Thursday, September 09, 2010

At the Intersection of Intellectual Property and Antitrust: Federal Circuit Pampers Patent Pools and Shackles the Patent Misuse Doctrine in Compact Disc Patents Case

At the dawn of the compact disc, corporations A and B developed two competing standards. Many years ago, Company B had already taken a severe competitive beating in the early days of video recording when a competing standard ultimately won out among the buying consumers, and Company B was not going to have that happen again. "Cooperation" was the new philosophy. Why take competitive risks?

Accordingly, Company A and Company B agreed among themselves that the patented compact disc technology developed by Company A was preferable to the patented compact disc technology developed by Company B -- who can know this for sure? -- and so they entered into an agreement whereby the patented compact disc technology of Company A would be used as the sole compact disc standard, for which Company B, in return for a magnificent price, would agree to put its own patented compact disc technology on ice, agreeing not to further develop or separately license that technology.

Rather than knocking heads in competition and perhaps lowering prices because of the battle of competing technologies, which might even have posed the danger of spawning new development and increased competition, it was of course much smarter to agree on one patented technology, to forbid the development and separate licensing of the competing technology, and to rake in the monopoly profits via patent licensing income.

Why compete when prices via monopoly could be easily fixed this way? After all, the consumer did want ONE standard and not a chaotic world of competing standards.

And voila! The Federal Circuit has agreed (if one can make sense of the rambling opinions).

No antitrust implications. No misuse of patents. Alternative and possibly competing technologies quashed? No problem. Everything is fine -- and the monopoly ruble continues to roll.

The case in question here involves a recent Federal Circuit court decision concerning antitrust and patents in the development of two separate standards for recordable (CD-R) and rewritable (CD-RW) compact discs.

The company Philips developed an analog solution to the the invention of the CD-R and the CD-RW (the Raaymakers patents) while the company Sony developed a digital solution (the Lagadec patent), as described below.
The companies ultimately agreed to develop the Raaymakers standard, but also "licensed" the Lagadec technology in the ultimate "patent package" for licensing.

As written in Federal Circuit Limits Patent Misuse Defense In Standard-Setting Context, an Antitrust and Intellectual Property alert from Ropes & Gray:
"The technology at issue, developed primarily by Philips and Sony, involved recordable compact discs (“CD-Rs”) and rewritable compact discs (“CD-RWs”). The patents covering the technology were pooled together into a standard comprised in part of essential and non-essential patents. This standard was defined in a publication known as the “Orange Book.” In developing the standard, Sony and Philips encountered the problem of properly positioning the CD writer while writing data to the disc. Philips proposed an analog solution that was later set forth in the two patents at issue in this case (the “Raaymakers patents”), while Sony’s digital approach was set forth in one of its own patents (the “Lagadec patent”). Working as part of a joint venture, Philips and Sony engineers elected to use the Raaymakers approach in lieu of the Lagadec approach, and incorporated the Raaymakers approach as the standard in the Orange Book.
Philips managed the patent pool and included both the Raaymakers and Lagadec patents as part of the package of patents it sold, regarding both as necessary to make Orange-Book-complaint [sic, compliant] CD-R or CD-RW discs. Philips did not offer a version of the package that omitted the Lagadec patent, which Princo argued was non-essential to the Orange Book standard. Moreover, the sale of the patent package contained a “field of use” restriction, limiting licensees to producing only Orange Book compliant discs. The original Federal Circuit panel indicated that Philips’s and Sony’s agreement not to license Lagadec for other purposes, if part of an agreement to suppress competing technologies, possibly constituted patent misuse. The Federal Circuit, sitting en banc, disagreed." [emphasis added by LawPundit]
A Morrison Foerster MoFo Client Alert by Sean Gates and Joshua Harman explains how Federal Circuit Narrows Patent Misuse Doctrine and Provides Guidance to Patent Pools (pdf). (Via Lexology which has the article in .htm format.)

