotte v. Thys Co., 379 US 29

(1964)

Discriminatory Royalty Rates Laitram v. King Crab Inc., 244 F. Supp. 9 (D. Alaska

1965) (misuse found) USM Corp. v SPS Technologies Inc., 694 F.2d 505

(7th Cir. 1982) (no misuse)

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Patent PoolsE. Bement & Sons v. National Harrow, 186 US 70 (1902) A patent pool involving 22 firms accounting for a 90% market share

agreed, as part of their pooling arrangement, ― To fix prices― Not to offer competing products― Not to challenge patents in the pool― To enforce their patents

Patent license terms upheld

Standard Sanitary Manufacturing v. U.S. 226 US 20 (1912) (similar facts, different result)Standard Oil Company v. United States 283 US 163 (1932) (“Cracking patents” case) Pool legal because patents in pool were blocking patents

United States v. Line Material, 333 US 287 (1948). Pool involving blocking patents unlawful because holder of dominant

patent could fix prices charged by holder of servient patent

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More Patent Pools

Baker-Cammack Hosiery Mills, Inc. v. Davis Co., 181 F.2d 550 (4th Cir. 1950). Legality of patent pool supported by No controls on prices charged by licensees No controls on output Finding that pooled patents were complementary, not

competingUnited States v. National Lead Co., 63 F. Supp. 513 (SDNY 1945), aff’d, 332 U.S. 319 (1947). National Lead cross-licensed with foreign competitors.

Licenses contained provisions for sharing of R&D, licensing of future patents and territorial exclusivity.

Agreements struck down, in part because of the “patent thicket” created; and in part because of the territorial exclusivity

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Even More Patent PoolsUnited States v. United States Gypsum Co., 333 US 364 (1948) US Gypsum acquired several patents and licensed them

on terms that ― required minimum resale prices― Imposed royalties on the sale of unpatented wallboard

Participants contributed new patents as the old ones expired

Pool found to be unlawful

United States v. New Wrinkle, Inc. 342 US 371 (1952)

―Holders of patents to competing technologies contributed them to a holding company that licensed them to all market participants

―License terms specified selling prices and terms―Pool held to be illegal

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DOJ & FTC IP Licensing Guidelines - 1995 http://www.justice.gov/atr/public/guidelines/0558.ht

m Points out possible problems presented by pooling,

such as may happen if ―they include price controls or output restriction―involve participants with market power and refuse to

license to others―Stifle R&D efforts because of the free rider problem.

Regulatory Developments

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Holders of numerous patents that covered aspects of the MPEG compression technology proposed a patent pool and sought assurance from the DOJ that it would not prosecute. DOJ assented because the proposal Limited the portfolio to technically essential patents which, by

definition, are not competitive with each other. An independent third party would decide which patents were essential.

Allowed portfolio patents to be licensed individually as well as in a package.

Envisioned the issuance of worldwide non-exclusive licenses. Tied royalties to actual use of the patents. Allowed licensees to develop and use alternative technologies.

Note that the proposal also required licensees grant back non-exclusive, non-discriminatory licenses to use patents that were essential to comply with the technology.

1997 DOJ Business Letter – MPEG LA

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1999 - DVD technology Similar to MPEG patent pool Firewalls used to prevent disclosure of a participant’s

sensitive information – such as cost data -- to other pool participants.

2000 - 3G Technology 5 separate patent pools administered by a single

manager Each pool retained an expert to weed out non-essential

patents Licensing agent had restricted access to proprietary data

of participants.

2008 – RFID Consortium

More DOJ-Approved Patent Pools

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2007: DOJ & FTC Joint Publication

Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition http://www.usdoj.gov/atr/public/hearings/ip/222655.pdf On the subject of patent pools, the agencies were

concerned about:― Inclusion of substitute technologies in the pool ―The free rider problem if ongoing R&D is contributed

On the subject of refusal to license patent individually, the agencies expressed little concern.

―One-stop shopping, efficiencies of administration in package licenses noted with approval

On some practices viewed as “extending the patent rights” – e.g., charging royalties beyond the license term, the agencies recommended a rule of reason approach.

