United States: Supreme Court Upholds Brulotte Rule Prohibiting Post-Expiration Patent Royalties

On June 22, 2015, the Supreme Court issued its decision in Kimble v. Marvel Entertainment, LLC, upholding the rule, first announced in Brulotte v. Thys Co., 379 U. S. 29 (1964), that an agreement allowing a patent owner to collect royalty payments after a patent's expiration is unlawful per se.  

Kimble arose out of a settlement agreement between Stephen Kimble, the inventor of a toy that allows children of all ages to play at being "a spider person" by shooting web-like foam string from the palm of their hands, and Marvel, which makes and markets products featuring Spider-Man, among other comic book characters. After it was sued for infringing Kimble's patent, and as part of the settlement, Marvel agreed to acquire the patent by paying Kimble a lump-sum amount (of about $500,000), along with a 3% royalty on future sales of toys embodying the patented invention.  Neither party was aware of Brulotte when they entered into the agreement, which had no sunset provision or expiration date for the royalty payments. The parties had apparently contemplated that the royalty payments would continue for as long as the toys continued to sell. 

Marvel eventually became aware of Brulotte and sought a declaratory judgment that it could stop its royalty payments at the patent's expiration in 2010. The district court granted Marvel's requested relief, holding that Brulotte rendered the parties' agreement unenforceable after the patent's expiration. Although the Ninth Circuit upheld the district court's decision, it expressed doubt as to Brulotte's correctness.

The Supreme Court granted certiorari to decide whether Brulotte should be overruled. In a 6-3 decision, the Court declined on grounds of stare decisis.

Writing for the majority, Justice Kagan started by noting the oft-cited balance — between fostering innovation and granting the public access to inventions and discoveries — that justifies the time-limited patent monopoly: in exchange for disclosing his or her invention to the public, the inventor receives the exclusive right to his or her patented invention for a period typically lasting 20 years from the date of application, after which time the invention passes to the public and is free for all to use. The Brulotte rule reinforces this settled balance by prohibiting the collection of royalties once the patented invention passes into the public domain.

Acknowledging that there are many situations in which both parties to a potential patent licensing agreement would benefit from the ability to extend the royalty payments over a longer period of time than the patent term provides, the Court observed that "[a] more extended payment period, coupled (as it presumably would be) with a lower rate, may bring the price the patent holder seeks within the range of a cash-strapped licensee." Alternatively, "such an extended term may better allocate the risks and rewards associated with commercializing inventions — most notably, when years of development work stand between licensing a patent and bringing a product to market."  

But such reasons, compelling as they may be, do not justify overruling Brulotte, the Court said.  "Respecting stare decisis means sticking to some wrong decisions." Implicitly conceding that Brulotte may not have been correctly decided, the Court explained that "stare decisis has consequence only to the extent it sustains incorrect decisions; correct judgments have no need for that principle to prop them up. Accordingly, an argument that we got something wrong — even a good argument to that effect — cannot by itself justify scrapping settled precedent." Something more is needed.  

According to the majority, this is particularly true where, as here, the decision sought to be overturned interprets a statute. Because Congress can fix whatever mistakes it believes the Court has made in its interpretation, there is even less reason to disturb statutory precedent than there is to revisit a decision interpreting a constitutional provision. And it bears noting, the Court observed, that in the 50 years the Brulotte rule has been in place, Congress never saw fit to change it, despite its active legislative involvement in patent law. 

Moreover, respect for precedent is all the more vital when it touches upon widespread settled expectations, as it does in this case, which involves the intersection of property (patents) and contracts (license agreements). In that regard, the majority appeared to draw a distinction between patent law and antitrust law, finding that principals of stare decisis weigh more heavily in patent cases than in antitrust cases. "Brulotte lies at the intersection of two areas of law: property (patents) and contracts (licensing agreements). And we have often recognized that in just those contexts — 'cases involving property and contract rights' — considerations involving stare decisis are 'at their acme,'" explained the majority opinion. "By contrast with the Sherman Act, the patent laws do not turn over exception law-shaping authority to the courts." 