Gates and Harman write inter alia about the Federal Circuit decision en banc in Princo Corporation v. International Trade Commission No. 2007-1386, United States Court of Appeals, Federal Circuit, August 30, 2010:
"The court stressed a narrow scope of the doctrine of patent misuse, explaining that it applies only where “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.” “What patent misuse is about, in short, is ‘patent leverage,’ i.e., the use of patent power to impose overbroad conditions on the use of the patent in suit that are ‘not within the reach of the monopoly granted by the Government.’” Given this limitation, the court distinguished between agreements that constitute patent misuse and agreements that may violate the antitrust laws but do not broaden the scope of the patent."
Judge Bryson, joined by Chief Judge Rader and Judges Newman, Lourie, Linn, and Moore (Judge Prost concurred in part, joined by Judge Mayer, while Judge Dyk dissented, joined by Judge Gajarsa) writes specifically as follows in the 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. Instead, the alleged act of patent misuse that the panel focused on was the claimed horizontal agreement between Philips and Sony to restrict the availability of the Lagadec patent—an entirely different patent that was never asserted in the infringement action against Princo. Even if such an agreement were shown to exist, and even if it were shown to have anticompetitive effects, a horizontal agreement restricting the availability of Sony's Lagadec patent would not constitute misuse of Philips's Raaymakers patents or any of Philips's other patents in suit.
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? Princo has not pointed to any authority suggesting that such a scenario constitutes patent misuse, and nothing in the policy underlying the judge-made doctrine of patent misuse would support such a result. 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.
What patent misuse is about, in short, is "patent leverage," i.e., the use of the patent power to impose overbroad 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." [emphasis added by LawPundit]
Judge Dyk writes in dissent:
"The overall issue is whether Philips has misused the asserted Raaymakers patents by (1) agreeing with Sony Corporation ("Sony") to jointly license the Raaymakers patents together with the Lagadec patent and providing, as part of that agreement, that the alternative technology embodied in the Lagadec patent will not be licensed in competition with the Raaymakers technology, and (2) securing an agreement from the licensees of the Raaymakers and Lagadec patents barring them from using the Lagadec patent to develop an alternative technology that would compete with the Raaymakers technology. The majority holds that there is no patent misuse because the Lagadec patent has not itself been asserted in this proceeding, see id. at 23, and, alternatively, because "Princo also failed to show that the asserted agreement had any anticompetitive effects because . . . the Lagadec technology was not a viable potential competitor to the technology embodied in the Raaymakers patents," id. at 29."
At LawPundit we ask quite spontaneously in such a case then, that if the patent technology being restrained was in fact "not a viable potential competitor", then why did it need to be restrained in the agreement in the first place??

Judge Dyk writes in dissent:
"The majority's first holding—that the agreements cannot infect the Raaymakers patents—rests on the resolution of an issue that apparently never occurred to Philips nor the International Trade Commission ("ITC") and was never briefed nor argued before the panel. When this case was before the panel, neither Philips nor the ITC urged that the failure to assert infringement of the Lagadec patent in the ITC proceedings barred a finding of patent misuse. The leading treatise on the interrelationship between patent law and antitrust law viewed the panel opinion here, holding the misuse doctrine applicable to agreements to suppress alternative technology, "as standing for the unexceptional proposition that patent licensing schemes are illegal where they are used as part of a broader effort to fix prices and restrict competition." Herbert Hovenkamp et al., IP and Antitrust § 3.3g, at 3-42 to -43 (2d ed. 2010); see Princo Corp. v. Int'l Trade Comm'n, 563 F.3d 1301, 1314—15 (Fed. Cir. 2009). Now the court en banc holds that such agreements cannot constitute patent misuse. Contrary to the majority, the Supreme Court cases establish that license agreements that suppress alternative technologies can constitute misuse of the patents for the protected technology, and the regional circuits have agreed.
The majority's second holding—that there is no misuse unless the accused infringer shows that the technology was, or would probably have become, commercially viable—is contrary to established patent misuse doctrine. That doctrine recognizes that antitrust violations may constitute misuse; that a presumption of anticompetitive effect flows from an agreement not to compete; and that the burden rests on the patent holder to justify such an agreement. Philips did not even attempt to make the required showing here."
Judge Dyk expounds on what actually happened:
"At the outset, it is important to understand the extent to which the Raaymakers technology, incorporated into the socalled "Orange Book" standard and covered by the asserted patents, dominates the multibillion dollar market for recordable compact discs ("CD-Rs") and rewritable compact discs ("CD-RWs")....
Philips created a patent pool for the CD-R/RW technology with its competitors and offered joint licenses for their patents. Although Sony Corp., Taiyo Yuden Co. Ltd., Ricoh, and Yamaha all contributed patents to the Orange Book patent pool, Philips has been the sole company responsible for administering the CD-R/RW licensing programs and for entering agreements to license the packages. Philips has charged a very substantial royalty to companies using the Orange Book standard. The royalty rate has ranged from one-half to two-thirds the manufacturers' selling price for the discs. This has enabled Philips and the other members of the patent pool to collectively secure hundreds of millions, if not billions, of dollars in revenue from the sale of those discs.... [emphasis added by LawPundit]
As the ITC recognized in its Initial Determination, "[n]o one can manufacture or sell CD-R or CD-RW discs legally in the United States without taking a license to the Philips patents." ... No competitive alternative to either the CD-R or CD-RW disc has been developed to the point of commercial viability....
However, Sony did in fact develop a potential alternative to a key aspect of the Orange Book technology covered by the Raaymakers patents. This technology is reflected in the Lagadec patent....
Although the parties recognized that the Lagadec patented digital method had the potential to compete with the patented Raaymakers technology, Philips and Sony determined not to license the Lagadec patent as an alternative to the Raaymakers patents. Instead, they agreed as part of the overall Orange Book agreement not to license the Lagadec patent as a competitive technology....
The rewards flowing to Sony from this series of agreements were considerable. In return for a minimal contribution to the Orange Book patent pool, Sony was rewarded a substantial portion of the royalties. For example, the Lagadec patent was the only essential Sony patent in the CD-RW pool. For this contribution Sony received 36 % of the royalties under the CD-RW patent pool. Philips' employees conceded that Sony employees "were more observers than real active developers of" the CD-RW format. J.A. 1830 (testimony of Dr. Jacques Heemskerk); see also J.A. 3254 (explaining that the CD-RW format was "written in close coperation [sic] with Ricoh and with the passive support of Sony."). The situation was not much different with respect to the CD-R pool where, out of eleven supposedly essential patents, only two of these were Sony patents, the Lagadec patent and Patent No. 5,126,994 (the "Ogawa" patent). See, e.g., J.A. 3534—65, J.A. 6592—6636. [emphasis added by LawPundit]
The effect of these agreements was to protect the Philips Raaymakers technology from any actual or potential competition. As no one could license the Lagadec patent outside of the Orange Book patent pool, the patent was rendered useless as an alternative technology."
You have to chuckle that Sony received more than one-third of the patent pool money (surely billions of $$) for patent technologies that, in the view of the Federal Circuit, were not commercially viable.

