Kimble v. Marvel Enterprises: U.S. Supreme Court Reaffirms Brulotte v. Thys on the Unenforceability of Postexpiration Royalties

I really didn't call this one right, did I?  Following the oral argument on March 31, I stated that, "based on the tenor of the oral argument I'd guess that there is a majority to overrule" Brulotte  v. Thys.  Turns out there wasn't.  Instead, the Court (6-3, with the majority opinion authored by Justice Kagan) voted to retain Brulotte on stare decisis grounds.  Opinion here.

For readers who aren't familiar with Kimble, Brulotte, or the issue of postexpiration royalties, here's a brief recap.  Brulotte is a 1964 decision holding that an agreement to pay postexpiration patent royalties is per se unenforceable.  Kimble is a more recent case involving the same principle, as explained in Justice Kagan's opinion (pp. 2-3): 

Kimble sued Marvel in 1997 alleging, among other things, patent infringement. The parties ultimately settled that litigation. Their agreement provided that Marvel would purchase Kimble’s patent in exchange for a lump sum (of about a half-million dollars) and a 3% royalty on Marvel’s future sales of the Web Blaster and similar products. The parties set no end date for royalties, apparently contemplating that they would continue for as long as kids want to imitate Spider-Man (by doing whatever a spider can).

And then Marvel stumbled across Brulotte, the case at the heart of this dispute. In negotiating the settlement, neither side was aware of Brulotte. But Marvel must have been pleased to learn of it. Brulotte had read the patent laws to prevent a patentee from receiving royalties for sales made after his patent’s expiration. See 379 U. S., at 32. So the decision’s effect was to sunset the settlement’s royalty clause. . . . On making that discovery, Marvel soughta declaratory judgment in federal district court confirmingthat the company could cease paying royalties come 2010—the end of Kimble’s patent term. The court approved that relief, holding that Brulotte made “the royalty provision . . . unenforceable after the expiration of the Kimble patent.” 692 F. Supp. 2d 1156, 1161 (Ariz. 2010).  The Court of Appeals for the Ninth Circuit affirmed,though making clear that it was none too happy about doing so. “[T]he Brulotte rule,” the court complained, “is counterintuitive and its rationale is arguably unconvincing.” 727 F. 3d 856, 857 (2013).

I would say that most economic analysts of patent law would agree that the rationale of Brulotte is unconvincing, and even Justice Kagan seemed to concede as much (p.5):

The Brulotte rule, like others making contract provisions unenforceable, prevents some parties from entering into deals they desire. As compared to lump-sum fees, royalty plans both draw out payments over time and tie those payments, in each month or year covered, to a product’s commercial success. And sometimes, for some parties, the longer the arrangement lasts, the better—not just up to but beyond a patent term’s end. 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. (Anyone who has bought a product on installment can relate.) See Brief for Memorial Sloan Kettering Cancer Center et al. as Amici Curiae 17. Or 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. See, e.g., 3 R. Milgrim & E.Bensen, Milgrim on Licensing §18.05, p. 18–9 (2013). As to either goal, Brulotte may pose an obstacle. 

Nevertheless, as Justice Kagan notes, there are ways to draft around Brulotte (p.6):

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. See 379 U. S., at 31; Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U. S. 100, 136 (1969). A licensee could agree, for example, to pay the licensor a sum equal to 10% of sales during the 20-yearpatent 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. See 379 U. S., at 30. Too, post-expiration royalties are allowable solong as tied to a non-patent right—even when closely related to a patent. See, e.g., 3 Milgrim on Licensing §18.07, at 18–16 to 18–17. 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.

In response, one might ask why, if there are ways to draft around Brulotte, we need Brulotte at all.  If the agreement uses the right magic words, the parties can agree to postexpiration royalties, otherwise not.  The rule simply creates a trap for the unwary and (in my view) advances no substantive goal except in cases in which the arrangement somehow enables the licensor or assignor to expand or maintain monopoly power (in which case a rule of reason approach, as advocated by Marvel, would suffice to render the clause unenforceable; see opinion pp. 6-7).  

But the Court is not swayed, invoking instead the principle that "[o]verruling precedent is never a small matter," and "[r]especting stare decisis means sticking to some wrong decisions" (p.7).  Thus, "[t]o reverse course, we require as well what we have termed a 'special justification'—over and above the belief 'that the precedent was wrongly decided.' . . .  What is more, stare decisis carries enhanced force when a decision, like Brulotte, interprets a statute. Then, unlike in a constitutional case, critics of our ruling can take their objections across the street, and Congress can correct any mistake it sees" (p.8).  Moreover, '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 favoring stare decisis are 'at their acme'” (p.9).  Given this framework, the Court says, the "superspecial justification" needed to warrant overruling Brulotte is lacking:  "Brulotte’s statutory and doctrinal underpinnings have not eroded over time," and "second, nothing about Brulotte has proved unworkable" (pp. 10-11).

