The Intellectual Property Strategist ® Volume 21, Number 5 • February 2015 Will the Supreme Court Remove Brulotte’s Shadow Over Patent Licensing? Part Two of a Two-Part Article By Sean Gates and Jeny Maier The court, however, left open the five-year period. After the licensee made question of whether a license agreement the third royalty payment, the patent Part One, last month, set the stage for that allocates royalty payments between was declared invalid and the licensee a possible overruling by the U.S. Supreme the patent rights and the trade secret refused to pay any further royalties, Court of its 1964 ruling in Brulotte v. rights would be enforceable. Id. at 1372 contending it was illegal for the licen- Thys Co. that the collection of royalties n.12 (“In light of our conclusion that the sor to exact royalty payments after the after a patent’s expiration constitutes per [agreement] violates federal patent law, patent was declared invalid. The district se patent misuse by looking at the case’s and the fact that there is no allocation court agreed and held that a holder of critics and its impact on licensing over in the agreement, we need not decide an expired or invalid patent is prohib- the last 50 years. In Part Two, the authors whether allocation — of some similar ited from collecting royalties due after continue that discussion and look at the provision — would have rendered it the patent was declared invalid. Id. at arguments made to the Supreme Court enforceable.”) If a patent owner could 14. The court explained that because for and against overruling the case. prove that it did not use the patent mo- the royalty was for both the patent and nopoly to leverage payments after the know-how, it should be considered a hy- Hybrid Licenses patent expiration, then the agreement brid royalty, but because the agreement Courts have also struggled in dealing providing for continuing trade secret failed to attribute a specific portion of with post-expiration royalty provisions royalties could be enforced. Id. Other the royalty to the know-how rather than in so-called “hybrid” licenses — pack- courts have applied this reasoning to the patent, the court held that the entire age licenses for issued patent rights hold that provisions in hybrid licenses provision was unenforceable. Id. (citing and non-patent rights, such as trade se- that do not have a step-down in royalty Pitney Bowes). Nevertheless, the court crets and know-how. The Eleventh Cir- rate after the patent expires are unen- noted that the licensor may be entitled cuit, for instance, has held that a hybrid forceable. See, e.g., Baladevon, Inc. v. to compensation for the value of the license constitutes misuse under Bru- Abbott Labs., Inc., 871 F. Supp. 89, 97 know-how. Id. at 15. lotte where: 1) the rights granted under (D. Mass. 1994) (citing cases but noting the license agreement applied equally Patent Applications that some compensation for non-patent before and after the patents’ expiration; Brulotte also casts its shadow over li- rights may be appropriate to avoid un- and 2) the agreement required the li- censes of pending patent applications. In just enrichment); Sanford Redmond, censee to pay royalties at the same rate Aronson v. Quick Point Pencil Co., 440 Inc. v. Mid-America Dairymen, Inc., 29 and on the same basis both before and U.S. 257 (1979), the Supreme Court up- U.S.P.Q. 2d (BNA) 1222, 1226 (S.D.N.Y. after the patents’ expiration. See, Pitney held an agreement that provided for per- 1992) (citing Pitney Bowes); Veltman v. Bowes, Inc. v. Mestre, 701 F.2d 1365, petual royalties on sales of a product, then Norton Simon, Inc., 425 F. Supp. 774, 1373 (11th Cir. 1983). the subject of a pending patent applica- 776 (S.D.N.Y. 1977) (license agreement tion, at a specified rate if the patent is- invalid where it failed to allocate roy- sued and a lower royalty rate if the patent Sean Gates is a Partner in the Los An- alties between patent and non-patent did not issue. The Court explained that geles office of Morrison & Foerster LLP rights, and had no distinction between the principle underlying the holding in focusing on antitrust, unfair competi- the pre- and post-expiration terms); see Brulotte was “simply that the monopoly tion, patent and trade secret matters. also, Nordion Int’l, Inc. v. Medi-Physics, granted under a patent cannot lawfully He can be reached at [email protected]. Inc., No. 95 C 1323, 1995 U.S. Dist. LEX- be used to ‘negotiate with the leverage Jeny Maieris a senior associate in Mor- IS 12639 (N.D. Ill. Aug. 29, 1995), where of that monopoly,’” but, in this case, “the rison & Foerster’s Antitrust Practice a license agreement for the use of the reduced royalty, which is challenged, far Group in Washington, DC. She can be licensor’s patent and technology