User:Sashashekhar/Patent Misuse

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In United States patent law, patent misuse is an affirmative defense used in patent litigation when a defendant has been accused of infringing on a patent. It has also been used to mitigate damages following a finding of infringement or in some cases to justify a failure to pay contracted-for royalties. The patent misuse doctrine prohibits extension of a patent beyond what is legally granted, it restricts efforts by patent holders to broaden the temporal or physical scope of a granted patent in a way that provides the patent owner an unfair economic advantage.

Definition and characteristics

The patent misuse doctrine can be successfully applied if a patent owner "leverages" their patent to improperly expand the scope or term of the patent. For example, patent misuse has been used to prevent tying purchase of a second non-patent protected good to the purchase of a first good that is patent protected. If market power exists then the process of tying expands protection of the patented product beyond what is granted by the patent. Use of licensing agreements to extend the payment of royalties beyond the term of a patent, and use of a licensing agreement to require a percentage of profit be paid as royalty for goods or services not exclusively linked to the patent, can also constitute patent misuse. Price-fixing is another form of per se patent misuse acknowledged by the Federal Circuit and it too can render a patent unenforceable. ^[1] Patent misuse can occur with or without violation of antitrust laws.

Other forms of patent misuse have also been identified as patent misuse through application of the rule of reason analysis, where the anticompetitive effect as well as the circumstances under which the act is committed are taken into consideration. "However, this is not a price-fixing or tying case, and the per se antitrust and misuse violations found in the Bauer trilogy and Motion Picture Patents are not here present. The appropriate criterion is whether...the patentee has ventured beyond the patent grant and into behavior having an anticompetitive effect not justifiable under the rule of reason... Anticompetitive effects that are not per se violations of law are reviewed in accordance with the rule of reason." ^[2] For more details on this case see Mallinckrodt, Inc. v. Medipart, Inc..

Background

The patent misuse defense arose from application of the "unclean hands" doctrine through several United States Supreme Court cases from the early 20th century. Prior to the establishment of the patent misuse doctrine in Motion Picture Patents Co. v. Universal Film Mfg. Co, ^[3] very few exceptions were placed on the patent holder rights to make, sell or use their protected good. Since the legal object granted by a patent was an exclusive right to a monopoly, the early courts held that any agreements formed between a licensee and the patent holder were enforcible by law.^[4] In the 1913 Bauer & Cie. v. O'Donnell decision the Supreme Court began to restrict the exclusivity and extent by which a patent holder could use licensing agreements to gain a market advantage. The 1913 court conceded to the patent holders right to control the time, place and manner of using a patented item as well as the rights associated with the choice to sell a patented good, but it held that the price for a protected item, could not through a licensing agreement, dictate the price for the item after the item was sold.

The patent misuse doctrine was established as a response to efforts by patent holders to use licensing agreements to derive unfair monetary advantages through expansion of the scope of their patents. Historically, courts were willing to entertain a patent misuse defense for patent owners who never undertook any commercial use and solely sought out infringers, see Continental Paper Bag Co. v. Eastern Paper Bag Co.^[5]. Under current U.S. patent law it is not patent misuse simply to enforce rights to a patent, in good faith, and enforcement is permissible irrespective of any use or non-use by the owner.^[6]

Case law

Pre-patent misuse

The 1912 Supreme Court did not incorporate a doctrine of patent misuse in Henry v. A. B. Dick Co.^[7] According to the Court, a finding of patent misuse would have asserted too much control over the ability for patent owners to control sale and use of patented goods through licensing agreements.^[7] In Henry v. A. B. Dick Co., the Court held that Henry's sale of unauthorized ink for use with a patented "rotory mimeograph" stencil printing machine manufactured by Dick Co., resulted in infringing use of the ink by a party who was bound by a licensing agreement that required ink and related goods for use with the mimeograph be manufactured by A. B. Dick Co. In current terms, the use of a licensing agreement on a patented good to require the exclusive purchase of non-patent protected secondary goods is called "tying" of the goods, and it can constitute patent misuse. A year later in 1913, the Supreme Court made another decision that appears to represent a shift in their perspectives. In Bauer & Cie. v. O'Donnell the Court acknowledged that license agreements could be used by patent holders to control manufacture, use and sale of a goods, but could not be used to control the value of the used good on the secondary market.^[8]

