United States: Supreme Court Docket Report - December 15, 2014

On Friday; the Supreme Court granted certiorari in three cases of interest to the business community:

  • Patent Law—Enforceability of a Royalty Agreement Beyond the Patent Term
  • Bankruptcy Code—Disposition of Funds Held By Chapter 13 Trustee After Conversion to Chapter 7
  • Bankruptcy Code—Appealability of Order Denying Confirmation of Plan

Patent Law—Enforceability of a Royalty Agreement Beyond the Patent Term

In Brulotte v. Thys Co., 379 U.S. 29 (1964), the Supreme Court held that a patent licensing agreement is per se unenforceable to the extent that it requires the licensee to pay royalties after the patent expires. The Court reasoned that such an agreement is an impermissible effort to extend the patent beyond its term. In recent years, courts and commentators alike have criticized Brulotte, arguing that a private licensing agreement does not expand the monopoly rights of the patent in the marketplace. Today, the Court granted certiorari in Kimble v. Marvel Enterprises, Inc., No. 13-720, to consider whether it should overrule Brulotte.

In 1990, Petitioner Stephen Kimble invented a toy that allows a child to imitate the comic book character Spider-Man by spraying foam string from a canister strapped to the child's wrist. In 2001, following litigation, Kimble and Respondent Marvel Enterprises entered a licensing agreement: Marvel agreed to pay Kimble about $500,000 plus 3% of "net product sales" in perpetuity. The patent for Kimble's innovation expired in May 2010. In subsequent litigation, Marvel asserted that, under Brulotte, the licensing agreement was unenforceable after the 2010 expiration of the patent. Marvel prevailed in the district court, and the Ninth Circuit affirmed. Kimble v. Marvel Enterprises, Inc., 727 F.3d 856 (9th Cir. 2013).

The Court of Appeals nonetheless severely criticized Brulotte, observing that its core assumption—that "by extracting a promise to continue paying royalties after expiration of the patent, the patentee extends the patent beyond the term fixed in the patent statute"—"is not true." "After the patent expires," the court explained, "anyone can make the patented process or product without being guilty of patent infringement." Thus, the effect of Brulotte, in the lower court's view, is simply to allow a patentee to extract royalties at "a lower rate over a longer period of time" rather than only "at a higher rate over a shorter period of time."

Following the petition for certiorari, the Supreme Court sought the views of the United States. The Solicitor General, on behalf of the United States, urged denial of the petition. In the government's view, Brulotte "fits comfortably within a line of precedents establishing that the federal patent laws are not indifferent to what happens when a patent's prescribed term expires."

Absent extensions, amicus briefs in support of the petitioner will be due on February 2, 2015, and amicus briefs in support of the respondent will be due on March 4, 2015.

Bankruptcy Code—Disposition of Funds Held By Chapter 13 Trustee After Conversion to Chapter 7

Chapter 13 of the Bankruptcy Code allows debtors to repay their creditors by turning a portion of their monthly income over to a trustee for distribution to those creditors. At any time, however, a debtor may convert a Chapter 13 case to one under Chapter 7. Congress has provided that except where the conversion is made in bad faith, the resulting Chapter 7 estate is limited to the debtor's property "as of the date" that the original Chapter 13 petition was filed. 11 U.S.C. § 348(f). In Harris v. Viegelahn, 14-400, the Supreme Court granted certiorari to decide whether, when a debtor in good faith converts a bankruptcy to Chapter 7 after confirmation of a Chapter 13 plan, undistributed funds held by the Chapter 13 trustee are refunded to the debtor (as the Third Circuit held in In re Michael, 699 F.3d 305 (3d Cir. 2012)), or distributed to creditors (as the Fifth Circuit held below).

In the decision below, the debtor (Harris) defaulted on his mortgage and then filed for relief under Chapter 13. The bankruptcy court confirmed a payment plan under which Harris would resume paying his mortgage, and his mortgage arrears and other debts would be repaid out of money garnished from his wages by the trustee. Harris failed to make his mortgage payments, however, so the lender foreclosed and Harris converted his case to Chapter 7. At the time of the conversion, the trustee held nearly $4,300 of Harris's post-petition garnished wages. The trustee distributed those funds to Harris's creditors, but the bankruptcy court ordered the trustee to refund the money to Harris.

