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By Tony Dutra
June 22 — A patent expiration rule set 50 years ago when Brulotte v. Thys Co. said that “a patentee's use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se” remains intact after a June 22 ruling by the Supreme Court.
In an opinion written by Justice Elena Kagan, the court said that “the intersection of two areas of law: property (patents) and contracts (licensing agreements)” creates a “superpowered form of stare decisis,” requiring “a superspecial justification to warrant reversing Brulotte.”
And the court saw no such special justification in the arguments presented by Spider-Man toy patentee Stephen Kimble or his supporting amici.
“Critics of the Brulotte rule must seek relief not from this Court but from Congress,” a 6-3 majority said.
Justice Samuel A. Alito filed a dissenting opinion, in which Chief Justice John G. Roberts Jr. and Justice Clarence Thomas joined, saying, “we do not give super-duper protection to decisions that do not actually interpret a statute.”
“[Brulotte] was based instead on an economic theory—and one that has been debunked,” the dissent said. “The decision interferes with the ability of parties to negotiate licensing agreements that reflect the true value of a patent, and it disrupts contractual expectations.”
“The outcome was not surprising, and will change nothing for IP owners and practitioners,” Robert G. Kidwell of Mintz, Levin, Cohn, Ferris, Glovsky & Popeo P.C., Washington, said. “What is more surprising in this case is the stridency of the dissent from Justice Alito; this case did not appear to warrant going ‘all in' on criticizing the Court’s own decisions, but that is what Justice Alito (along with the Chief Justice and Justice Thomas) chose to do.”
The majority and dissent struggled with the lack of evidence provided in the briefing as to whether parties have come to rely on Brulotte and been able to find creative ways to work around it to negotiate efficient licensing deals.
Some stakeholders commenting to Bloomberg BNA after the opinion was announced had no such difficulty.
“Parties have relied on the fact that a patent is dedicated to the public at the end of its term (about 20 years from application date),” Jeanne M. Gills of Foley & Lardner LLP, Chicago, said in an e-mail. “Parties have thus long been free to negotiate a business deal that allocates both risk and reward without running afoul of Brulotte.”
Melanie L. Mayer of Fenwick & West LLP, Seattle, pointed to specific examples of such agreements in the Ninth Circuit opinion in this case and the Seventh Circuit in Meehan v. PPG Indus., Inc., 802 F.2d 881, 886 (7th Cir. 1986).
The Ninth Circuit said that “a license for inseparable patent and non-patent rights involving royalty payments that extends beyond a patent term is unenforceable for the post-expiration period unless the agreement provides a discount for the non-patent rights from the patent-protected rate” or there is “some other clear indication that the royalty was in no way subject to patent leverage,” she noted. And the Seventh Circuit held that “parties can contract for trade secret payments to extend beyond the life of a patent, [but] there must be some provision that distinguishes between patent royalties and trade secret royalties.”
Gills also identified “joint venture, cross-licensing, consulting relationships, etc.” that the majority failed to mention.
The dissenting opinion, however, said that “the suggested alternatives do not provide the same benefits as post-expiration royalty agreements.”
It pointed specifically to “an invention or medical breakthrough that takes decades to develop into a marketable product.”
Mayer said she agreed with that observation.
“As one example, for those products that take decades to develop into a marketable product (e.g., products in the biotechnology and pharmaceutical fields), post-patent expiration royalty agreements may be preferred by the parties, but unenforceable under the Brulotte rule,” she said.
Deborah Fishman of Kaye Scholer LLP, Palo Alto, Calif., also agreed with the dissent to some extent.
“The Supreme Court decision doesn’t squarely address how to structure a contract in the form of a license to shift payment for use during the life of a patent into its post-expiration period without having to depart from a licensing arrangement,” she said. “This gap leaves a grey area that district courts and, ultimately circuit courts, will have to sort out in each case as to whether parties intended to defer payments for past use or whether they intended to have a pay-as-you-go approach in their patent license agreements.”
However, Gills said she was not persuaded.
“Today’s ruling simply means business as usual, although it may encourage parties to be even more creative in negotiating patent licenses going forward, especially with breakthrough technology,” Gills said.
The case revolves around Kimble's patent on a toy simulating the release of a spider web by shooting a foam string from a can mounted on one's wrist. U.S. Patent No. 5,072,856.
Marvel Enterprises Inc., the parent of the publisher of Spider-Man comic books, stopped making royalty payments after the patent expired, even though their contract identified no end date for the payment obligation.
The Ninth Circuit, affirming a lower court decision, criticized the rule set forth by Brulotte v. Thys Co., 379 U.S. 29, 32, 143 U.S.P.Q. 264 (U.S. 1964), but nevertheless held in favor of Marvel (727 F.3d 856, 107 U.S.P.Q.2d 1496 (9th Cir. 2013).
The question presented in Kimble's cert. petition was simply: “Whether this Court should overrule Brulotte v. Thys Co.”
The high court granted certiorari despite the Office of the U.S. Solicitor General's recommendation against it.
Many of the 13 amicus briefs filed in the case featured economic arguments, supporting overturning Brulotte, because modern competition law favors rule-of-reason analysis as opposed to per se rules. Oral arguments were heard March 31.
Kagan's opinion was generally light-hearted, with occasional references to Spider-Man tied together at the end with a line that will endear her to fans of the comic book series.
