United States: Solicitor General Argues That Antitrust Principles Do Not Warrant Overturning Brulotte

Last Updated: March 22 2015
Article by J. Taylor Kirklin and Robert P. LoBue

On Friday the Solicitor General filed an amicus brief in Kimble v. Marvel Enterprises. As we previously noted, in Kimble, the Supreme Court will consider whether to overturn Brulotte v. Thys Co., a 50-year-old precedent holding that "a patentee's use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se." In its amicus brief, the Solicitor General urges the Court not to overrule that precedent. In addition to relying on stare decisis, the Solicitor General strongly rebuts the arguments, made by the petitioner and other amici curiae, that antitrust concepts warrant reconsideration of Brulotte.

In 1990, Kimble applied for a patent on a toy glove that shoots pressurized foam from the palm, allowing the wearer to role-play as Spider-Man. After Marvel manufactured a similar toy known as the "Web Blaster," Kimble sued for patent infringement.

The parties entered into a settlement agreement in 2001. Under the terms of the agreement, Kimble assigned the patent to Marvel in exchange for a lump sum payment and a running royalty of 3% of "net product sales." Significantly, however, the agreement did not include an expiration date for the royalty payments, and did not differentiate between royalty rates for pre- and post-patent-expiration periods.

In 2007, the parties had a dispute over the meaning of "net product sales," and Kimble brought a breach of contract suit against Marvel. The district court granted summary judgment to Marvel, concluding that because the settlement agreement did not provide for reduction of royalty payments at the patent's expiration, the agreement was unenforceable in its entirety under Brulotte. On appeal, the Ninth Circuit affirmed, concluding that, although "the Brulotte rule is counterintuitive and its rationale is arguably unconvincing," the court was "bound to follow Brulotte."

The Supreme Court granted the petition for certiorari in December. In his brief, Kimble relies heavily on economic principles to explain why Brulotte should be overturned. He maintains that the Court "has, in recent years, reexamined other outdated competition law decisions in light of a keener awareness of economics and real world business circumstances, and has supplanted rigid per se rules . . . . It is now Brulotte's turn." Several amici curiae also submitted briefs arguing that antitrust principles warranted reconsideration of Brulotte.

In its amicus brief, the Solicitor General argues that the Court should give no weight to antitrust principles in deciding the continuing validity of Brulotte—a patent case. Although acknowledging that "[s]ome aspects of Brulotte's reasoning invoke economic concepts commonly used in antitrust cases" (in particular, the terminology "unlawful per se"), the Government argues that "Brulotte is not, as petitioners suggest . . . rooted primarily in principles of 'competition law.'" Rather, the Government maintains, Brulotte reflects the Supreme Court's appreciation of the affirmative policy of unrestricted public access to a formerly-patented invention once the patent term expires.

The Government sees this distinction between antitrust and patent law as fundamental. While antitrust law has moved away from reliance on per se rules toward analysis under the rule of reason, the Solicitor General asserts, "[t]he patent laws, by contrast, operate largely through bright-line rules that are designed to promote the effective implementation of the patent system as a whole." The Solicitor General further points out that Brulotte does not establish antitrust liability for a royalty agreement that projects beyond the expiration date; rather, the sole consequence of the Brulotte rule is that a settlement agreement extending beyond the patent term cannot be enforced by a court. Furthermore, the Government maintains, there is no sound reason to believe that Brulotte actually causes real-world economic harm. Accordingly, the Solicitor General suggests, Kimble and the other amici seek to subsume Congress's distinct policy choices with respect to patents under antitrust principles.

One of the oddities that may be resolved by the decision: if an inventor chooses not to seek a patent and instead discloses the invention as a trade secret in exchange for a royalty, the royalty obligation may extend for so long as the licensee uses the invention, even if that extends past the time when a patent on the same invention would have expired. See the "Listerine Royalty" case. But, if the same inventor chooses to make his or her disclosure to the world in exchange for a patent, under Brulotte the permissible royalty term cannot exceed the patent term. This sometimes raises complex questions regarding the permissibility of "hybrid" licensing of patented and non-patented technology. Patent, antitrust and all IP licensing attorneys: stand by!

The case is set for oral argument on March 31.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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