The Fifth Circuit reversed. Acknowledging that the question "has divided courts for thirty years," the court rejected the Third Circuit's conclusion in Michael in holding that the trustee correctly distributed Harris's post-petition wages to Harris's creditors. Unlike the Third Circuit and some other lower courts, the Fifth Circuit found "little guidance in the Bankruptcy Code." The Fifth Circuit therefore turned to "considerations of equity and policy" in holding that creditors were entitled to the funds. The court explained that it would be "'patently unfair'" to allow debtors to use secured property during the Chapter 13 proceedings and then "'snatch away the monies which the trustee is holding to make the payments'" by converting to Chapter 7, rejecting the Third Circuit's view that distributing post-petition income to creditors would create a disincentive to borrowers attempting to repay their debts under Chapter 13.

The Supreme Court's decision in this case will resolve a recurring issue in bankruptcy practice that has deeply divided the lower courts. Absent extensions, amicus briefs in support of the petitioner will be due on February 2, 2015, and amicus briefs in support of the respondent will be due on March 4, 2015.

Bankruptcy Code—Appealability of Order Denying Confirmation of Plan

Under 28 U.S.C. § 158(d)(1), litigants in bankruptcy cases may appeal "final decisions, judgments, orders, and decrees" of district courts and bankruptcy appellate panels. Last Friday, at the urging of both petitioner and respondent, the Supreme Court granted certiorari in Bullard v. Hyde Park Savings Bank, No. 14-116, to decide whether an order denying confirmation of a bankruptcy plan is a final order appealable under § 158(d)(1).

Petitioner Louis Bullard filed a petition for Chapter 13 bankruptcy in 2010. Two years later, the bankruptcy court rejected Bullard's initial plan, because he had proposed a "hybrid" repayment scheme. A hybrid plan reduces the balance owed on a secured loan to the underlying asset's fair market value. The debtor may then pay off the revised balance over a period longer than the usual five-year term of a Chapter 13 plan. The additional balance of the secured loan—the portion above the asset's fair market value—is lumped into the borrower's unsecured debts, and the borrower makes payments on these debts only within the five years of a typical Chapter 13 plan. In rejecting Bullard's plan, the bankruptcy court noted that courts have disagreed on the legality of hybrid proposals.

The bankruptcy appellate panel affirmed the bankruptcy court's ruling. The appellate panel determined that the bankruptcy court's denial of Bullard's plan was not "final," and therefore not appealable to the appellate panel under 28 U.S.C. § 158(a)(1), because Bullard still had the option of returning to bankruptcy court and proposing a different plan. The appellate panel nevertheless proceeded to hear Bullard's appeal under 28 U.S.C. § 158(a)(3), which allows appeals "with leave of the court, from other interlocutory orders and decrees." On the merits, the appellate panel ruled that Bullard's hybrid plan was not acceptable.

Bullard appealed to the First Circuit, which dismissed the appeal for lack of jurisdiction. The court of appeals found that Bullard's case presented a significant and unsettled question of law regarding hybrid bankruptcy plans. It agreed with the bankruptcy appellate panel, however, that Bullard had the right to return to bankruptcy court and propose a different plan, which meant that the decision was not final under § 158(d)(1).

The petition for certiorari argued that there is a deep circuit conflict on the appealability of an order denying confirmation of a bankruptcy plan. The petition also asserted that the First Circuit's resolution of that issue is incorrect, both because an order denying confirmation of a plan resolves a discrete legal dispute and because the notion of "finality" in bankruptcy proceedings is broader and more flexible than in other areas of law. In its response to the petition, respondent Hyde Park Savings Bank, which holds a mortgage on petitioner's property, agreed that there is a circuit conflict on the question presented and that certiorari should be granted to resolve it, but argued that the First Circuit correctly held that the denial of plan confirmation is not a final and appealable order.

The issue in this case is of significant interest to the business community because it may arise when a business is a debtor as well as when it is a creditor: in addition to governing appeals in individual persons' bankruptcy cases, § 158(d)(1) governs appeals of corporate reorganization plans filed under Chapter 11. The Supreme Court's decision will determine whether that provision authorizes an immediate appeal of right of a denial of plan confirmation in either situation.

Absent extensions, amicus briefs in support of petitioner will be due on February 2, 2015, and amicus briefs in support of respondent will be due on March 4, 2015.

Today, the Supreme Court has also invited the Solicitor General to file briefs expressing the views of the United States in one case of interest to the business community:

Gobeille v. Liberty Mutual Ins. Co., No. 14-181: The question presented is whether the Second Circuit erred in holding that the Employee Retirement Income Security Act of 1974 (ERISA) preempts Vermont's health care database law as applied to the third-party administrator for a self-funded ERISA plan.

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© Copyright 2014. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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