Origins of the doctrine

In 1917, the United States Supreme Court reversed the four-year-old Henry v. A.B. Dick Co. decision and established the patent misuse doctrine. The doctrine was established through application of the "unclean hands" principle of in the Courts decision on Motion Picture Patents Co. v. Universal Film Mfg. Co. In this case the Court held that a restriction requiring that a patented film projector be used for screening only films authorized by the patent holder was unenforceable and constituted patent misuse.^[9] The "unclean hands" principle is evoked when the behavior of a plaintiff is so egregious that it warrants punishment instead of an award of damages.^[10] Since it's formation, the patent misuses doctrine has been used to refer to a number of types of malfeasance including "tying" and "temporal extension."^[8]

Patent-to-product tying

Several Supreme Court cases have addressed the issue of patent-to-product tying as examples of patent misuse. In Carbice Corp. v. American Patents Development Corp.Cite error: The <ref> tag has too many names (see the help page). a method patent held by American Patents Development Corp. for an enclosure used to transport dry ice was restricted to use with dry ice distributed by their exclusive licensee, Dry Ice Corp. American Patents Dev. Co. sued Carbice for contributory infringement on the grounds that Carbice knowingly continued to sell dry ice to customers who transported the dry ice in boxes protected by the patent. The Supreme Court held that use of this method patent to control dry ice sales was patent misuse, and a few months later the Supreme Court declared as a separate issue, that the patent was not valid.Cite error: The <ref> tag has too many names (see the help page).

Any existing ambiguity about the application of patent misuse to the patent-to-product tying" was codified by the 1942 Supreme Court in Morton Salt Co. v. G.S. Suppiger Co.^[11] Suppinger Co. manufactured salt-tablet dispensing machines for which it owned a patent, part of the sales agreement for these machines required that salt tablets used in the machines be purchased exclusively from Suppinger. Morton Salt Co., a competitor that also sold salt tablets, manufactured and leased the dispensing machines for which Suppinger Co. owned a patent. The Supreme Court denied Suppinger Co. compensation for direct infringement by Morton Salt Co., holding that the patent was not enforceable because the patent holder was using it to unfairly restrain competition. The Court further stated that the judgement would not be different if Morton Salt Co. was not a competitor in the salt tablet market. "Where the patent is used as a means of restraining competition with the patentee's sale of an unpatented product, the successful prosecution of an infringement suit even against one who is not a competitor in such sale is a powerful aid to the maintenance of the attempted monopoly of the unpatented article, and is thus a contributing factor in thwarting the public policy underlying the grant of the patent."^[11] More recently in Illinois Tool Works Inc. v. Independent Ink, Inc., the Supreme Court held that for patent-to-product tying to exist there must be proof that market power in the patented product exists and that the licensing agreement has a direct effect on competition in a relevant market.^[8]

Temporal extension and royalties

The patent misuse doctrine could also be applied to use of licensing agreements to extend the term of a patent or to extract royalties as a percentage of profit from sales of other products or goods. In "Brulotte v Thys Co."^[12] Mr. Brulotte purchase a hop-harvesting machine from Thys Co., upon purchase Brulotte also accepted terms of a licensing agreement which required payment of annual royalties as well as compliance with restrictions preventing transfer of the license and movement of the machine out of a given location. When Mr. Brulotte realized that the terms of the contract exceeded the duration of the Thys Co. patent he ceased payment of the annual royalties. The Supreme Court held that the contract between Mr. Brulotte and Thys Co. was not enforceable because it extended the term of patent protection beyond the duration of the patent.^[13] In a similar case, Zenith Radio Corp. v. Hazeltine Research Inc., ^[14] the Supreme Court found patent misuse when the patent holder attempted to license patents as a package and garner royalties as payment, measured as a percentage of profit from sales of other products or goods.

Interpretations since the 1980s

The patent misuse doctrine has been subject to primarily Federal circuit interpretation in more recent years. One heavily cited case, Windsurfing v AMF^[15] illustrates the most current form of the doctrine. "To sustain a misuse defense involving a licensing arrangement not held to have been per se anticompetitive by the Supreme Court, a factual determination must reveal that the overall effect of the license tends to restrain competition unlawfully in an appropriately defined relevant market."^[15] This interpretation represents the tendency for the federal circuit courts to place a high value on the necessity for demonstrating anticompetitive effect. This court also provided a clear definition for the "patent leverage" test which is implemented in cases involving non per se misuse. This "patent leverage" test asks if "the patentee “impermissibly broaden[ed] the ‘physical or temporal’ scope of the patent grant with anticompetitive effect.” ^[15]

