The Federal Circuit will conduct an en banc hearing on March 3, 2010 in Princo Corp. v. Int’l Trade Comm’n, (2007-1386).  As detailed in our April 21, 2009 post, in the original decision, the panel remanded the case back to the International Trade Commission to consider one of Princo’s patent misuse defenses.

By way of background, Sony and Philips jointly developed the standard for CD-R and CD-RW discs which they called the “Orange Book” standard.  The Court held that U.S. Patent Nos. 4,999,825 and 5,023,856 (the “Raaymakers patents”), claiming an analog method of encoding discs, undeniably relate to the Orange Book.  Another patent, Sony’s U.S. Patent No. 4,942,565 (the “Lagadec patent”) claims a digital method of encoding, which is incompatible with the analog standard.  One of the claims in the Lagadec patent, however, is arguably broad enough to fall within the Orange Book.  Philips, the party responsible for licensing the patents, pooled all three patents together.  Princo took a license, but when it stopped paying royalties, Philips initiated an action before the ITC.

As a defense to the infringement claim, Princo made two patent misuse arguments before the ITC.  First, Princo argued that the package license was an illegal tying arrangement, because it required licensing the Lagadec patent which was not necessary for the Orange Book Standard.  Second, Princo argued that Sony and Philips had entered into an agreement to not license the Lagadec patent separately from the patents in the pool.  The Federal Circuit panel rejected Princo’s first misuse argument but remanded to the Commission for further analysis of the second allegation.  Specifically, the panel ordered the Commission to determine whether there was, in fact, such an agreement and whether Lagadec was a potentially viable alternative to the Orange Book standard.

In response to the panel opinion, the Commission, plaintiff U.S. Philips Corporation and Princo all filed petitions for rehearing en banc.  The Federal Circuit denied Princo’s petition but granted the ITC’s and Philips’ petitions.  The Court asked for briefing from the parties addressing the second misuse theory.

The ITC argues that the Federal Circuit erroneously ordered a remand on an issue that was never before the Commission.  According to the ITC, no party raised the issue of whether Sony and Philips had entered into an agreement not to license the Lagedec patent as competitive technology to the Orange Book.

In its brief, Philips agrees with the ITC that it is not proper to remand to the ITC for findings on the existence of an agreement when Princo, who had the burden of proving the existence of an agreement, never sought those findings before the Commission.  Furthermore, Princo never proved existence of an agreement nor identified a market that such an agreement might have harmed.  According to Philips, both of these factors are essential to proving a patent misuse case.

Philips also asserts that, even if the issue had been raised and an agreement existed, it could not be the basis of a patent misuse defense without an unprecedented and unwarranted expansion of misuse law.  According to Philips, since the Lagadec patent stemmed from a joint effort by Sony and Philips to develop CD-R/RW technology, any agreement not to license separately is a reasonable ancillary restraint that has the pro-competitive effect of encouraging joint ventures.  Because such an agreement is facially reasonable, the proper standard by which to analyze any alleged agreement is under a rule of reason, rather than the lower per se standard.  Under the rule of reason standard, Princo failed to prove patent misuse.  Princo did not present proof of a relevant market, did not prove actual or likely competitive harm, and did not prove that the Lagadec patent would be used to enter a relevant market to compete with the Orange Book.

Philips further asserts, even if the agreement existed and was anticompetitive, it could not be used as the basis for a misuse defense.  According to Philips, the misuse defense applies only where the patentee conditions a license on terms that improperly expand the patent grant.  For the ITC to find misuse -- where Philips never tried to impose license conditions going beyond the terms of the patents in the Orange Book -- would be an “unprecedented and unwise expansion of the misuse defense.”

Princo, on the other hand, asserts in its brief that it (and the Commission Investigative Staff ) did argue to the Commission that Philips and Sony had an agreement to suppress competition.  According to Princo, it asserted at the ITC that Philips decided to combine with its competitors and create a patent pool and this created a horizontal restraint of trade.  Princo also points to arguments it made about how the cost of patent licenses went down when the Taiwan Fair Trade Commission ordered the pool licensors to license the patents individually.  Princo also points to arguments it made that when Philips and Sony tied essential and non-essential patents in the pool, they ensured there would be no competing standard.  According to Princo, there is sufficient argument and evidence on the record to support its patent misuse allegation.

Princo also asserts that the Commission did, in fact, address Princo’s horizontal competition-suppression theory in its final determination.  As to the waiver arguments made by the ITC and Philips, Princo asserts that it raised the issues in its opening brief on appeal and that the ITC and Philips both addressed the merits of its argument substantively, without asserting that these issues had been waived.  In other words, Princo asserts that the waiver argument has been waived.

Oral argument in this case is scheduled for March 3 at 2:00 p.m.