Against these observations, Kimble had argued that Brulotte's statutory or doctrinal underpinnings have eroded over time. The Court was not persuaded. The basic understanding that the patent grant is a time-limited monopoly given as an incentive to foster innovation continues to animate the interpretation of the patent law. And the Brulotte rule is much simpler to apply than the antitrust law's rule of reason proposed by Kimble, which would require identifying and analyzing post-expiration royalty clauses on a case-by-case basis to determine if they have anticompetitive effects. The majority opinion said, "[W]hatever its merits may be for deciding antitrust claims that 'elaborate inquiry' produces notoriously high litigation costs and unpredictable results."

The Court also observed that for those who wish to enter into a different arrangement, there are ways around the Brulotte rule (although it acknowledged they may not be ideal):

To start, Brulotte allows a licensee to defer payments for pre-expiration use of a patent into the post-expiration period; all the decision bars are royalties for using an invention after it has moved into the public domain.... A licensee could agree, for example, to pay the licensor a sum equal to 10% of sales during the 20-year patent term, but to amortize that amount over 40 years. That arrangement would at least bring down early outlays, even if it would not do everything the parties might want to allocate risk over a long timeframe. And parties have still more options when a licensing agreement covers either multiple patents or additional non-patent rights. Under Brulotte, royalties may run until the latest-running patent covered in the parties' agreement expires.... Too, post-expiration royalties are allowable so long as tied to a non-patent right — even when closely related to a patent.... That means, for example, that 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). Finally and most broadly, Brulotte poses no bar to business arrangements other than royalties — all kinds of joint ventures, for example — that enable parties to share the risks and rewards of commercializing an invention.

Ultimately, the Court declined to overrule Brulotte not on its merits — indeed, the Court seems to acknowledge that the 50-year old decision may have been wrongly decided — but on the grounds that the settled expectations at issue favor respecting precedent, and that Congress is best positioned to determine whether innovation and the public interest favor keeping the Brulotte rule or adopting a more flexible approach.  

Justice Alito, joined by Chief Justice Roberts and Justice Thomas, dissented, arguing that Brulotte is a "baseless and damaging precedent" that interferes with parties' ability to negotiate licenses that reflect business realities:

There are ... good reasons why parties sometimes prefer post-expiration royalties over upfront fees, and why such arrangements have pro-competitive effects. Patent holders and licensees are often unsure whether a patented idea will yield significant economic value, and it often takes years to monetize an innovation. In those circumstances, deferred royalty agreements are economically efficient. They encourage innovators, like universities, hospitals, and other institutions, to invest in research that might not yield marketable products until decades down the line.... And they allow producers to hedge their bets and develop more products by spreading licensing fees over longer periods.... By prohibiting these arrangements, Brulotte erects an obstacle to efficient patent use. In patent law and other areas, we have abandoned per se rules with similarly disruptive effects... [T]he need to avoid Brulotte is an economic inefficiency in itself... And the suggested alternatives do not provide the same benefits as post-expiration royalty agreements... The sort of agreements that Brulotte prohibits would allow licensees to spread their costs, while also allowing patent holders to capitalize on slow-developing inventions.

The dissent also took issue with the Kimble majority's view that stare decisis should be given greater weight in patent than in antitrust cases:

[T]his distinction is unwarranted. We have been more willing to reexamine antitrust precedents because they have attributes of common-law decisions. I see no reason why the same approach should not apply where the precedent at issue, while purporting to apply a statute, is actually based on policy concerns. Indeed, we should be even more willing to reconsider such a precedent because the role implicitly assigned to the federal courts under the Sherman [Antitrust] Act has no parallel in Patent Act cases.

It remains to be seen whether Congress will ever take up the Court's repeated invitation to revisit the Brulotte rule, but given that neither of the patent reform Bills currently under consideration in Congress (the Innovation Act in the House and the companion PATENT Act in the Senate) contain such a provision, a legislative "fix" to Brulotte appears unlikely near-term.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Bruce D. Sokler
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions