Princo Corp. v. International Trade Com'n

• Decision Date: 20 April 2009
• Docket Number: No. 2007-1386.,2007-1386.
• Citation: Princo Corp. v. International Trade Com'n, 563 F.3d 1301 (Fed. Cir. 2009)
• Parties: PRINCO CORPORATION and Princo America Corporation, Appellants, v. INTERNATIONAL TRADE COMMISSION, Appellee, and U.S. Philips Corporation, Intervenor.
• Court: U.S. Court of Appeals — Federal Circuit

563 F.3d 1301

PRINCO CORPORATION and Princo America Corporation, Appellants, v.INTERNATIONAL TRADE COMMISSION, Appellee, and U.S. Philips Corporation, Intervenor.

No. 2007-1386.

United States Court of Appeals, Federal Circuit.

April 20, 2009.

Eric L. Wesenberg, Orrick, Herrington & Sutcliffe LLP, of Menlo Park, California, argued for appellants.With him on the brief were Robert E. Freitas, Cynthia Wickstrom Zuniga, Kenneth J. Halpern, and Michael C. Ting.

Clara Kuehn, Attorney, Office of the General Counsel, United States International Trade Commission, of Washington, DC, argued for appellee.With her on the brief were James M. Lyons, General Counsel, and Wayne W. Herrington, Assistant General Counsel.

Jonathan G. Cedarbaum, Wilmer Cutler Pickering Hale and Dorr LLP, of Washington, DC, argued for intervenor.With him on the brief were A. Douglas Melamed, Edward C. DuMont, and Perry A. Lange.

Before BRYSON, GAJARSA, and DYK, Circuit Judges.

Opinion for the court filed by Circuit Judge DYK.Opinion concurring in the result in part and dissenting in part filed by Circuit Judge BRYSON.

DYK, Circuit Judge.

Princo Corporation and Princo America Corporation(collectively "Princo") appeal from a final order of the United States International Trade Commission("Commission").The Commission found that compact discs imported by Princo infringed claims of six patents asserted by U.S. Philips Corporation("Philips") and rejected Princo's patent misuse defense.In re Certain Recordable Compact Discs & Rewritable Compact Discs,No. 337-TA-474, slip op. at 9(Int'l Trade Comm'nFeb. 5, 2007)("Final Determination"), available at2007 WL 1256290(public version).

On appeal, Princo contends that the Commission erred by failing to find misuse with respect to two aspects of Philips's licensing practices: first, that Philips conditioned the license of Philips patents essential to the production of Orange Book compliant recordable compact discs upon the purchase of a license to an allegedly-nonessential Sony patent (the Lagadec patent), and second, that Philips allegedly agreed with Sony not to license the Lagadec patent as competing technology to the Orange Book.We affirm the Commission's rejection of Princo's misuse argument based on the first practice; we vacate and remand for further proceedings with regard to the second.

BACKGROUND

I

This is the second time that this case has come before us.SeeU.S. Philips Corp. v. Int'l Trade Comm'n,424 F.3d 1179(Fed.Cir.2005)("Philips I")(remanding case to Commission);see alsoU.S. Philips Corp. v. Princo Corp.,173 Fed. Appx. 832(Fed.Cir.2006)("Philips II")(appeal in related infringement action filed by Philips against Princo in federal district court);In re Princo Corp.,478 F.3d 1345(Fed.Cir.2007)("Philips III")(same).

The central issue is again whether Princo's admitted infringement of Philips's patents is subject to a patent misuse defense.The background on the parties' dispute is as follows.

Philips and three other companies (Sony, Taiyo Yuden, and Ricoh) own patents relevant to the manufacture of recordable compact discs ("CD-Rs") and rewritable compact discs ("CD-RWs").Some of those patents cover features of discs necessary to comply with the "Orange Book," a technical standard jointly developed by Philips and Sony in the late 1980s and early 1990s.Manufacturers produce CD-R and CD-RW discs in accordance with the Orange Book technical standard in order for the discs to be compatible with CD players and CD-ROM drives installed in computers and home entertainment systems, which are also manufactured in accordance with the corresponding Orange Book specifications.

In the early 1990s, the companies agreed to pool their Orange Book-related CD-R and CD-RW patents.In return for a share of royalties from the pool, Sony, Taiyo Yuden, and Ricoh authorized Philips to administer the pool and to grant package licenses of their pooled patents to manufacturers interested in producing Orange Book compliant compact discs.Philips made available a joint license to the pooled CD-R patents held by Philips, Sony, and Taiyo Yuden and a joint license to the pooled CD-RW patents held by Philips, Sony, and Ricoh.¹Licensees desiring to produce Orange Book discs could choose one of the packages offered by Philips; licenses to individual patents were not offered.The package licenses required a manufacturer to pay a per-disc royalty on each compact disc produced using at least one licensed patent.The per-disc royalty did not vary depending on which or how many features covered by licensed patents were actually used to produce the disc, "meaning that licensees must pay a royalty based on the number of discs manufactured regardless of how many of the patents are actually used in the manufacturing."Philips III,478 F.3d at 1348.