Patent-to-patent tying

In U.S. Philips Corp. v. International Trade Commission ^[16], a more recent patent misuse case, the federal circuit found that proof of antitrust violations does not in itself support a claim for patent misuse. Philips, Sony and several other manufactures held patents on various technology for creating disks that were readable by CD players and CD-ROM drives. It was understood that the Philips patent better served the industry, so to create a uniform industry standard the companies bundled their patents and offered them as a package to CD manufacturers. Princo Corp., the original defendant in the infringement suit, stopped paying fees to Philips yet continued to import readable discs covered under the licensing agreement. Princo Corp. asserted that the bundling of patents by Philips suppressed competition by Sony and other companies and thus constituted patent misuse. En banc opinion by a panel of judges from the Fed. Circuit Court of Appeals held that the scope of the patent was not broadened impermissibly and therefore, did not find patent misuse. ^[16]

Patent Misuse Reform Act of 1988

In 1988, Congress enacted legislation that narrowed the scope of the patent misuse doctrine through addition of sections 4-5 of 35 U.S.C. § 271(d).

“

No patent owner otherwise entitled to relief for infringement or contributory infringement of a patent shall be denied relief or deemed guilty of misuse or illegal extension of the patent right by reason of his having done one or more of the following:

(1) derived revenue from acts which if performed by another without his consent would constitute contributory infringement of the patent;

(2) licensed or authorized another to perform acts which if performed without his consent would constitute contributory infringement of the patent;

(3) sought to enforce his patent rights against infringement or contributory infringement;

(4) refused to license or use any rights to the patent; or

(5) conditioned the license of any rights to the patent or the sale of the patented product on the acquisition of a license to rights in another patent or purchase of a separate product, unless, in view of the circumstances, the patent owner has market power in the relevant market for the patent or patented product on which the license or sale is conditioned.

”

The Patent Misuse Reform Act of 1988 did not explicitly define patent misuse the way the Supreme Court cases from the early 20th century did, instead it provided safe harbors to protect patent holders from liability that could arise from broad interpretation of the patent misuse doctrine. Sections 1-3 of 35 U.S.C. § 271(d) were added to protect patent holders in cases of contributory infringement, these additions were made by the Patent Act of 1952.

Remedy

Most types of misuse can be "purged" by abandoning the practice and causing its effects to dissipate.^[17] Fraud or inequitable conduct in patent procurement, however, is not purgeable.

"If the alleged infringer can demonstrate that the patent owner engaged in prohibited conduct, the patent is rendered unenforceable despite its validity. In this respect, patent misuse is similar to the doctrine of inequitable conduct, which also renders a patent unenforceable. It is interesting to note that a defendant claiming patent misuse need not show that he/she was personally harmed by the misuse."^[18]

Criticisms and support

Critics of the patent misuse doctrine argue that it is anachronistic, and that it's interpretation has been narrowed to the point of abolishment by the Federal Courts since 1988. ^[19] Further support for the notion that the patent misuse doctrine is antiquated has come from recent criticisms on the interpretation of patent misuse by the federal circuit court in the Princo Corp. v. Int'l Trade Comm'n cases. "The Federal Circuit's August 2010 en banc decision in Princo Corp. v. Int'l Trade Comm'n, 616 F.3d 1318 (Fed. Cir. 2010) ("Princo II"), interpreted the patent misuse defense narrowly. It required proof of both leveraging of an enforced patent and an anticompetitive effect outside the scope of the patent right, absent per se misuse.^[20]"

Proponents of the patent misuse doctrine argue the doctrine is underused and suggest that it could be re-branded in a more contemporary context as a defense against litigation brought on by Patent Trolls. "This type of egregious behavior by nefarious actors (i.e., patent trolls) needs to be characterized as patent misuse, which would taint the patents and render them incapable of being enforced.^[21]." Use of this doctrine to contest patent infringement suits by non-practicing entities may require the courts to challenge precedent set in 1908 by the Supreme Court in Continental Paper Bag Co. v. Eastern Paper Bag Co.

