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A divided U.S. Court of Appeals for the Federal Circuit has ruled that an anti-competitive agreement between two companies to restrict the availability of one of their patents in favor of two others is not misuse of the favored patents. Applying the patent misuse doctrine narrowly, the court determined that the patents at issue are enforceable. The Aug. 30 en banc ruling in Princo Corp. v. International Trade Commission was filed with a concurring and a dissenting opinion. The case involves the technology for recordable compact discs and rewritable compact discs, which was largely developed through a collaborative effort between U.S. Philips Corp. and Sony Corp. The two companies also played the chief role in developing the industry’s manufacturing standard for these products. Philips and Sony agreed to jointly license these patents, even though Philips’ patents are the ones incorporated in the standard. The agreement stipulated that licensees wouldn’t use the alternative technology in the Sony-developed patent to compete with the Philips-developed patents used in the standard. The agreement also prevented licensees from using the Sony-developed patent to develop an alternative technology to compete with the standard. Philips gave Princo a license in the late 1990s, but later sued it at the ITC after Princo stopped paying licensing fees. Philips alleged that Princo violated trade laws by importing CDs that infringed Philips’ patents. Princo argued that Philips’ and Sony’s agreement constituted patent misuse. The case has been up to the Federal Circuit two times. In 2005, the Federal Circuit reversed the ITC and ruled that Philips did not engage patent misuse by improperly tying nonessential patents to key patents. The Federal Circuit remanded the case back to the ITC to further explain the grounds on which it ruled that Philips’ licensing program was anti-competitive. The ITC then rejected the rest of Princo’s patent misuse theories. Princo appealed, and in 2009, a divided Federal Circuit panel ruled against ITC and Philips. The en banc ruling sustains the ITC’s decision that the patent misuse doctrine does not bar Philips from enforcing its patent rights against Princo. The majority ruling authored by Judge William Bryson separated patent misuse from antitrust questions. Chief Judge Randall Rader and judges Pauline Newman, Alan Lourie, Richard Linn and Kimberly Moore joined. “Recognizing the narrow scope of the [patent misuse] 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,” Bryson wrote. The opinion went on to say: “Although joint ventures can be used to facilitate collusion among competitors and are therefore subject to antitrust scrutiny, … research joint ventures such as the one between Philips and Sony can have significant procompetitive features, and it is now well settled that an agreement among joint venturers to pool their research efforts is analyzed under the rule of reason.” A four-page concurring opinion by Judge Sharon Prost, which Senior Judge Haldane Robert Mayer joined, noted that, “Princo failed to meet its burden of showing that any agreement regarding the [Sony] patent had anticompetitive effects.” The concurring opinion stated that the patent misuse doctrine is not “as narrow or expansive as each [side] respectively suggests.” Prost went on to assert that she does not agree with the majority that antitrust considerations are completely separate from the question of whether there has been patent misuse. Instead, the case may have posed the question too narrowly, she wrote. “I would thus reserve judgment on the precise metes and bounds of the patent misuse doctrine.” In an impassioned dissent, Judge Timothy Dyk, joined by Judge Arthur Gajarsa, argued that an antitrust violation does constitute patent misuse.”Evidently the majority thinks it appropriate to emasculate the doctrine so that it will not provide a meaningful obstacle to patent enforcement,” Dyk wrote. Dyk continued by noting that he reads “the relevant Supreme Court cases and congressional legislation as supporting a vigorous misuse defense, clearly applicable to agreements to suppress alternative technology.” The takeaway from the ruling is that “the Federal Circuit is extremely hostile to the defense of patent misuse” in patent infringement cases, said Princo’s lawyer on the case, Eric Wesenberg, a partner in the Menlo Park, Calif., office of Orrick, Herrington & Sutcliffe. That’s “particularly pernicious” when you’re talking about new technologies, he said. “When the Federal Circuit has laminated on the patent misuse doctrine a [requirement for] showing that there’s an anticompetitive effect in order to…show patent misuse, how is that accomplished when you’re talking about a technology that hasn’t seen the light of day?,” Wesenberg said. Wesenberg added that Sony’s and Philips’ agreement “privately decided” what technology the industry would use and split the proceeds, instead of letting market forces play a rule.”That’s not a standards issue at all,” he said. “That’s a plain and simple agreement between two competitors.” The ITC “has a longstanding policy of not commenting on matters in litigation,” said public affairs officer Peg O’Laughlin. Philips, which was an intervener in the Federal Circuit case, is “very pleased with the decision,” said William Kolasky, a partner in the Washington office of Wilmer Cutler Pickering Hale and Dorr. “Our view of the facts of the case is summarized very well in the court’s [majority] opinion,” he said. The majority ruling is “a vindication of the traditional antitrust analysis in cases like this,” said Q. Todd Dickinson, executive director of the American Intellectual Property Law Association, which submitted an amicus brief in the case. “The court clearly declined to expand the categories of action or activity which constitute patent misuse,” Dickinson said. The association’s amicus brief argued that the Federal Circuit should “apply a … rule of reason antitrust approach,” he said. “You could argue they did and we were content with the outcome.” But another amicus, American Antitrust Institute, finds the ruling “very disappointing” according to Jonathan Rubin, a member of the institute’s advisory board member and the author of its brief. Rubin said the majority “has put formalism before substance” by requiring that patent misuse must involve extending the physical or temporal scope of the patent. “In my view, it’s an improper use of the patent right to force the market to accept a standard devised by two companies,” Rubin said. Industry standard-setting “can be very beneficial,” but it’s important to keep in mind what’s at stake when setting standard that involves patented technologies because “you necessarily exclude other technologies,” he said. “That is too important and it involves too much market power to leave to the devices of two private companies.”

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