The narrowing of the defence of patent misuse in America

In the recent American case of Princo Corp. v. International Trade Commission, the U.S. Court of Appeal for the Federal Circuit narrowed the doctrine of patent misuse in the context of licensing.  This case centred around a licence granted to Princo by Philips for a pool of patents in relation to recordable and rewriteable CDs (“CD-R/RW”). 

In the 1980s/1990s Philips and Sony worked together to create CD-R/RW technology, as well as an industry standard for this technology, known as the “Orange Book” standard.  Both companies agreed that the Orange Book standard would incorporate Philips’ CD-R/RW patent (rather than Sony’s patent).  The parties then decided to commercialise their technology by licensing the patents required to manufacture CD-R/RW in accordance with the Orange Book standard.  It was agreed that Philips would facilitate the licensing of the patents.  Philips offered several package licences which included the Philips and Sony patents, as well as those of other entities.  The package licences included a restriction that limited licensees to use of the patents to produce CD-R/RW according to the Orange Book standard.         

In the late 1990s Princo entered into a package licence agreement with Philips.  However, soon after entering into this agreement, Princo failed to pay Philips the necessary licensing fees.  On the basis of this, Philips filed a complaint with the International Trade Commission, alleging that Princo violated the Tariff Act of 1930, 19 U.S.C. by importing CDs that infringed their patents.  In the course of these infringement proceedings, Princo raised the defence of patent misuse, which is a non-statutory based defence against claims of patent infringement. 

Patent misuse occurs where a patentee attempts to create or enforce rights beyond the scope of the patent.  The basic rule is that a patentee is entitled to exploit their patent, but may not “use it to acquire a monopoly not embraced in the patent” (Transparent-Wrap Mach. Corp v. Stokes & Smith Co., 329 U.S. 637).  Princo argued that Philips and Sony had agreed not to licence Sony’s alternative CD-R/RW technology, thus removing the development of a potentially competitive product from the industry.  The court considered that the question came down to whether: “When a patentee offers to licence a patent, does the patentee misuse that patent by inducing a third party not to licence its separate, competitive technology?

The majority of the court held that patent misuse will only occur where the patent owner has “…impermissibly broadened the physical or temporal scope of the patent grant and has done so in a manner that has anticompetitive effects.  The majority of the court found that Philips’ conduct would not have the effect of broadening the scope of their patent and therefore would not fall within the defence of patent misuse.  Princo raised several arguments in attempt to prove this defence, all of which were unsuccessful.  The court also made it clear that the defence is not available to infringers simply because a patent owner engages in conduct that may have anticompetitive effects.  This decision therefore shows that something more than anticompetitive conduct is necessary for a party to successfully prove this defence.

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