Today, the Supreme Court declined to overrule its prior decision in Brulotte v. Thys Co., 379 U.S. 29 (1964), and maintained its ruling that a patent holder cannot charge royalties for the use of his invention where the use occurs after the patent term has expired. The Supreme Court held that stare decisis ruled the day, and it would be up to Congress to change the Brulotte rule if a change is to be made. The Court also gave advice on how to structure an agreement to avoid the Brulotte rule.
Further, in explaining the strength that stare decisis plays in patent cases, the Court gave insight into distinctions between competition issues under the Sherman Act–where courts are more expected to overrule prior decisions based on newer economic theories–and patent (as property law) and contract law where parties rely on settled decisions and Congress is the more appropriate body to overrule prior case rulings.
Justice Kagan authored the opinion; Justices Alito authored a dissent joined by Chief Justice Roberts and Justice Thomas.
Background
The patent at issue (U.S. Patent No. 5,072,856) allows “children (and young-at-heart adults)” to role play as “a spider person” by shooting “webs” (i.e., pressurized string) from the palm of their hand. The patent owner, Kimble, sought to sell or license his patent to Marvel Entertainment for their Spider-Man character. Marvel did not buy or license the patent. But Marvel later sold its own “Web Blaster” toy that used a canister of foam to shoot a web. The patent owner sued Marvel in 1997 and they reached a settlement agreement in which Marvel bought the patent for a lump sum (about $500,000) and a 3% royalty royalty on Marvel’s future sales of the Web Blaster and similar products. The agreement provided no end to such running royalty payments.
When entering the agreement, neither party had considered the Supreme Court’s Brulotte decision that prevents a patentee from receiving royalties for sales made after the patent expires. But Marvel did later, and brought a declaratory judgment action seeking a ruling that it need not pay royalties after the patent expired in 2010. The Brulotte case involved a patent owner who maintained ownership while licensing the patent at a running royalty; in this case, however, the running royalty was part of the sale of the patent to the party making the royalty payments. The Supreme Court noted that “no one here disputes that Brulotte covers a transaction structured in that alternative way.”
The district court agreed with Marvel and applied Brulotte to preclude royalty payments after the patent expired. The Ninth Circuit reluctantly affirmed, stating that the Brulotte rule “is counterintuitive and its rationale is arguably unconvincing.”
Decision
Following the theme presented, the Supreme Court initially noted that “Patents endow their holders with certain superpowers, but only for a limited time.” (emphasis added) The Court has “carefully guarded that cut-off date.”
The Court noted that the Brulotte rule may “prevent[] some parties from entering into deals they desire.” But the Court also noted that “parties can often find ways around Brulotte, enabling them to achieve those same ends.” For example, parties can (1) amortize payments after the patent expires for products sold during the royalty period, (2) require payment until the last of several licensed patents expire, (3) tie royalties to non-patent rights or (4) make “business arrangements other than royalties–all kinds of joint ventures”:
Yet parties can often find ways around Brulotte, enabling them to achieve those same ends. 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 time frame. 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 close 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.
The Court stated that the Brulotte rule “is simplicity itself to apply”:
A court need only ask whether a licensing agreement provides royalties for post-expiration use of a patent. If not, no problem; if so, no dice.
The Court stressed the importance of stare decisis — “the idea that today’s Court should stand by yesterday’s decisions” — particularly in the areas of “property (patents) and contracts (licensing agreements)” where “parties are especially likely to rely on such precedents when ordering their affairs.” Keeping with the theme, the Supreme Court called this context a “superpowered form of stare decisis” requiring “a superspecial justification to warrant reversing Brulotte.” (emphasis added)
The Court discussed at length the patent owner’s competition law arguments, but found them ill-suited in the patent context. Basically, competition law under the Sherman Act may be based on economic theory that may change over time and, hence, may require courts to be more inclined to overrule prior decisions where “to overturn [a prior] decision in light of sounder economic reasoning was to take them ‘on [their] own terms.'”. But patent law interprets statutes where stare decisis is more important and “Congress is the right entity to fix” problematic court rulings, the Court stating:
Although some of [Brulotte’s] language invoked economic concepts, the Court did not rely on the notion that post-patent royalties harm competition. Nor is that surprising. The patent laws–unlike the Sherman Act–do not aim to maximize competition (to a large extent, the opposite). And the patent term–unlike the “restraint of trade” standard–provides an all-encompassing bright-line rule, rather than calling for practice-specific analysis.
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