The entire development and licensing of compact disc technology is in fact a how-to-do lesson in anti-competitive monopolization of a market by clever exploitation and misuse of patents and patent law.

Unfortunately, the majority of judges on the Federal Circuit do not get it.

Note: footnotes are excluded in this posting from all quoted materials.
Enhanced by Zemanta

The ISandIS Network

Our Websites and Blogs: 3D Printing and More 99 is not 100 Aabecis AK Photo Blog Ancient Egypt Weblog Ancient Signs (the book) Ancient World Blog Anthropomorphic Design Archaeology Travel Photos (blog) Archaeology Travel Photos (Flickr) Archaeo Pundit Arts Pundit Astrology and Birth Baltic Coachman Bible Pundit Biotechnology Pundit Book Pundit Chronology of the Ancient World Computer Pundit DVD Pundit Easter Island Script Echolat Einstein’s Voice Energy Environment and Climate Blog Etruscan Bronze Liver of Piacenza EU Laws EU Legal EU Pundit FaceBook Pundit Gadget Pundit Garden Pundit Golf Pundit Google Pundit Gourmet Pundit Hand Proof HousePundit Human Migrations Idea Pundit Illyrian Language Indus Valley Script Infinity One : The Secret of the First Disk (the game) Jostandis Journal Pundit Kaulins Genealogy Blog Kaulinsium Kiel & Kieler Latvian Blog Law Pundit Blog LexiLine Group Lexiline Journal Library Pundit Lingwhizt LinkedIn Literary Pundit Magnifichess Make it Music Maps and Cartography Megalithic World Megaliths Blog) Minoan Culture Mutatis Mutandis Nanotech Pundit Nostratic Languages Official Pundit Phaistos Disc Pharaonic Hieroglyphs Photo Blog of the World Pinterest Prehistoric Art Pundit Private Wealth Blog PunditMania Quanticalian Quick to Travel Quill Pundit Road Pundit Shelfari SlideShare (akaulins) Sport Pundit Star Pundit Stars Stones and Scholars (blog) Stars Stones and Scholars (book) Stonehenge Pundit The Enchanted Glass Twitter Pundit UbiquitousPundit Vision of Change VoicePundit WatchPundit Wine Pundit Word Pundit xistmz YahooPundit zistmz