Patent Misuse and Patent
Pools
The Effect of Princo v. ITC
BBA Presentation 18 November 2010
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)


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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
Parameters of the Doctrine
Defense to infringement allegation
Based upon equitable concept of unclean
hands
Remedy 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 Pools
E. 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).

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Pool involving blocking patents unlawful because holder of dominant patent could fix
prices charged by holder of servient patent
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 competing
United 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 Pools
United 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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Regulatory Developments
DOJ & FTC IP Licensing Guidelines - 1995
 http://www.justice.gov/atr/public/guideline
s/0558.htm
 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.
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1997 DOJ Business Letter – MPEG LA
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 nonexclusive, non-discriminatory licenses to use patents that were
essential to comply with the technology.
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More DOJ-Approved Patent Pools
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
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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 §50.6
RFID Letter available at
http://www.justice.gov/atr/public/busreview/238429.h
tm
Features 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 – nonexclusive, FRAND terms
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DOJ Analysis of RFID Consortium
Applies rule of reason analysis
Potential 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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The Orange Book Patent Pool
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
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The Orange Book Patent Pool
The 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
patents
It later stopped paying royalties
Philips 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 review
Of 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 case
On 30 August 2010, the court issued a new opinion
 Available at





http://www.cafc.uscourts.gov/images/stories/opinionsorders/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 at
617-443-9292
Sunstein Kann Murphy & Timbers LLP
125 Summer Street
Boston MA 02110
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