May 2016
AIPLA Patent Law Committee Newsletter
By Gracie K. Mills; Jessica L. Roberts, Ph.D.
More than sixty years after deciding Brulotte v. Thys Co.,1the Supreme Court revisited the issue of post-expiration patent royalties in Kimble v. Marvel Entertainment LLC.2Despite fifty years of unrelenting criticism, the Supreme Court declined to abandon Brulotte's per se ban on patent licenses extending royalties beyond expiration of the patent. This article recaps Brulotte, explores Marvel's impact on the per se ban, and offers practical tips for maximizing flexibility in negotiating patent licenses within the Brulotte framework.
In Brulotte, Thys Co. sold to Brulotte a hop-picking machine embodying several patents owned by Thys. Thys conditioned the sale of the hop-picking machine on a license, which required Brulotte to pay Thys, for each season in which the machine was used to harvest hops, the greater of a minimum royalty and a per-pound royalty based on the harvested hops. While Thys' patents expired before 1957, the license to Brulotte continued thereafter. Brulotte challenged the license as unenforceable, arguing that Thys was not entitled to collect any royalties after expiration of the patents. The Supreme Court agreed. While the "right to make, the right to sell, and the right to use" confers a patent monopoly on the patent owner prior to expiration of the patent, the Court reasoned, "any attempted reservation of the patentee … after the patent expires, whatever the legal device employed, runs counter to the policy and purpose of the patent laws."3And Thys, by its license, had attempted just such a reservation of his patent monopoly, the Court found.
In particular, the Supreme Court focused on the indistinguishable nature of Brulotte's obligations under the license before and after expiration of Thys' patents: "The present licenses draw no line between the term of the patent and the post-expiration period. The same provisions as respects both use and royalties are applicable to each."4According to the Court, such continued payment of the royalties after expiration of the patents constituted a "telltale sign that the licensor was using the licenses to project its monopoly beyond the patent period."5Thus, the Court concluded, "a patentee's use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se."6
Since Brulotte, courts and commentators have consistently criticized this per se ban on post-expiration royalty payments. Indeed, the per se ban has been described as "illogical,"7"flawed,"8and even "one of the all-time economically dumb Supreme Court decisions."9
In place of the per se ban, courts and commentators have recommended a "rule of reason" inquiry borrowed from antitrust law. Such an inquiry would demand an investigation into a license's so-called "anticompetitive effects," a case-by-case determination of whether post-expiration royalties imposed by the license will undermine market competition following expiration of the patent.
Under the "rule of reason" inquiry, a court would determine whether the patent owner had "market power" in the relevant market at the time the license was negotiated.10Notably, the patent monopoly does not, under this analysis, automatically confer market power; rather, market power depends on the "definition of the market, barriers to entry, and the like."11If the patent owner has market power, the court would further inquire whether the post-expiration royalties imposed by the license would impose an "unreasonable restraint on competition."12Thus, against the backdrop of five decades of criticism, the Supreme Court agreed to hear Kimble v. Marvel Entertainment, LLC.
Stephen Kimble obtained a patent on a "web-shooting glove," a Spiderman-inspired toy that enabled a player to "act like a spider person by shooting webs from the palm of his or her hand."13After seeking unsuccessfully to license his patent to Marvel Entertainment, LLC, Kimble discovered that Marvel had begun marketing a toy called the "Web Blaster," which Kimble believed infringed his patent.14
Figure 4 of Kimble's U.S. Patent No. 5,072,856 for Toy Web-Shooting Glove
When Kimble sued Marvel in 1997, the parties entered a settlement agreement under which Marvel would purchase Kimble's patent in exchange for a lump sum and a royalty on Marvel's future sales of the Web Blaster.15Per the license, the Web Blaster royalties were to continue indefinitely.16Thereafter, however, Marvel became aware of Brulotte. Relying on the per se ban of Brulotte, Marvel obtained a declaratory judgment that Marvel could cease paying royalties when Kimble's patent expired. While the Ninth Circuit affirmed, it couldn't resist some grumbling, describing Brulotte's per se ban as "counterintuitive" and its rationale as "arguably unconvincing."17The Supreme Court granted certiorari.