We then get to the most interesting part of the opinion, the policy discussion.  Stating that "[a] broad scholarly consensus supports Kimble’s view of the competitive effects of post-expiration royalties, and we see no error in that shared analysis," (p.13), the Court nonetheless distinguishes the force of stare decisis in antitrust and patent cases (pp. 14-17):

If Brulotte were an antitrust rather than a patent case,we might answer both questions as Kimble would like.This Court has viewed stare decisis as having less-than-usual force in cases involving the Sherman Act. See, e.g., Khan, 522 U. S., at 20–21. Congress, we have explained,intended that law’s reference to “restraint of trade” to have “changing content,” and authorized courts to oversee the term’s “dynamic potential.” Business Electronics Corp. v. Sharp Electronics Corp., 485 U. S. 717, 731–732 (1988). We have therefore felt relatively free to revise our legal analysis as economic understanding evolves and (just as Kimble notes) to reverse antitrust precedents that misperceived a practice’s competitive consequences. See Leegin, 551 U. S., at 899–900. Moreover, because the question in those cases was whether the challenged activity restrained trade, the Court’s rulings necessarily turned on its understanding of economics. See Business Electronics Corp., 485 U. S., at 731. Accordingly, to overturn the decisions in light of sounder economic reasoning was to take them “on [their] own terms.” Halliburton, 573 U. S., at ___ (slip op., at 9).

But Brulotte is a patent rather than an antitrust case,and our answers to both questions instead go against Kimble. To begin, even assuming that Brulotte relied on an economic misjudgment, Congress is the right entity to fix it. By contrast with the Sherman Act, the patent laws do not turn over exceptional law-shaping authority to the courts. Accordingly, statutory stare decisis—in which this Court interprets and Congress decides whether to amend—retains its usual strong force. See supra, at 8. And as we have shown, that doctrine does not ordinarily bend to “wrong on the merits”-type arguments; it instead assumes Congress will correct whatever mistakes we commit. See supra, at 7–8. Nor does Kimble offer any reason to think his own “the Court erred” claim is special. Indeed, he does not even point to anything that has changed since Brulotte—no new empirical studies or advances in economic theory. Compare, e.g., Halliburton, 573 U. S., at ___ (slip op., at 9–12) (considering, though finding insufficient, recent economic research). On his argument, the Brulotte Court knew all it needed to know to determine that post-patent royalties are not usually anticompetitive; it just made the wrong call. See Brief for Petitioners 36–40. That claim, even if itself dead-right, fails to clear stare decisis’s high bar.

And in any event, Brulotte did not hinge on the mistake Kimble identifies. Although some of its language invoked economic concepts, see n. 4, supra, 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. So in deciding whether post-expiration royalties comport with patent law, Brulotte did not undertake to assess that practice’s likely competitive effects. Instead, it applied a categorical principle that all patents, and all benefits from them, must end when their terms expire. See Brulotte, 379 U. S., at 30–32; supra, at 3–5. Or more specifically put, the Court held, as it had in Scott Paper, that Congress had made a judgment: that the day after a patent lapses, the formerly protected invention must be available to all for free. And further: that post-expiration restraints on even a single licensee’s access to the invention clash with that principle. See Brulotte, 379 U. S., at 31–32 (a licensee’s obligation to pay post-patent royalties conflicts with the “free market visualized for the post-expiration period” and so “runs counter to the policy and purpose of the patent laws” (quoting Scott Paper, 326 U. S., at 256)). That patent (not antitrust) policy gave rise to the Court’s conclusion that post-patent royalty contracts are unenforceable—utterly “regardless of a demonstrable effect on competition.” 1 Hovenkamp §3.2d, at 3–10.

Kimble’s real complaint may go to the merits of such a patent policy—what he terms its “formalis[m],” its “rigid[ity]”, and its detachment from “economic reality.” Brief for Petitioners 27–28. But that is just a different version of the argument that Brulotte is wrong. And it is, if anything, a version less capable than the last of trumping statutory stare decisis. For the choice of what patent policy should be lies first and foremost with Congress. So if Kimble thinks patent law’s insistence on unrestricted access to formerly patented inventions leaves too little room for pro-competitive post-expiration royalties, then Congress, not this Court, is his proper audience. . . 

Kimble also seeks support from the wellspring of all patent policy: the goal of promoting innovation. Brulotte, he contends, “discourages technological innovation and does significant damage to the American economy.” Brief for Petitioners 29. Recall that would-be licensors and licensees may benefit from post-patent royalty arrangements because they allow for a longer payment period and a more precise allocation of risk. See supra, at 5. If the parties’ ideal licensing agreement is barred, Kimble reasons, they may reach no agreement at all. See Brief for Petitioners 32. And that possibility may discourage invention in the first instance. The bottom line, Kimble concludes, is that some “breakthrough technologies will never see the light of day.” Id., at 33. 

