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Princo Corp. v. Int’l Trade Comm’n: How Deep is the Patent Pool?

April 24, 2009

The Federal Circuit’s April 20, 2009 decision in Princo Corp. v. Int’l Trade Comm’n has implications for patent holders, licensees, and companies using patented technologies to manufacture products subject to multiple companies’ patents (as sometimes occurs when competitors have jointly-developed industry standards).  When different companies own patents each of which is, or may be, essential to making a product, a sensible way to solve the problem is to form a “patent pool”:  the patent holders agree collectively to license their patents and to charge licensees an agreed-upon joint royalty to obtain licenses that cover all the necessary technology.  As Princo reflects, such a pool needs to be set up carefully because various aspects of the negotiation or terms of a patent pool can give rise to antitrust allegations, patent disputes, or both.

In Princo, the Federal Circuit considered some of these issues on appeal from an International Trade Commission (“ITC”) decision that had previously upheld a patent pool for technologies used to manufacture CD-Rs (recordable compact discs) and CD-RWs (rewritable compact discs).  In forming the patent pool, the participants agreed on an industry standard that used an analog process.  They then included in the patent pool both a Philips patent to manufacture CDs according to the standard analog process, and a Sony patent that taught a digital process to manufacture CDs that would not meet the industry standard.  In order to manufacture CDs, licen­sees had to license both patents.  Princo took such a license, but eventually stopped paying its royalties.  This led Philips to sue Princo before the ITC. 

Princo ultimately conceded the CDs it was manufacturing infringed Philips’ patent, but it argued that the patents were unenforceable because two aspects of this patent pool constituted patent misuse.  First, Princo argued that the patent pool was “too deep” – that it operated as an illegal tying arrangement because it required licensees, who wanted to obtain a license of patents that were “essential” to making standard-compliant CDs, also to buy a license to an allegedly-nonessential patent.  Second, Princo argued that the patent pool was “too wide” – because it allegedly included an agreement that Sony would not allow its digital technology to be developed into a competing product.  On appeal, the Federal Circuit rejected the tying argument, but concluded that there may be merit in the non-compete argument and remanded the case for further proceedings.

Patent Misuse by Unlawful Tying
The majority of the Federal Circuit panel held that if, indeed, a patent pool required licensees to pay to license unnecessary patents in order to obtain the patents they need, that would be an act of patent misuse.  However, Princo’s tying claim failed because, in this case, although it might turn out that licensing the Sony patent was not necessary in order to produce standard-compliant CDs, there was enough of an argument that production might infringe Sony’s patent that it was reasonable to license the patent in order to avoid the risk of having to litigate over the issue.  Put another way, the patent pool was not “too deep,” because the Sony license was essential to avoiding the risk of litigation, even if it was not essential to manufacturing CDs.

Use of a Patent Pool as an Agreement To Stifle Competition
The majority of the Federal Circuit, however, found that there could be a patent misuse argument based upon Sony’s alleged agreement not to develop its competing digital technology.  The Federal Circuit found that the ITC was incorrect in assuming from the fact that Sony’s technology had not been commercialized, that it could not be developed.  The Court remanded this part of the case for further proceedings in the ITC so that the ITC could: (1) establish a standard, somewhere along the continuum between certain viability and certain non-viability, by which to assess when an agreement not to compete would be meaningful; (2) determine whether the Sony patent offered a potentially-workable competing technology in accordance with the standard; and (3) decide whether, in fact, Philips and Sony entered into a side agreement not to compete. In essence, the majority said that a patent pool could be "too wide" if it included unnecessary ancillary agreements not to compete.

How This Decision Might Affect Your Business
As Princo shows, the intersection between the patent and antitrust laws – each of which is complicated in its own right – reflects the inherent tension between a patent holder’s exclusive rights to control a patented technology and the public policy considerations of encouraging the development of competing technologies.  This case counsels caution to technology companies considering patent pools: although there are significant efficiencies to be gained, entering a patent pool also entails a significant degree of risk that requires full analysis of any potentially anticompetitive outcomes.  Entry into a patent pool requires competent advice to understand the necessity of patents in the pool, and the impact of any ancillary agreements that may affect the development of competing technologies by pool participants.  And, potential licensees considering licensing from a patent pool should look carefully to evaluate what they are paying for.  If it appears that the pool is either “too deep” or “too wide,” it may constitute patent misuse.

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