In a charming opinion replete with superhero references, Justice Kagan embraced stare decisis to defend the per se ban on post-expiration royalties erected by Brulotte.
The Court began by reminding that "[p]atents endow their holders with certain superpowers, but only for a limited time."18"While a patent lasts," the Court explained, "the patentee possesses exclusive rights to the patented articles," but "when the patent expires, the patentee's prerogatives expire too, and the right to make or use the article, free from all restriction, passes to the public."19
According to the Court, the time-limited nature of the patent monopoly reflects a "balance," struck by Congress, "between fostering innovation and ensuring public access to discoveries," and the Court, it noted, "has carefully guarded that cut-off date."20And Brulotte, the Court explained, reflected this balance. The post-expiration royalties at issue in Brulotte, the Court reasoned, "conflict with patent law's policy of establishing a 'post-expiration … public domain' in which every person can make free use of a formerly patented product."21
Kimble's argument echoed the criticism long lobbed against Brulotte by courts and commentators. Kimble criticized the per se ban as "rigid,"22and challenged that the Brulotte rule should be replaced with the "rule of reason" analysis.23The Brulotte ban, Kimble argued, "impairs the ability of contracting parties to balance and allocate the risks of developing and commercializing new patentable technologies, disincentivizing their initial creation, and thus increasing the likelihood that such technologies will never reach … consumers."24In short, Kimble argued that Brulotte should be overturned because "Brulotte is wrong."25
The Court candidly acknowledged that "[t]he Brulotte rule … prevents some parties from entering into deals they desire."26But, nevertheless, the Court stuck by Brulotte, for two reasons. First, the Court explained, stare decisis entitled Brulotte to some respect, regardless of whether it was rightly decided. As the Court explained, "[r]especting stare decisis means sticking to some wrong decisions. The doctrine rests on the idea … that it is usually 'more important that the applicable rule of law be settled than that it be settled right.'"27Second, if Brulotte were wrong, the Court reasoned, it is up to Congress to solve it. "[S]tare decisis carries enhanced force," the Court explained, "when a decision, like Brulotte, interprets a statute" because "Congress can correct any mistake it sees."28According to the Court, "the choice of what patent policy should be lies first and foremost with Congress."29Thus, the Court left Brulotte alone, grouping Brulotte in with the "balls tossed into Congress' court, for acceptance or not as that branch elects."30
Despite the Court's ultimate defense of Brulotte, Kimble was not merely a rehashing of the reasoning relied in Brulotte to support the per se ban on post-expiration licensing royalties. In acknowledging "[t]he Brulotte rule … prevents some parties from entering into deals they desire," the Court highlighted that Brulotte need not be the death-knell for all license agreements extending beyond expiration of a patent. Rather, the Court reminded, "parties can often find ways around Brulotte, enabling them to achieve those same ends" made possible by post-expiration royalties."31
In particular, the Court offered three approaches for maximizing flexibility in negotiating patent licenses within the Brulotte framework. First, the Court noted, Brulotte permits parties to defer payments for pre-expiration use of a patent into the post-expiration period. Second, parties may tie post-expiration royalties to a non-patent right, which will not expire with the patent. And third, the Court pointed out, Brulotte leaves parties free to enter into business arrangements other than royalties that enable parties to share in the risks and rewards of commercializing a patented invention.
Practice tips for each of these three approaches are discussed below.
Deferred Payments
Brulotte permits parties negotiating a patent license to "defer payments for pre-expiration use of a patent into the post-expiration period."32In Marvel, the Court provides an example of such an acceptable arrangement: "[a] licensee could agree … to pay [a] licensor a sum equal to 10% of sales during the 20-year patent term, but to amortize that amount over 40 years."33Such an arrangement confers flexibility on the parties, Marvel explains, by "bring[ing] down early outlays" to accommodate a "cash-strapped licensee."34
Parties agreeing to such amortized royalty payments, however, should be cautious in crafting language to describe such payments, lest the payments appear tied to post-expiration use of the patent, as was the case in Brulotte.35To this end, parties should clearly distinguish between pre-expiration and post-expiration royalties, being sure to account for any royalties exacted after expiration of the patent.
