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Supreme Court Hears Oral Argument on Brulotte Rule

The Supreme Court on March 31, 2015, heard oral argument on whether to overrule the Court’s decision in Brulotte v. Thys Co., 379 U.S. 29 (1964), which held that a license requiring royalty payments for uses of a patented product after the patent expired is per se a patent misuse. Kimble v. Marvel Ent. Inc., U.S., No. 13-720, oral argument 3/31/2015.

The Court responded to the Petitioner’s challenge to Brulotte with questions on the Constitutional and statutory limits on patent terms, and on the issue of stare decisis for the Brulotte rule. Respondent pressed the argument that the antitrust “rule of reason” standard is not required for this patent policy mandate on public access to inventions when a patent term expires. The government position is that the applicable analysis can be found in the Court’s decisions preempting patent-like protections under state law.

Petitioner’s Argument

Roman Melnik, appearing for Petitioner Kimble, argued that Brulotte’s per se ban on patent royalties for post-expiration uses of a patented invention should be discarded because it is a rule without reason. The decision is widely recognized as an outdated and misguided prohibition of royalty arrangements that are frequently socially beneficial, suppressing the very innovation the patent system is meant to promote.

Justice Sotomayor said she has not seen any examples of industries falling apart because of this rule. Melnik cited examples from amicus briefs in the case that point to a suppressing effect of the rule on licensing arrangements that would otherwise be undertaken. Justice Ginsburg questioned the answer, pointing out that licensors need only specify that payments are for uses made of the invention before the patent expires. Why should this be so troublesome, she asked.

The distinction is between what you’re paying for and how you’re paying for it, Melnik answered. Brulotte currently permits only one method of how to pay for the use, i.e., to defer payment into the post-expiration period. It does not permit one to defer accrual of royalties into the post-expiration period. Deferred accrual allows parties to do something they cannot do with deferred payment, i.e. shift the risk of commercialization failure and innovation failure from the licensee to the licensor.

Why not just get around that problem by entering a joint venture, Justice Kagan asked. The better question is why does the law impose a prohibition that makes no sense, according to Melnik.  Even so, we have statutory stare decisis rule, Justice Kagan pointed out, which requires us to resist overruling a decision without a showing that it is causing a problem in the real world.  Melnik said the rule has confined parties to license arrangements that are not “risk redistributive” in the way the deferral of accrual is risk-free distributive.

It would make a difference for early stage technology which may not realize any sales until fairly late in the patent term, he explained, by permitting the parties could stretch the royalty base into the post-expiration period. This would allow the licensee to take the risk in exchange for the licensor’s agreement to bear the risk of low royalty payments if there are no sales, according to Melnik.  This would not work for payment postponement, he added, because the royalty is still owed, even if later.  But that objective could be accomplished by other means, Justice Kagan replied. According to Melnik, the alternatives would not be realistic for entities such as universities or research hospitals. 

Even if there are good reasons for providing more licensing flexibility, how do you reconcile the Constitution’s requirement that patents are for limited times, and the statute’s provision limiting the limited term is 20 years, Judge Breyer asked. Melnik replied that it can be reconciled by decoupling the notion of the right to exclude from the specific royalty arrangement.  But in year 29 of the patent's life, new entrants will enter in the market for free and the licensees will continue to pay a royalty, Justice Breyer pointed out. And those new entrants may well fact overwhelming technology problems that would be barriers to everyone but the licensees that are already in the business. Melnik said that such a circumstance would be impermissible under the rule of reason.

But why import the economics of the rule of reason into patent law when antitrust law appears to handle that rule perfectly well, Justice Sotomayor asked. Even if that’s been the practice in the past, she added, we could simply reverse Brulotte and its per se rule, and confine the analysis to an inquiry of whether the license fails for coercion or fraud. Melnik agreed that result would make sense.

Justice Kagan, however, observed that the alternatives suggested by Melnik are simple different ways of saying Brulotte is wrong, and despite the views of economists, that is not the kind of special justification we require to overcome stare decisis. Even if we know better now than before about these dynamics, surely it is for Congress to make the adjustment you request, Justice Sotomayor added.

Justice Breyer agreed that economics plays an important role in antitrust law, but he added that economists often don’t take account of the administrative costs where judges have to apply a complex rule. The rule of reason as applied to this case could raise a multiplicity of issues that would be very difficult to decide, he added. Melnik answered that the question is not whether the rule of reason should apply to patent misuse, but whether the royalty arrangements in this case should be subject to that rule of reason. He said it is also important that these are negotiated terms to which the licensor and licensee have agreed.

Respondent’s Argument

Thomas Saunders, appearing for Respondent, said the analysis of this case should begin and end with stare decisis. Brulotte was correctly decided and Congress has looked at the doctrine and declined to change it. continues to serve an important public interest with respect to patent law, he added.

If the interest of Congress was a bar to our consideration, Chief Justice Roberts observed, then a long line of cases from the 1960s should not have been decided. Saunders answered that antitrust law is grounded in a "barebones statute" where the Court has shown a willingness to overturn precedent. By contrast, Congress has revisited the Patent Act 33 times since 1952, he explained, changing the patent term, adding patent term extensions, and carefully calibrating the incentives to innovate.

Saunders noted that the Brulotte rule has been in existence for over 50 years, and said it would be hazardous to disregard the reliance interest that has grown up around the rule over that time. Justices Ginsburg and Scalia questioned the purported reliance, noting that the parties to this case had no knowledge of the rule. Saunders replied that, after the five decades of its existence, the issue has been taken off the table, observing that no one is reading cases about the horrors of perpetual royalties.

But it’s not that no one has been thinking about this, Chief Justice Roberts observed, pointing to the economist who nearly unanimously think Brulotte is a bad rule. Justice Kennedy questioned the reliance argument, observing that the perpetual royalty issue is easy to get around with the appropriate contract language. Saunders said the overriding consideration is that the rule is a matter of patent policy established when Congress decided on a limited opportunity to capture both the value of the invention and follow-on inventions.

Justice Roberts noted the risks that an invention will not realize its potential during the patent period, which could require the license fees to take that contingency into account. Saunders replied that Brulotte requires that the benefit of the innovation must be captured within the 20-year patent term, according to Saunders. The advocate for the contingency is really saying that 20 years is not long enough for his invention to become successful, he observed. However, the fact that the inventor might not capture the benefits of his innovation in that period is a direct consequence of a decision by Congress on the length of that period, according to Saunders.

Government’s Argument

Deputy Solicitor General Malcolm Stewart, appearing for the government, said Brulotte is not an outlier decision, but instead fits comfortably within the patent policy of providing unrestricted public access to patented inventions when their term of protection expires. That policy was well developed in Supreme Court decisions which found preemption of state laws that provided patent-like protection, according to Stewart, noting that those decisions recited no rule of reason justification.

Do you disagree with the economists' critique of the rule, Justice SotoMayor asked. Yes, to the extent that they misunderstand Brulotte as prohibiting the extension of royalty payments beyond the patent’s expiration date, Stewart answered. In fact, the decision is more narrow, he explained, in that it prohibits the accrual of royalties after the patent expires. He also recognized, as a matter of antitrust policy, that a rule of reason approach is more effective than a per se approach for determining the pro-competitive effects of a licensing arrangement.

However, the proper perspective for evaluating Brulotte is the patent policy perspective as stated in the Bonito Boats and Sear/Compco decisions, according to Stewart. Those cases did not focus on some economic harm related to those state statutes, he explained, but rather on the balance that Congress struck between the innovator and the public through the Patent Act.

To read the transcript of the oral argument, click here. Click here to hear the audio recording of the argument.