References

^ Bernhard, Herbert A. "Patents: Misuse Doctrine: Multiple Licenses with Price-Fixing Provisos as Sherman Act Violation" Michigan Law Review Vol. 55, No. 5 (Mar., 1957), pp. 726-728 http://www.jstor.org/stable/1285286
^ Wagner, P. Class 19 "Antitrust and Patent Misuse" quoting Mallinckrodt v. Medipart (Fed. Cir. 1992)" https://www.law.upenn.edu/blogs/polk/patents/Class%2021%20slides%20(full%20version).pdf
^ Motion Picture Patents Co. v. Universal Film Mfg. Co 243 U.S. 502 (1917) (Supreme Court holding unenforceable a restriction that a user of a patented film projector must use it to screen only such films as the patentee authorized).
^ E. Bement & Sons v. National Harrow Co., 186., U.S. 70 755 (1902)
^ The Paper Bag Patent Case Continental Paper Bag Co. v. Eastern Paper Bag Co., 210 U.S. 405 (1908) http://supreme.justia.com/cases/federal/us/210/405/case.html
^ 35 U.S.C. § 271(d)(4); Dawson Chemical Co. v. Rohm & Haas Co., 448 U.S. 176 (1980). "Sham" or bad-faith patent enforcement--i.e., without belief that the claim is meritorious--however, can give rise to liability. See Professional Real Estate Investors, Inc. v. Columbia Pictures Industries, Inc., 508 U.S. 49 (1993).
^ ^a ^b Henry v. A.B. Dick Co., 224 US 1 (1912) http://caselaw.lp.findlaw.com/scripts/getcase.pl?navby=CASE&court=US&vol=224&page=1
^ ^a ^b ^c Brian D. Hill, "Princo Corp. v. Int'l Trade Comm'n: Patent Misuse No Longer a Deterrent to Anticompetitive Behavior in the Group Venture Context", 7 J. Bus. & Tech. L. 361 (2012) Available at: http://digitalcommons.law.umaryland.edu/jbtl/vol7/iss2/5
^ Motion Picture Patents Co. v. Universal Film Mfg. Co. 243 U.S. 502 (1917)
^ White, Katherine "A Rule for When Patent Misuse Should be Applied" FORDHAM INTELL. PROP., MEDIA & ENT. L.J. [Vol.11:671] http://iplj.net/blog/wp-content/uploads/2009/09/Article-A-Rule-for-Determining-When-Patent-Misuse-Should-be-Applied.pdf
^ ^a ^b Morton Salt Co. v. G.S. Suppiger Co. 314 U.S. 488 (1942) (tie-in between patented salt dispenser machine and unpatented salt).
^ Brulotte v. Thys Co. - 379 U.S. 29 (1964) http://supreme.justia.com/cases/federal/us/379/29/case.html
^ Gates, S., Meier, J., "Brulotte’s continuing shadow over patent licensing" Journal of Intellectual Property Law & Practice, 2009, Vol. 4, No. 3 http://jiplp.oxfordjournals.org/content/4/3/181.full.pdf+html
^ Zenith Radio Corp. v. Hazeltine Research, Inc. - 401 U.S. 321 (1971) http://supreme.justia.com/cases/federal/us/401/321/
^ ^a ^b ^c Windsurfing Intern. INC. v. AMF, INC 782 F.2d 995 (1986) http://www.leagle.com/decision/19861777782F2d995_11607
^ ^a ^b Princo Corp. v. International Trade Commission and U.S. Philips Corp., 616 F.3d 1318 (Fed. Cir. 2010) https://www.courtlistener.com/cafc/TPu/princo-corp-v-international-trade-commission/?q=Carbice+Corp.+v.+American+Patents+Development+Corp&stat_Precedential=on&sort=dateFiled+desc
^ United States Gypsum Co. v. National Gypsum Co., 352 U.S. 457 (1957); B.B. Chem. Co. v. Ellis, 315 U.S. 495 (1942).
^ Leaffer, M. Patent Misuse and Innovation" 10 J. HIGH TECH. L. 142 (2010) http://law2.suffolk.edu/jhtl/docs/pdf/Leaffer_10JHTL142.pdf
^ Testimony of Robert J. Hoerner FTC Hearings on Competition and Intellectual Property Law and Policy in the Knowledge-Based Economy (2002) http://www.ftc.gov/opp/intellect/020711hoerner.pdf
^ Frankel, Kenneth M. "Patent Misuse After Federal Circuit's Princo Decision En Banc The AIPLA Antitrust News February 2011 http://www.finnegan.com/resources/articles/articlesdetail.aspx?news=92d27184-e349-490c-a4e3-62d336980109
^ Gene Quinn "Indicia of Extortion – Federal Circuit Slams Patent Troll" http://www.ipwatchdog.com/2011/08/04/indicia-of-extortion-federal-circuit-slams-patent-troll/id=18568/