Veltman v. Norton Simon, Inc.36provides an example. The owner of two patents, Veltman, entered into a patent license with Denver Chemical Manufacturing Company.37The license provided that Denver would pay Veltman a percentage royalty equal to 5% of annual net sales of products embodying the patents for 25 years.38In addition, Denver would pay Veltman a minimum royalty for 25 years.39The license provided that, when the patents expired, the percentage royalty would remain at 5% and the minimum royalty would cease.40
The Court dismissed a characterization of the post-expiration percentage royalty as deferred or amortized payments, pointing to the terms of the license: "the royalty payments due for the post-expiration period under the agreement of the parties herein are by their terms for use during that period."41Most problematically, the Court observed, the license "[drew] no line between the term of the patents and the post-expiration period with regard to royalties."42On the contrary, "the royalties exacted were the same for the post-expiration period as they were for the period of the patents."43Accordingly, the Court found that the "royalty arrangement constitute[d] on its face an impermissible extension of the patent monopoly beyond the statutory period."44
Thus, parties wishing to avoid the results in Brulotte and Veltman should clearly "draw a line between the term of the patents and the post-expiration period with regard to royalties," as Veltman advised, perhaps even going so far as to label post-expiration royalties as amortized or deferred.45In this manner, parties can leave no doubt that post-expiration royalties are not for use of the patent after its expiration, but rather result only from pre-expiration use.
Non-Patent Rights
Another approach for maximizing flexibility in negotiating patent licenses within the Brulotte framework is tying post-expiration royalties to additional non-patent rights. According to Marvel, Brulotte permits post-expiration royalties contingent upon non-patent rights—even those closely related to a patent.46For example, Marvel provides, "a license involving both a patent and a trade secret can set a 5% royalty during the patent period (as compensation for the two combined) and a 4% royalty afterward (as payment for the trade secret alone)."47
Parties relying on such non-patent-right royalties, however, should take care that the patent and non-patent rights are separable to avoid falling within Brulotte's per se ban. To this end, parties may, for instance, craft a patent license to ensure that "the agreement provides a discount for the non-patent rights from the patent-protected rate" so as to avoid a "presum[ption] that the post-expiration royalty payments are for then-current patent use."48
Such a carefully crafted agreement was at issue in Aronson v. Quick Point Pencil Co.49Quick Point Pencil entered into an agreement with Aronson, owner of a patent application, under which Quick Point Pencil would pay Aronson a 5% royalty in exchange for the exclusive right to sell a product embodying Aronson's invention.50The agreement contained a contingency: if the patent application failed to mature into a patent within five years, the 5% royalty would be reduced to 2.5%.51
When Aronson's patent application was rejected, Quick Point Pencil sought to void the agreement, arguing that the contingency requiring Quick Point Pencil to pay the 2.5% royalty after rejection of the patent application was unenforceable.52According to Quick Point Pencil, the contingency reflected an attempt by Aronson to leverage the patent application after it was rejected, which violated Brulotte.53The Supreme Court disagreed. The contingency, the Court explained, was not the product of any patent rights flowing from the patent application; rather, the contingency reflected only a non-patent right, namely, a right not to be excluded should a patent issue:
No doubt a pending patent application gives the applicant some additional bargaining power for purposes of negotiating a royalty agreement. The pending application allows the inventor to hold out the hope of an exclusive right to exploit the idea, as well as the threat that the other party will be prevented from using the idea for 17 years … the amount of leverage arising from a patent application depends on how likely the parties consider it to be that a valid patent will issue.54
It was this leverage, and not any patent rights, that underscored the contingency requiring Quick Point Pencil to pay the 2.5% royalty after rejection of the patent application. Because the patent application thus "played no part in the contract to pay the 2.5% royalty indefinitely," the Court reasoned, the contingency was enforceable.55
Unlike the post-expiration royalties in Brulotte, then, the potentially problematic royalties in Aronson were tied to a non-patent, rather than a patent, right. Put differently, Aronson's leverage in negotiating the contingency stemmed not from Aronson's ownership of the patent application, but rather from the potentiality that the patent application would mature into a patent. This potentiality, the Court found, represented a non-patent right.
