Wednesday, November 5, 2014

Postexpiration patent royalties

In Brulotte v. Thys Co., 379 U.S. 29, 32-33 (1964), the U.S. Supreme Court held that “a patentee’s use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se,” because otherwise "the free market visualized for the post-expiration period would be subject to monopoly influences that have no proper place there. . . .  The exaction of royalties for use of a machine after the patent has expired is an assertion of monopoly power in the post-expiration period"  Thus, if I purport to license my patent to you for a 5% royalty beginning today and ending (say) 25 years from now, my attempt to extract royalties past the date on which the patent expires is unenforceable.  

It's fair to say that most economists and law-and-economics scholars who have considered the issue think Brulotte's per se rule is a silly one.  An agreement of the type described above might simply enable the licensee to spread out a smaller payment over a longer period of time, and in any event would have no impact on other would-be users of the patented invention, who are free to use it without any authorization once the patent expires.  The agreement therefore is unlikely to enable the patent owner to extend its "monopoly" power (assuming it had any to begin with) beyond the statutory term, precisely because  competitors are free to use the patent as much as they want upon expiration.  See, e.g., 1 Herbert Hovenkamp, Mark D. Janis, Mark A. Lemley & Christopher R. Leslie, Antitrust & IP, §§ 23.2a, b (2d ed. 2010) (noting, among other things, that such agreements do not injure competition "except perhaps in a few circumstances discoverable under the rule of reason," and that the rule "limits the ability of the patentee to amortize royalty payments over longer periods than the remaining life of the patent, even when such an arrangement is in the interest of the licensee"); William M. Landes & Richard A. Posner, The Economic Structure of Intellectual Property Law 380-81, 417-18 (2003) (referring to Brulotte as "one of the all-time economically dumb Supreme Court decisions").

Notwithstanding these critiques, the lower courts are bound to uphold Brulotte until the Supreme Court overrules it.  Earlier this year I joined in an amicus brief urging the Court to do just that in Kimble v. Marvel Enterprises, Inc., Case No. 13-720, and as I mentioned  in this post from June 3 the Court subsequently invited the U.S. Solicitor General to file a brief expressing the views of the United States on the matter.  

The SG's Office filed its brief this past week (available here), and I have to say it's a major disappointment.  To be sure, the SG rightly notes that patent policy and competition law policy are not identical.  There might be reasons to restrict or prohibit certain types of IP agreements because on balance experience suggests they generate more social costs than social benefits, even if the social costs they generate are not precisely the same sort of social costs that monopolies generate.  (According to some research, one example fitting this description might be employee noncompete agreements, which rarely violate antitrust law but nevertheless may greater social costs than benefits by impeding employee mobility and the free flow of ideas.  See Orly Lobel, Talent Wants to Be Free (2013).  Other examples might include agreements to forgo reverse engineering or fair use of copyright works, both of which also arguably impede the free flow of information without necessarily conferring the sort of market power with which antitrust law is concerned.)  Nevertheless, it's hard to see what policy, other than an empty formalism, could possibly justify the Brulotte rule of per se illegality:  once the patent expires, it is free for anyone to use without payment, other than a party who voluntarily agreed to continue paying a license fee (presumably for some other benefit, such as amortization).  Perhaps the concern is that some licensees may sign contracts that they later come to regret, but that's not usually a reason to invalidate those contracts absent some more serious concern, such as fraud or unconscionability, and it is unlikely that that all agreements to pay postexpiration royalties are bad for licensees; again, they may reduce licensee costs in the short term.  And while stare decisis may sometimes counsel in favor of adhering to a rule around which settled expectations have been constructed, the rule here is only 50 years old and has been the subject of criticism for almost as long.  (If, as Oliver Wendell Holmes once stated, "It is revolting to have no better reason for a rule of law than that so it was laid down in the time of Henry IV," then all the more so when the rule has only been around since the time of Beatlemania and LBJ.) 

Anyway, we'll see what happens.  The Court usually follows the SG's advice, but not always, and I am hopeful that this case may be the exception that proves the rule.

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