called from being negotiated ‘with the leverage’ reached at [email protected]. for royalty payments to be paid over a of a patent, rested on the contingency that LJN’s The Bankruptcy Strategist February 2015 no patent would issue within five years.” expiration royalties if the agreement does plus 3% of net sales of: 1) products that Id. at 265 (emphasis in original) (quoting not provide for a step-down for the post- would be deemed to infringe the patent; Brulotte, 379 U.S. at 33). expiration period or for the failure of the and 2) Web Blaster products. In cases concerning license agreements patents to issue. See, Boggild, 776 F.2d at A number of years later, the parties covering patent applications where the 1321 (“As in Brulotte, the agreement con- found themselves in litigation over the patent actually issues, however, courts tains neither provisions for reduction of amount of royalties due to Kimble under have applied the Brulotte rule to conclude royalties in the event valid patents never the settlement. The district court granted that agreements providing for post-expi- issued nor terms for reduction of post- summary judgment for Marvel, holding ration royalties are unenforceable. As the expiration royalties. … Therefore, under that the settlement was a “hybrid” license Sixth Circuit explained: “Once the pend- Brulotte, the agreement is unlawful per and, because it did not specify different ing patent issues, enforcement of royalty se.”); Meehan, 802 F.2d at 886 (“Under royalty rates for the patent and non-pat- provisions for other rights which con- Brulotte when royalty payments extend ent rights, the royalties had to end when flict with and are indistinguishable from unchanged beyond the life of a patent, the patent expired. royalties for patent rights, is precluded.” patent leverage has been abused and is On appeal, the Ninth Circuit first sum- Boggild v. Kenner Prods., 776 F.2d 1315, unlawful per se”); Pitney Bowes, 701 F.2d marized the rule of Brulotte and its prog- 1319 (6th Cir. 1985). The court thus held at 1373. The necessity of coercion in such eny: “[A] license for inseparable patent that the terms of a license agreement cases may depend on the circuit in which and non-patent rights involving royalty for patent applications calling for royal- the case is brought. A license to a package payments that extends beyond a patent ty payments after the expiration of the of patent applications, however, may ex- term is unenforceable for the post-expi- later-issued patent were unenforceable tend royalties out to the expiration of the ration period unless the agreement pro- under Brulotte where the parties enter last patent, even though the date of expi- vides a discount for the non-patent rights the agreement “with clear expectations ration is uncertain because the patent has from the patent-protected rate.” Kimble that a valid patent will issue.” Id. at 1316. not yet been issued. Similarly, a license v. Marvel Enters., Inc., 727 F.3d 856, 863 According to the Sixth Circuit, patent ap- that includes future improvements to an (9th Cir. 2013). While acknowledging plications give the applicant bargaining invention may also extend the royalty that its “application of the Brulotte rule power (or, in the language of Brulotte, term to the expiration of any subsequently in this case arguably deprives Kimble of “leverage”) just like issued patents but issued improvement patent, even if no ap- part of the benefit of his bargain based to a lesser extent. Id. at 1320-21 (“In our plication was filed for the improvement at upon a technical detail that both parties view, the same violations of patent law the time of the license. Zila, Inc. v. Tinnell, regarded as insignificant at the time of arising from abuse of the leverage at- 502 F.3d 1014, 1027 (9th Cir. 2007). the agreement,” the Ninth Circuit never- tached to a pending or issued patent can theless held it was bound by Brulotte to THE CASE BEFORE THE arise from abuse of the leverage afforded affirm the judgment in favor of Marvel. by an expressly anticipated application SUPREME COURT Id. at 866-67. for a patent. … The terms of the licensing The criticisms of Brulotte have now agreement compel the conclusion that, at been placed before the Supreme Court THE DIFFERING VIEWS OF the time the parties executed the license, in Kimble v. Marvel Enterprises, Inc. Rec- BRULOTTE the plaintiffs exerted considerable lever- ognizing these criticisms as “particularly Kimble’s petition for certiorari brought age from the anticipated patents”). apt,” the Ninth Circuit in Kimble never- out a number of amici, nearly all sup- The Seventh Circuit similarly reasoned, theless held that it was bound to follow porting Kimble’s argument that Brulotte “It is the issuance of the patent that trig- Brulotte.