Princo took a package license from Philips in 1997, but like several other manufacturers of CD-Rs and CD-RWs, ceased paying royalties soon thereafter.Philips filed a complaint with the International Trade Commission, contending that some of the manufacturers were violating 19 U.S.C. § 1337(a)(1)(B) by importing compact discs that infringed Philips's patents.There was no allegation that the manufacturers had infringed patents owned by other pool participants.On July 26, 2002, the Commission instituted an investigation and named nineteen respondents, not including Princo.In re Certain Recordable Compact Discs & Rewritable Compact Discs,67 Fed.Reg. 48,948(Int'l Trade Comm'nJuly 26, 2002).Princo thereafter moved to intervene and was added as a respondent.

Although it initially contested the issue of infringement, Princo now admits that its products are within the scope of Philips's patents.Instead, Princo asserts patent misuse by Philips as a defense.Before the Commission, Princo argued that Philips improperly expanded the scope of its statutory patent rights through price fixing, price discrimination, and the use of mandatory package licensing to force manufacturers to take licenses to "nonessential" pool patents in order to obtain licenses to pool patents that were in fact essential to the manufacture of CD-Rs or CD-RWs.The administrative law judge ("ALJ") agreed, ruling that the Philips patents were unenforceable due to patent misuse per se and under the rule of reason.SeeIn re Certain Recordable Compact Discs & Rewritable Compact Discs,No. 337-TA-474, slip op. at 219-20(Int'l Trade Comm'nOct. 24, 2003)("Initial Determination").With regard to per se misuse, the ALJ determined that Philips and other pool members fixed prices at higher than competitive levels and charged excessive royalties that would drive manufacturers out of the market, and that Philips committed improper price discrimination by exempting favored disc manufacturers from paying royalties.With regard to misuse under the rule of reason, the ALJ found that anticompetitive effects flowed from the inclusion of nonessential patents in the mandatory package licenses and from the excessive fixed royalty rates set by the pool.

On review, the Commission affirmed the ALJ's misuse determination, but on narrower grounds.In re Certain Recordable Compact Discs & Rewriteable Compact Discs, No. 337-TA-474, USITC Pub.No. 3686, slip op. at 4-5(Apr. 11, 2004).The Commission took no position on the ALJ's ruling of patent misuse per se based on theories other than tying, and no position on eight of the twelve pool patents the ALJ found to be nonessential for the manufacture of Orange Book compliant CD-R/RWs and hence improperly tied to the essential patents.Id. at 5 n. 3, 50-51.Focusing its analysis on the four remaining allegedly-nonessential patents, the Commission concluded that Philips's "practice of mandatory package licensing constitute[d] patent misuse per se as a tying arrangement between (1) licenses to patents that are essential to manufacture CD-Rs or CD-RWs according to Orange Book standards and (2) licenses to [the four] other patents that are not essential to that activity."Id. at 4-5.It agreed with the ALJ that the four patents were not actually essential because for the technology covered by each patent a non-infringing, "economically viable[ ] alternative technology existed" that could be used to create an Orange Book compliant disc. Id. at 61.It also adopted the ALJ's conclusion that the tying arrangement constituted misuse under the rule of reason.Id. at 50.

On appeal, we reversed and remanded.Philips I,424 F.3d at 1198-99.We explained that offering the package licenses at issue did not constitute a per se violation "[i]n light of the efficiencies of package patent licensing and the important differences between product-to-patent tying arrangements and arrangements involving group licensing of patents."Id. at 1193.In addition, we concluded that Philips's inclusion of the four allegedly-nonessential patents in the package licenses did not constitute misuse under the rule of reason because those patents were essential rather than nonessential.The patents were essential because they covered features necessary for Orange Book compliance, and the record did not disclose that "any commercially viable alternative actually existed" to those patents.Id. at 1197-98.However, because the Commission's relatively narrow decision based on tying of the four patents "did not address all of the issues presented by the administrative law judge's decision under both the per se and rule of reason analysis,"we remanded for further proceedings concerning Princo's remaining theories of misuse.Id. at 1198.

II

Among Princo's arguments on remand were issues concerning misuse relating to one particular pool patent, Sony's U.S. PatentNo. 4,942,565(the "Lagadec patent" or " '565 Patent"), and those are the sole issues on appeal.A brief description of the development of the Orange Book standard and the relationship of the Lagadec patent to other pool patents is...