Maybe. Or, then again, maybe not. While we recognize that post-patent royalties are sometimes not anticompetitive, we just cannot say whether barring them imposes any meaningful drag on innovation. As we have explained, Brulotte leaves open various ways—involving both licensing and other business arrangements—to accomplish payment deferral and risk-spreading alike. See supra, at 6. Those alternatives may not offer the parties the precise set of benefits and obligations they would prefer. But they might still suffice to bring patent holders and product developers together and ensure that inventions get to the public. Neither Kimble nor his amici have offered any empirical evidence connecting Brulotte to decreased innovation; they essentially ask us to take their word for the problem. And the United States, which acts as both a licensor and a licensee of patented inventions while also implementing patent policy, vigorously disputes that Brulotte has caused any “significant real-world economic harm.” Brief for United States as Amicus Curiae 30. Truth be told, if forced to decide that issue, we would not know where or how to start.

So, if I may paraphrase, the Court recognizes that as a matter of economics the Brulotte rule probably condemns some private agreements that do not result in anticompetitive harm, but posits that the rule must survive because "Brulotte is a patent rather than an antitrust case."  But patents are (indisputably, in my view) a utilitarian body of law--a means to an end--and as such, it's hard to see how economics can be irrelevant to their proper interpretation.  Moreover, the Court's statement that "patent laws . . . do not aim to maximize competition" seems a bit off, given that the end that patent law is intended to achieve is to maximize dynamic competition through promoting innovation.  And sure, we don't know (empirically) whether Brulotte has stifled innovation, but it imposes a needless cost (drafting around) and has no obvious merit other than formalism:  the "categorical principle that all patents, and all benefits from them, must end when their terms expire" (unless you cleverly draft around the rule, I guess).  Finally, much of patent law (historically, and today as well) is essentially common law, not clearly based on the language of the statute.  While the Sherman Act is more in the nature of a delegation to the courts to create a common law of competition, the distinction between the two bodies of law (in my view) should not be exaggerated.

Justice Alito's dissent (joined by the Chief Justice and Justice Thomas) makes the case for overruling Brulotte (dissent pp. 1-2, 4, 7):

The Court employs stare decisis, normally a tool of restraint, to reaffirm a clear case of judicial overreach. Our decision in Brulotte v. Thys Co., 379 U. S. 29 (1964),held that parties cannot enter into a patent licensing agreement that provides for royalty payments to continue after the term of the patent expires. That decision was not based on anything that can plausibly be regarded as an interpretation of the terms of the Patent Act. It was based instead on an economic theory—and one that has been debunked. The decision interferes with the ability of parties to negotiate licensing agreements that reflect the true value of a patent, and it disrupts contractual expectations. Stare decisis does not require us to retain this baseless and damaging precedent. . . .

Not only was Brulotte based on policymaking, it was based on a policy that is difficult to defend. Indeed, in the intervening 50 years, its reasoning has been soundly refuted. . . .

The majority downplays this harm by insisting that “parties can often find ways around Brulotte.” Ante, at 6. But the need to avoid Brulotte is an economic inefficiency in itself. Parties are not always aware of the prohibition—as this case amply demonstrates. And the suggested alternatives do not provide the same benefits as post-expiration royalty agreements. For instance, although an agreement to amortize payments for sales during the patent term would “bring down early outlays,” the Court admits that such an agreement might not reflect the parties’ risk preferences. Ante, at 6. Moreover, such an arrangement would not necessarily yield the same amount of total royalties, particularly for an invention or a medical breakthrough that takes decades to develop into a marketable product. 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. . . 

Even taking the Court on its own terms, Brulotte was an antitrust decision masquerading as a patent case. The Court was principally concerned with patentees improperly leveraging their monopoly power. See 379 U. S., at 32–33. And it expressly characterized post-expiration royalties as anti-competitive tying arrangements. See id., at 33. It makes no sense to afford greater stare decisis protection to Brulotte’s thinly veiled antitrust reasoning than to our Sherman Act decisions.

Well, as I said, I am disappointed by the Court's refusal to overrule what Posner and Landes once (correctly) referred to as as “one of the all-time economically dumb Supreme Court decisions,” William M. Landes & Richard A. Posner, The Economic Structure of Intellectual Property Law 418 (2003).  I guess the case also goes to show that one cannot always predict how a justice will rule based on what he or she says during oral argument; apparently Justice Scalia was convinced by the stare decisis argument, even though he seemed to me to be unimpressed by the substance of the Brulotte rule at oral argument.

For previous discussion on this blog of Kimble v. Marvel, see here, here, here, here, here, here, and here.)