Supreme Court Will Reconsider Brulotte, May Modify the Rule against Post-Expiration Royalties

On Friday, the Supreme Court granted certiorari to reconsider the fifty-year-old patent licensing rule from Brulotte v. Thys. Co., 379 U.S. 29 (1964), which held that charging post-expiration patent royalties is "unlawful per se." The rule against post-expiration royalties has been the subject of sharp criticism since its conception, and it played the villain's role in Kimble v. Marvel Enters., 727 F.3d 856 (9th Cir. 2013), the case of the Spider-Man "Web Blaster" toy that will now be reviewed by the Supreme Court.

The Kimble case, now under review, involves a so-called "hybrid" license agreement, where both patent and non-patent rights are licensed. By its terms, the agreement provides the patentee (Mr. Kimble) a perpetual running royalty on sales of the Spider-Man Web Blaster toy. In analyzing the agreement, the Ninth Circuit explained how courts have come to understand the application of Brulotte to hybrid license agreements:

A license for inseparable patent and non-patent rights involving royalty payments that extends beyond a patent term is unenforceable for the post-expiration period unless the agreement provides a discount for the non-patent rights from the patent-protected rate. This is because—in the absence of a discount or other clear indication that the license was in no way subject to patent leverage—we presume that the post-expiration royalty payments are for the then-current patent use, which is an improper extension of the patent monopoly under Brulotte.

Kimble, at 863-64. In many hybrid agreements, the "discount" is accomplished through a so-called "step down" royalty provision, where the royalty continue—at a lower rate—beyond expiration of the patent.

But, in the agreement at issue in the Kimble case, the Ninth Circuit didn't find any "discount or other clear indication that the license was in no way subject to patent leverage." Therefore, following its analysis quoted above, the Ninth Circuit held that the agreement violated the rule from Brulotte, and the post-expiration royalty was unenforceable.

The per se rule against post-expiration royalties has been sharply criticized by legal scholars, economists, and jurists over the last fifty years. Judge Posner penned this succinct summary twelve years ago:

Thus, as these cases and a tidal wave of legal and economic scholarship point out, the idea that you can use tying to lever your way to a second (or, in the post-expiration patent royalty setting, a longer and therefore greater) monopoly is economic nonsense, imputing systematic irrationality to businessmen.

Scheiber v. Dolby Labs., Inc., 293 F.3d 1014, 1020 (7th. Cir. 2002). For its part, the Ninth Circuit noted its own reluctance in applying the rule in the Kimble case; Judge Callahan noted:

We acknowledged that the Brulotte rule is counterintuitive and its rationale is arguably unconvincing. … Nonetheless, recognizing that we are bound by Supreme Court authority and the strong interest in maintaining national uniformity on patent law issues, we have reluctantly applied the rule. … We are compelled to do so again.

The criticism of Brulotte has focused primarily on supposed fallacies in the rule's underpinnings. Specifically, the Brulotte opinion states that using the patent "monopoly" as "leverage to project … royalty payments beyond the life of the patent is analogous to an effort to enlarge the monopoly of the patent by tieing the sale or use of the patented article to the purchase or use of unpatented ones." Brulotte, at 33. But critics have pointed out, for example, that a post-expiration royalty obligation does not allow the patent to be enforced after the patent's expiration, and thus does not extend the patent monopoly. See, e.g., Scheiber at 1017.

Despite consistent criticism of the rule from Brulotte, the U.S. Solicitor General submitted a brief in the Kimble case (in response to the Supreme Court's invitation) recommending that the rule remain intact. But the Court also received multiple amicus briefs opposing the rule, and on December 12, 2014, certiarori was granted to consider the following question:

Whether this Court should overrule Brulotte v. Thys Co., 379 U.S. 29 (1964), which held that a license agreement requiring royalty payments for use of a patented invention after the expiration of the patent term is unlawful per se.

Thus, the rule against post-expiration royalties might finally be modified. Of course, there's no way to predict what the Supreme Court will do in the Kimble case–the petitioner's briefs advocate for a "flexible, case-by-case" approach to post-expiration royalties, which is one possible outcome. In any event, the per se rule against post-expiration royalties remains in effect for now; perhaps not for long.

Author: Michael Kevin Henry, Ph.D.