On April 20, 2009, the Federal Circuit issued its Opinion in Princo Corp. v. Int’l Trade Comm’n, No. 2007-1386.  This was an appeal from the Commission’s ruling in Certain Recordable Compact Discs & Rewritable Compact Discs (Inv. No. 337-TA-474) that Princo Corp. and Princo America Corp. (“Princo”) had violated Section 337 through the importation of compact discs that infringed six patents owned by U.S. Philips Corp. (“Philips”).  At the ITC, Princo conceded infringement but made two distinct arguments that Philips’ patents were unenforceable due to patent misuse.  The Commission found both patent misuse arguments unpersuasive and held that Princo had violated section 337.  Princo appealed to the Federal Circuit.

In the opinion, the Federal Circuit affirmed the Commission’s rejection of Princo’s first patent misuse argument but vacated and remanded with respect to the Commission’s rejection of the second patent misuse argument.

The patents at issue all relate to the “Orange Book” standard for CD-R and CD-RW discs that was jointly developed by Philips and Sony in the 1980s and early 1990s.  While the standard was being developed, Philips, Sony, and others agreed to pool their patents and authorize Philips to grant package licenses to the pooled patents (with all of the patent owners sharing in the royalties).

Philips’ U.S. Patent Nos. 4,999,825 and 5,023,856 (the “Raaymakers patents”) and Sony’s U.S. Patent No. 4,942,565 (the “Lagadec patent”) are the particular patents giving rise to Princo’s patent misuse contentions.  According to the opinion, the Raaymakers patents are undeniably part of the core technology for the “Orange Book” standard.  The Lagadec patent, on the other hand, is for the most part incompatible with the standard because it teaches a digital method for encoding timing information in CD-R and CD-RW discs, as opposed to the analog method that is taught by the Raaymakers patents and is part of the official standard.  However, one claim of the Lagadec patent can be read broadly so as to encompass both the analog method and the digital method.

Against this backdrop, Princo made two separate patent misuse arguments.  First, it argued that Philips’ and Sony’s patent pool constituted an illegal tying arrangement because the Lagadec patent was not necessary to practice the “Orange Book” standard, and therefore the requirement that Princo license that patent along with the patents that were truly necessary to practice the standard (e.g., the Raaymakers patents) was a misuse of the necessary patents.  The Federal Circuit rejected this argument, affirming the finding of the Commission, since the Lagadec patent had at least one claim that might have read on the “Orange Book” standard, the Lagadec patent qualified as an “essential” patent for purposes of the standard, and thus the pooling did not constitute an illegal tying arrangement and was not patent misuse.

The Federal Circuit found Princo’s second patent misuse argument persuasive, however, and remanded to the Commission for further analysis.  This second argument alleged that Philips and Sony had entered into an illegal agreement not to compete – a classic antitrust violation – by agreeing never to license the Lagadec patent separately from the other patents in the pool.

According to Princo, by never licensing the Lagadec patent outside the “Orange Book” patent pool, Philips and Sony effectively stifled any potential development of the Lagadec digital method into a viable technology that could compete with the “Orange Book” standard. 

The Federal Circuit found that this argument had merit, but remanded to the Commission for a determination of whether there was in fact an agreement between Philips and Sony to prevent the licensing of the Lagadec patent as a competitor to the “Orange Book” standard, and whether the Lagadec technology was truly a potentially viable alternative to the standard.