United States: Supreme Court Decision Alert - June 22, 2015

Today, the Supreme Court issued two decisions, described below, of interest to the business community.

  • Patent Act—Availability of Royalties after Expiration of the Patent
  • Takings Clause—Price-Stabilization Reserve Requirements

Patent Act—Availability of Royalties after Expiration of the Patent

Kimble v. Marvel Entertainment, LLC., No. 13-720 (previously described in the December 15, 2014, Docket Report)

Under the Patent Act, a patent typically expires twenty years after its application date. See 35 U.S.C. § 154(a)(2). In Brulotte v. Thys Co., 379 U.S. 29 (1964), the Supreme Court held that a licensing arrangement as to a patent is per se anticompetitive if it provides royalties to the patentee for periods that extend beyond the patent's expiration date. Brulotte thus rendered agreements for post-expiration royalties unenforceable. In recent years, commentators and economists have broadly criticized Brulotte's suggestion that post-expiration royalties are always anticompetitive. In Kimble v. Marvel Entertainment LLC, the Court granted certiorari to consider whether to overrule Brulotte.

By a vote of 6-3, the Court declined to overrule Brulotte. In an opinion by Justice Kagan, the Court reasoned that the principle of stare decisis—the idea that the Supreme Court should stand by one of its prior holdings absent a compelling reason to overrule it—counseled strongly against revisiting the Brulotte rule.

In this case, the Court ruled, stare decisis has "enhanced force" for two reasons. First, because Brulotte interpreted a statute (the Patent Act), Congress, not the Court, has primary responsibility for correcting any perceived errors in the Court's statutory interpretation. Because Congress has repeatedly declined to amend the Patent Act to overrule Brulotte, the Court should not do so of its own initiative. Second, Brulotte involves both property rights and contract rights, areas where overturning old precedent could upset parties' expectations and lead to unfair surprise.

Here, the Court held, Kimble failed to provide the "superspecial justification" the Court would require to overrule Brulotte. The statutory and doctrinal underpinnings of the Brulotte holding have not eroded over time, and the decision has not proved unworkable. And even if Brulotte relied on a "misjudgment" about the economics of patent royalties, the onus remains on Congress, not the Court, to correct the error.

Justice Alito filed a dissenting opinion that was joined by Chief Justice Roberts and Justice Thomas. In his view, Brulotte did not interpret the Patent Act but rather made policy—and bad policy at that. According to the dissent, the Brulotte rule forces parties to licensing agreements to compress royalty payments into a shorter period of higher fees, decreasing efficiency and harming innovation—a result inconsistent with the goals of the Patent Act. Based on his view that Brulotte's error was "obvious" and not grounded in statute, Justice Alito would have overruled the decision.

The Supreme Court's decision in this case is significant because it resolved uncertainty as to whether Brulotte's bar on post-expiration royalties would persist. But, as the majority addressed at some length, there are alternative mechanisms—including deferred royalty payments, licensing of multiple patents with different terms, and licensing of other, non-termed rights like trade secrets—that may permit parties to structure their transactions in an economically similar fashion, notwithstanding Brulotte.

Takings Clause—Price-Stabilization Reserve Requirements

Horne v. Department of Agriculture, No. 14-275 (previously described in the January 20, 2015, Docket Report)

Today, the Supreme Court issued a decision in Horne v. Department of Agriculture, No. 14-275, holding that the Department of Agriculture's program for stabilizing raisin prices resulted in a per se taking of the petitioner raisin handlers' property. Under the Agricultural Marketing Agreement Act of 1937, 7 U.S.C. §§ 601 et seq, the Department created a program that requires raisin handlers to surrender a portion of their raisin crop each year to the federal government. The government then "disposes" of the surrendered raisins in a variety of ways that do not affect the market price for domestic raisins. For example, the government may sell the raisins to foreign governments, give them to schools, or even physically destroy them. The government uses proceeds from this raisin disposal to cover the expense of administering the program. If any additional funds remain, they are distributed to the raisin handlers on a pro-rata basis.

Petitioners were raisin farmers who argued that the raisin program was an uncompensated taking of their private property, in violation of the Fifth Amendment. In the decision below, the Ninth Circuit disagreed, holding that although the government has a "categorical" duty to pay just compensation when it takes physical possession of privately owned real property, this categorical duty did not apply to personal property such as crops. Additionally, the Ninth Circuit held that the categorical duty to pay compensation did not apply because the raisin handlers retained one contingent property interest in the surrendered raisins: The right to a possible share in any proceeds from the government's raisin disposal.

In an opinion by Chief Justice Roberts, the Supreme Court reversed. Tracing the history of the protection of agricultural crops and other personal property from government seizure back to the Magna Carta, the Court rejected the notion that the Fifth Amendment provides less protection to real property than to personal property. The Court also held that the government could not avoid the categorical duty to pay just compensation by providing a contingent future interest in the proceeds from the raisin disposal. The Court emphasized that the value of that contingent interest was doubtful, as it was entirely dependent on the government's discretion.

The Court also rejected the government's argument that participation in the raisin-marketing program was a reasonable condition that raisin handlers must satisfy to receive permission to engage in interstate commerce in raisins. In reaching that conclusion, the Court limited an earlier case that had held that the EPA could require pesticide producers to disclose trade secrets in exchange for a permit to sell their products. The Court explained that "[s]elling produce in interstate commerce, although certainly subject to reasonable regulation, is . . . not a special governmental benefit that the Government may hold hostage, to be ransomed by the waiver of constitutional protection. Raisins are not dangerous pesticides; they are a healthy snack."

Finally, the Court held that the government could not deduct the "asserted regulatory benefits" of the raisin-marketing program from any compensation owed. Avoiding "complicated" inquiry into the possible benefits of the raisin program, the Court explained that "just compensation" has always been interpreted to mean fair market value at the time of the taking.

Justice Thomas filed a concurring opinion to express his continuing opposition to Kelo v. New London, 545 U.S. 469 (2005), which had established that the Fifth Amendment imposes little or no restraint on the uses for which government may seize private property.

Justice Breyer, joined by Justices Ginsburg and Kagan, concurred in part and dissented in part. Justice Breyer's opinion agreed that a taking had occurred but objected to the Court's deciding whether the benefits of the raisin program should be deducted from the just compensation that was owed to raisin handlers. He argued that the case should be remanded to the Ninth Circuit for full briefing and consideration of that issue.

Justice Sotomayor dissented in full, arguing that no categorical taking had occurred because the raisin handlers retained the right to the proceeds from the raisin disposal.

This case is important for businesses operating in highly regulated industries. It confirms the vitality of the distinction that the Supreme Court has drawn between physical seizures of property, which are subject to a per se takings rule, and regulatory restrictions on the use of property, which are subject to a balancing test. It also clarifies that although reasonable regulation may be constitutional, the right to engage in commerce or to make use of personal property is not merely a governmental benefit subject to the plenary authority of regulators.

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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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