PRINCO CORPORATION AND PRINCO AMERICA CORPORATION V. INTERNATIONAL TRADE COMMISSION

In affirming the ITC’s holding as to Princo’s first tying claim, the court found that a reasonably broad reading of the Lagadec patent (Sony’s digital method) would support a finding of infringement where anyone practiced the Phillips analog method, currently used as the industry standard.  Under the broad construction, since neither patent could be practiced without infringing the other, the court found the Lagadec patent to be essential to the patent pool.  However, the Federal Circuit vacated and remanded Princo’s claim of patent misuse.  The court found persuasive Princo’s argument that Phillips and Sony violated anti-trust law by agreeing not to compete, and remanded the issue to the ITC to determine whether  there was in fact such an agreement and whether the Lagadec method could realistically compete with the Orange Book standard.

563 F.3d 1301, 90 U.S.P.Q.2D (BNA) 1673 (Fed. Cir. 2009)

I.     STATEMENT OF THE FACTS

In the late 1980s and the early 1990s, Phillips, Sony, and a few other large technology companies began collaborative research into rewriteable CD technology (CD-R, CD-RW).  Both companies came to the realization that in order for the laser to accurately read and write to the disc, the laser’s position relative to the disc must be known precisely.  The two companies, in exchanges between engineers, settled on using a spiral with wobbles at regular intervals to serve as a track and a clock for the laser.  Phillips proposed an analog implementation, encoding the position data by modulating the frequency of the wobble, while Sony utilized a digital modulation method.  The two solutions solved the same problem, but are inherently incompatible—CD players using the Phillips approach would not be able to read CDs made using the Sony approach, and vice versa.  The industry now uses the analog method.

Writeable and rewriteable CDs are manufactured using a set of patents held by several companies, among them being Sony, Phillips, Taiyo Yuden, and Ricoh.  In the early 1990s, the companies agreed to pool the patents and have the pool administered by Phillips.  Included in this pool were both the analog method and the digital (Lagadec) method.  Licenses are issued from this pool to manufacturers of CD­Rs and CD-RWs, and no license for an individual patent may be issued.

Princo manufactures CD-Rs.  They took a license from the pool, but then stopped paying the royalty, and Phillips sued in the ITC.  At the ITC, Princo admitted infringement, but asserted the affirmative defense of patent misuse.  Princo alleged that the inclusion of the alternative digital technology in the patent pool constituted tying and price-fixing, as it required payment of royalties on unused and unnecessary patents.  They also argued that the inclusion of the Lagadec method patent also sequestered a viable work-around technology, preventing competitive development.  Their basic allegation is that Phillips bribed Sony not to compete by offering them licenses to their unused Lagadec patent.  The ITC rejected both of these arguments, and Princo appealed to the Federal Circuit.

II.   HOLDING

The court affirmed the ITC’s holding as to Princo’s first tying claim, but vacated and remanded the ITC rejection of Princo’s second claim of patent misuse.

III.  REASONING

In affirming the ITC’s holding as to Princo’s first tying claim, the court found that a reasonably broad reading of the Lagadec patent (Sony’s digital method) would support a finding of infringement where anyone practiced the Phillips analog method, currently used as the industry standard.  Under the broad construction, since neither patent could be practiced without infringing the other, the court found the Lagadec patent to be essential to the patent pool.  However, the Federal Circuit vacated and remanded Princo’s claim of patent misuse.  The court found persuasive Princo’s argument that Phillips and Sony violated anti-trust law by agreeing not to compete, and remanded the issue to the ITC to determine whether  there was in fact such an agreement and whether the Lagadec method could realistically compete with the Orange Book standard.

IV.  OBSERVATIONS

The court here, with respect to Princo’s second claim, is pointing out the difference between pooling essential patents together to reach a precompetitive effect, and not allowing licenses to be taken to any of those patents for other uses.  Patent pooling and some forms of such tying are a double-edged sword—on one hand, the tying of patents to other patents or products can cause blocking of progress and other anti-competitive effects, while on the other hand the pooling of patents may lead an industry forward towards standardization and convergence.  Princo’s last best hope is to convince the court that by refusing to license the Lagadec patent for uses other than those consistent with the Orange Book standard, Sony and Phillips have engaged in violations of classic antitrust prohibitions against agreements not to compete.  See, e.g., Palmer v. BRG of Ga., Inc., 498 U.S. 46, 49 (1990); Otter Tail Power Co. v. United States, 410 U.S. 366, 377 (1973).