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2008 DOJ Business Review Letter re: RFID Consortium

Business review letters issued pursuant to procedure set out in 28 CFR §50.6RFID Letter available at http://www.justice.gov/atr/public/busreview/238429.htmFeatures of Consortium: RFID Standard created by private SSO Seven companies formed consortium for purpose of

licensing essential patents Consortium proposed to license patent pool on RAND

basis Not all holders of essential patents had joined Consortium

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RFID Consortium (cont)

Features of Consortium (cont) Strict confidentiality provisions in operating

agreement Participants grant Consortium a non-exclusive right

to grant licenses to patents, retaining right to license individually

Licenses from Consortium have:―5 year term―Different royalties for different device types―Grant-back clause for essential patents – non-

exclusive, FRAND terms

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DOJ Analysis of RFID Consortium

Applies rule of reason analysisPotential Issues Analyzed Invalid Patents: Consortium will not evaluate patent

validity, but expel patents ruled invalid. DOJ is satisfied with this approach.

Substitute patents: The definition of “essential” is sufficient to exclude substitute patents. The Consortium’s definition includes patents that do not read on the standard, but are necessary to meet it.

Harm to Downstream Markets: Although some consortium members are vertically integrated, RAND terms minimize risk to downstream competition.

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DOJ Analysis of RFID Consortium (cont)

Issues (cont) Foreclosure of Innovation / Grantbacks: DOJ

concluded that the grantback clause at issue would foster competition because it:

―Requires only a non-exclusive grant back―Is limited to essential patents―Provides for reasonable compensation to patentee

Tying: Not an issue because all patents are essential

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Philips, Sony and two other Japanese manufacturers contributed their patents covering the technology of writeable CDs to a patent pool Philips licensed the patents to over 100 CD

manufacturers. Royalties were imposed on a per-disk basis,

not on the number or identity of the patents infringed.

Philips filed a complaint with the International Trade Commission (ITC) alleging the importation of infringing CDs into the United States

The Orange Book Patent Pool

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The Orange Book Patent PoolThe Sony Patent Sony’s patent covered a digital means of locating

data on a disk The Orange Book standard did not use this

technology, but instead used an analog means patented by Philips

Sony agreed not to license its patent to others except in “exceptional circumstances”

Sony received a 36% interest in the patent pool for this single contribution

Philips’s license terms included royalties of 50% or more of the selling price of disks sold by licensees

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Princo and the Orange Book

Princo initially licensed the Orange Book patentsIt later stopped paying royaltiesPhilips sued to stop the importation of Princo-manufactured CDs

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The Orange Book Patent Pool (cont)

The ITC considered an argument that the Sony patent was a competitive patent buried in the pool, suppressing competition.The ITC was not persuaded, but a panel of the Federal Circuit remanded the case for further reviewOf concern to the panel was Philips’s refusal to license the Sony patent separately.The remand directed the ITC to develop a legal standard of patent misuse to apply to this fact pattern.

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The En Banc Rehearing

The Federal Circuit agreed to rehear the caseOn 30 August 2010, the court issued a new opinion Available at

http://www.cafc.uscourts.gov/images/stories/opinions-orders/07-1386.pdf

The majority opinion upheld Philips’s license practices It strictly limited patent misuse to practices that extend the

scope or term of patents Other antitrust violations are not covered by patent misuse Since the Orange Book licenses did not seek to extend the

scope or the terms of the patents, there could be no misuse The court emphasized section 271(d), which excepts from

misuse―Refusal to license―Packaging patents

• But what about the “absence of market power”?

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What is the future of Patent Misuse

Some have suggested that it be abandoned altogether It seems redundant of antitrust laws The minority in Princo suggests that antitrust

enforcement and remedies are not practical. Is that true? Does this mean that misuse no longer applies to: Refusal to license separately (clearly) non-competition clauses discriminatory royalty rates Fixed resale prices?

The Agencies appear less concerned about extending the term of patents than does the Federal Circuit

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Thanks!

Thomas Carey

Please feel free to contact me by email at tcarey@sunsteinlaw.com

or at617-443-9292

Sunstein Kann Murphy & Timbers LLP125 Summer StreetBoston MA 02110