Thus, parties wishing to avoid the result in Brulotte in favor of the result in Aronson should, when negotiating, identify the source of their leverage to ensure that it stems from a non-patent right and not from a patent right. This will enable the parties to clearly identify and, crucially, delineate the non-patent right to which any post-expiration royalties are tied. By tying royalties to a separable non-patent right, such as the potentiality at issue in Aronson or a trade secret, the parties may maximize flexibility in their negotiations while remaining within the Brulotte framework.
Non-Royalty Arrangements
Finally, the broadest approach for maximizing flexibility in negotiating patent licenses within the Brulotte framework is considering business arrangements other than patent royalties. The per se ban articulated in Brulotte is limited to royalties for patents; Brulotte poses no bar to other business arrangements that allow parties to share the risks and rewards of commercializing an invention.
In Princo Corp. v. International Trade Commission,56an accused patent infringer, Princo, challenged the enforceability of the asserted patents on the grounds of patent misuse. In particular, Princo asserted that the patent owner, Philips, had, in licensing the patents, conditioned the licenses on the licensing of other, unrelated patents. In rejecting Princo's argument, the Federal Circuit construed patent misuse generally—and Brulotte in particular—quite narrowly, leaving many commercial arrangements beyond their reach.
In particular, the Federal Circuit relied on Brulotte to note that "there are established limits which the patentee must not exceed in employing the leverage of his patent to control or limit the operations of the licensee."57 Nevertheless, the Court explained, these limits are not exceeded merely by entering into otherwise suspect commercial arrangements: "Recognizing the narrow scope of the doctrine, we have emphasized that the defense of patent misuse is not available … simply because a patentee engages in some kind of wrongful commercial conduct, even conduct that may have anticompetitive effects."58
Based on these narrowly drawn limits of patent misuse, the Federal Circuit concluded that the patent owner's licensing agreements did not violate Brulotte or otherwise constitute patent misuse.59In particular, the Federal Circuit noted that the licensing agreements did not "enlarge the physical or temporal scope of those patents;" indeed, the Court could identify no link between the putative misconduct and the … patents."60Accordingly, the Court found the licensing agreements unproblematic.
Princo is significant for its refusal to conflate the Brulotte per se ban with an antitrust-style analysis of anticompetitive effects. In fact, Princo even goes so far as to hold that patent use "requires, at a minimum, … that the patent in suit … itself significantly contribute to the [licensing] practice under attack."61This means that Brulotte is irrelevant to business arrangements that rely on other means of sharing the risks and rewards of commercializing an invention.
While the Supreme Court in deciding Kimble declined to overrule Brulotte, it did accept commentators' invitation to acknowledge that Brulotte's per se ban can damper parties' freedom to negotiate licensing agreements. In doing so, Kimble articulated three approaches that are permissible under the Brulotte framework to permit parties to maximize their flexibility during such negotiations.
Importantly, though, Kimble is also a reminder of the importance of preparing to negotiate. In addition to keeping in mind the practical tips provided above, parties entering negotiations should take care to research and consider each potential provision of their patent licenses, lest undiscovered case law upset a carefully-struck balance between parties.
Endnotes
1Brulotte v. Thys Co., 379 U.S. 29 (1964).
2Kimble v. Marvel Ent’t LLC, 133 S. Ct. 2401 (2015).
3Brulotte, 379 U.S. at 31.
4Brulotte, 379 U.S. at 32.
5Brulotte, 379 U.S. at 32.
6Brulotte, 379 U.S. at 33.
7Roger M. Milgrim & Eric E. Bensen, Milgrim on Licensing § 18.05 (2014).
8Richard Gilbert & Carl Shapiro, Antitrust Issues in the Licensing of Intellectual Property: The Nine No-No’s Meet in the Nineties in Brookings Papers on Economic Activity: Microeconomics 283, 322 (1997).
9William M. Landes & Richard A. Posner, The Economic Structure of Intellectual Property Law 418 (Harvard Univ. Press 2003).
10County Materials Corp. v. Allan Block Corp., 502 F. 3d 730, 735 (7th Cir. 2007).
11Mark A. Lemley & Christopher R. Leslie, IP and Antitrust: An Analysis of Antitrust Principles Applied to Intellectual Property Law § 3.2e at 3-12.1 (2d. ed. 2015).
12County Materials Corp. v. Allan Block Corp., 502 F. 3d 730, 735 (7th Cir. 2007).
13Stephen E. Kimble, U.S. Patent No. 5,072,856 (1990).
14Kimble, 135 S. Ct. at 2406.
15Kimble, 135 S. Ct. at 2406.
16Kimble, 135 S. Ct. at 2406.
17Kimble, 135 S. Ct. at 2406 (quoting Kimble v. Marvel Ent’t, LLC, 727 F.3d 856, 857 (2013).
18Kimble, 135 S. Ct. at 2406.
19Kimble, 135 S. Ct. at 2407.
20Kimble, 135 S. Ct. at 2406-07.
21Kimble, 135 S. Ct. at 2407-08.
22Brief for Petitioners, Kimble v. Marvel Ent’t LLC, 133 S. Ct. 2401 (2015) (No. 13-720), 2015 WL 428993, at *1.
23Brief for Petitioners, Kimble v. Marvel Ent’t LLC, 133 S. Ct. 2401 (2015) (No. 13-720), 2015 WL 428993, at *18.
24Brief for Petitioners, Kimble v. Marvel Ent’t LLC, 133 S. Ct. 2401 (2015) (No. 13-720), 2015 WL 428993, at *14.
25Kimble, 135 S. Ct. at 2412.
26Kimble, 135 S. Ct. at 2408.
27Kimble, 135 S. Ct. at 2409 (quoting Burnet v. Coronado Oil & Gas Co., 285 U.S. 393, 406 (1932) (Brandeis, J., dissenting)).
28Kimble, 135 S. Ct. at 2409.
29Kimble, 135 S. Ct. at 2414.
30Kimble, 135 S. Ct. at 2409.
31Kimble, 135 S. Ct. at 2408.
32Kimble, 135 S. Ct. at 2408.
33Kimble, 135 S. Ct. at 2408.
34Kimble, 135 S. Ct. at 2408.
35Brulotte, 379 U.S. at 32 ("The royalty payments due for the post-expiration period are by their terms for use during that period, and are not deferred payments for use during the pre-expiration period.").
36Veltman v. Norton Simon, Inc., 425 F. Supp. 774 (S.D.N.Y. 1977).
37Veltman, 425 F. Supp. at 774.
38Veltman, 425 F. Supp. at 775.
39Veltman, 425 F. Supp. at 775.
40Veltman, 425 F. Supp. at 775.
41Veltman, 425 F. Supp. at 775.
42Veltman, 425 F. Supp. at 775.
43Veltman, 425 F. Supp. at 775.
44Veltman, 425 F. Supp. at 775.
45Veltman, 425 F. Supp. at 775.
46Kimble, 135 S. Ct. at 2408.
47Kimble, 135 S. Ct. at 2408.
48Kimble v. Marvel Enterprises, Inc., 727 F.3d 856, 863-64 (9th Cir. 2013).
49Aronson v. Quick Point Pencil Co., 440 U.S. 257 (1979).
50Aronson, 440 U.S. at 259.
51Aronson, 440 U.S. at 259.
52Aronson, 440 U.S. at 260.
53Aronson, 440 U.S. at 261.
54Aronson, 440 U.S. at 265.
55Aronson, 440 U.S. at 265.
56Princo Corp. v. Int'l Trade Comm'n, 616 F.3d 1318 (Fed. Cir. 2010).
57Princo, 616 F.3d at 1327-28 (quoting Zenith, 395 U.S. at 136).
58Princo, 616 F.3d at 1329.
59Princo, 616 F.3d at 1331.
60Princo, 616 F.3d at 1332.
61Princo, 616 F.3d at 1332.
Originally printed in AIPLA’s Patent Law Committee Newsletter, May 2016. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.
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