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
 
In association with
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
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

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