She said that the court has the power to “undecide” a former case, but that it “should exercise that authority sparingly.”
“[I]n this world, with great power there must also come—great responsibility,” she said, quoting arguably the most famous line from co-creators Stan Lee and Stephen Ditko.
The majority and dissenting opinions agreed on two points: Brulotte's economic analysis was a “misjudgment” and “an obvious mistake,” and modern economic principles would favor more flexibility in assessing the anticompetitive implications of a license that extended royalties beyond the patent expiration date.
The two opinions differed in that the majority characterized Brulotte as a statutory interpretation of the Patent Act—such that the antitrust question was subordinate—while the dissent said the majority had at best shown that it “was an antitrust decision masquerading as a patent case.”
“In the end, Brulotte’s only virtue is that we decided it,” the dissent said. “But that does not render it invincible. Stare decisis is important to the rule of law, but so are correct judicial decisions.”
Patents endow their holders with certain superpowers, but only for a limited time. In crafting the patent laws, Congress struck a balance between fostering innovation and ensuring public access to discoveries. While a patent lasts, the patentee possesses exclusive rights to the patented article—rights he may sell or license for royalty payments if he so chooses. See 35 U. S. C. §154(a)(1). But a patent typically expires 20 years from the day the application for it was filed. See §154(a)(2). And 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.
The majority distinguished “statutory stare decisis” from requests to overturn its precedents in antitrust law.
As to the latter, Congress, via the Sherman Act,” intended that law’s reference to ‘restraint of trade' to have ‘changing content,' and authorized courts to oversee the term’s ‘dynamic potential,'” the court said, citing Business Electronics Corp. v. Sharp Electronics Corp., 485 U. S. 717, 731–732 (1988).
But again, it said, Brulotte as statutory interpretation “carries enhanced force.”
“All our interpretive decisions, in whatever way reasoned, effectively become part of the statutory scheme, subject (just like the rest) to congressional change,” it said. “Absent special justification, they are balls tossed into Congress’s court, for acceptance or not as that branch elects.”
Other than its conclusion that Brulotte “was not really statutory interpretation at all,” the dissent essentially said that reliance on Congress was ill-founded.
“Passing legislation is no easy task,” it said, identifying “onerous process” and “practical hurdles” that must be overcome.
The Brulotte rule “is simplicity itself to apply,” the court said. “A court need only ask whether a licensing agreement provides royalties for post-expiration use of a patent. If not, no problem; if so, no dice.”
Under Kimble's reasoning, the court said, district courts would have to apply “antitrust law’s rule of reason to identify and invalidate those post-expiration royalty clauses with anticompetitive consequences.”
“But whatever its merits may be for deciding antitrust claims, that ‘elaborate inquiry' produces notoriously high litigation costs and unpredictable results,” the court said.
For Kimble, unfortunately, the decision brings his reliance on a lifetime royalty stream for his invention to an end.
Neither Kimble or Marvel knew of the Brulotte rule at the time of their agreement, and that certainly bothered the dissent, which assumed Kimble would have bargained for a higher royalty had he known.
The majority acknowledged Marvel's good fortune in later discovering that it could nullify the license. But without further proof that multiple parties are unaware of the rule, the majority was unmoved by Kimble's “[u]nfair surprise.”
Finally, in a footnote, the court addressed an issue that was of some interest when the Ninth Circuit heard the case but was not contested subsequently.
Kimble had actually sold his patent to Marvel as part of the royalty deal, but the patent owner in Brulotte had retained ownership.
“But no one here disputes that Brulotte covers a transaction structured in that alternative way,” the court said.
The majority's description of the “dynamic” nature of competition jurisprudence is somewhat undercut by a 2014 decision.
“This is the second time in so many years that the Supreme Court has agreed to re-examine a long-standing business-law precedent, only to leave it on the books,” Igor V. Timofeyev of Paul Hastings LLP, Washington, said in an e-mail, referring to Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014).
Halliburton “refused to jettison the quarter-century-old fraud-on-the-market theory in securities actions” of Basic Inc. v. Levinson, 485 U.S. 224, 108 S. Ct. 978 (1988), Timofeyev said.
“Notably, in both instances, the Court acknowledged that the economic theory may have eroded the decision’s underpinnings, but then pointed to Congress as the proper forum to remedy any negative economic effects through legislation,” he said.
Notably, the majority opinion in Halliburton was written by Roberts, who by contrast joined the dissent in Kimble.
“The Chief Justice may be approaching this case differently because—as the dissent argued—he views Brulotte as an instance of pure judicial policy-making masquerading as statutory interpretation,” Timofeyev said.
“Or it may be that in Halliburton, the Chief Justice (who often prefers an incremental approach to precedents he disfavors) had an option of constraining Basic without overruling it, by allowing defendants to rebut Basic’s presumption of reliance at the class certification stage,” he said.
“By contrast, Kimble offered no such middle path.”
Roman Melnik of Goldberg, Lowenstein & Weatherwax LLP, Los Angeles, represented Kimble. Thomas G. Saunders of Wilmer Cutler Pickering Hale & Dorr, Washington, represented Marvel. Malcolm L. Stewart of the Office of the U.S. Solicitor General, Department of Justice, Washington, represented the government.
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Full text at http://pub.bna.com/ptcj/130720decision15Jun22.pdf.
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