Tuesday, March 31, 2015

Initial Thoughts on the Oral Argument in Kimble v. Marvel Enterprises

The transcript of oral argument is now available, here.  As I noted earlier today, the issue presented is "Whether this Court should overrule Brulotte v. Thys Co., which held that 'patentee’s use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se.'"  (Note that I joined one of the amicus briefs in support of the petitioner, urging the Court to overrule Brulotte.  For my previous blog posts and for access to the briefs filed in this matter, see herehere, here, here, here, and here.)

Arguing for the petitioner Kimble, Roman Melnik faced questions from Justices Kagan and Sotomayor on stare decisis, with Justice Kagan stating that overruling a previous decision normally requires "special justifications .. . more than that the decision is wrong" (p.15) or "based on what we now view to be naive economics" (p.19), such as that the rule is "unworkable" or "completely anomalous" (p.16).  (She also argued that there are ways to draft around Brulotte, to which Mr. Melnik responded that, even if that is the case, "if you're prohibiting something that doesn't make sense, the initial question should be why are you prohibiting it? (pp. 6-7)).  Mr. Melnik's principal response to the stare decision argument was that since Brulotte the Court has abandoned the presumption that patents confer market power and has moved away from per se rules; and that experts in the field have a "a much more nuanced understanding of the economics of post-expiration royalties." Mr. Melnik also noted that even in the patent arena the Court has not always bowed to the force of stare decisis, citing Blonder-Tongue, a 1971 case in which the Court held that, once an infringement defendant succeeds in proving patent invalidity, the patent owner is precluded from relitigating the patent against someone else, thus reversing the then-governing rule in patent cases.  Justice Breyer seemed concerned that overruling Brulotte would contravene the Constitutional and statutory rules that patents be for limited terms, and posed a hypo in which the patentee has licensed all 55 persons who would be able to use the patent; but here Chief Justice Roberts noted that even if there were contracts requiring licensees to pay postexpiration royalties, postexpiration anyone else would be free to compete against the licensees (a point he came back to during respondent's argument), and Mr. Melnik noted that the petitioner was not advocating a rule of per se legality.  Justice Breyer nevertheless seemed concerned about the administrative costs of  applying the rule of reason, as opposed to a "simple rule" (p.20).  In response, Mr. Melnik noted that the rule of reason typically does apply to allegations of patent misuse, and provided an example from the Hovenkamp, Janis, Lemley & Leslie treatise of when postexpiration royalties would violate antitrust's rule of reason.

Arguing for the respondent, Thomas Saunders pressed the stare decisis point, contending that it should be for Congress, not the Court, to overrule Brulotte.  Chief Justice Roberts responded with a list of antitrust cases the Court has overruled, stare decisis notwithstanding (p.25), to which Mr. Saunders countered that the patent act is different from the antitrust laws, with Congress revisiting the patent laws 33 times since 1952.  (But Congress has amended the antitrust laws from time to time as well . . . Still, I understand the point that in the U.S. the antitrust statutes say very little, and are viewed as authorizing the courts to create a body of common-law competition law norms.  But much of patent law is judge-created common law as well.  And in any event, should stare decisis be applied differently when the issue is one of common law as opposed to statutory intepretation?)  Mr. Saunders also referred to protecting "reliance interests," as discussed in one of the amicus briefs, though Justices Ginsburg, Scalia, Sotomayor seemed skeptical about the force of that argument in the context of postexpiration royalties, with Justice Scalia providing a pointedly funny riposte:  "The only person I think we could be disappointing is the person who knows of this exotic law and enters a contract which provides for posttermination payments knowing that that will be invalid. Now, him we would disappoint, wouldn't we?" (p.27).  Chief Justice Roberts also noted that "the economists are almost unanimous that this is a very bad rule" (p.29).  Mr. Saunders responded with a cite to an article by William Baxter (President Reagan's appointee to head the the Antitrust Division, and a Chicago-School enthusiast), but the Chief Justice shot back with "What's the date of that article?"  Answer:  "1966."  Justice Kennedy also took up the point about drafting around Brulotte, stating "doesn't that cut against you as much as it cuts in your favor?" (p.30).  Mr. Saunders, however, responded to Chief Justice Roberts's observation that anyone other than the contractually-bound licensee could practice the patent post-expiration free and clear by asserting "the patent policy interest in a completely free public domain"(p.32).  (My own view is that, if a "completely free public domain" is the relevant policy, then Brulotte is consistent with it, but then what is the rationale for that policy in a case where a party has freely agreed to pay a postexpiration royalty?  To go back to antitrust analogies, every contract is a restraint on trade in the sense that it precludes someone from doing something she would otherwise be free to do, but that's hardly a reason to outlaw all contracts.)  

Arguing for the United States, Malcolm Stewart returned to the issue of Brulotte serving patent policy, and cited other decisions for the proposition that even when "a single licensee is restricted in his ability to use the formerly patented invention, it's not only he who suffers; it's the consuming public who could otherwise hope to buy the products he manufactures" (p.40).  Justice Sotomayor asked whether Mr. Stewart took issue "with the economic theory of all of the amici that have filed in the antitrust areas saying this makes no sense . . . economically," to which Mr. Stewart responded that he would, partially, because "at least some of the criticisms are based on the misconception that Brulotte prohibits extending royalty payments out past the date of patent expiration, and Brulotte properly understood . . . prohibits royalties that accrue based on post-expiration use, but it doesn't prohibit the post-expiration payment of royalties that are calculated based on use during the patent" (p.41).  (As Mr. Melnik suggested earlier, however, prohibiting the payment of royalties that accrue later may make it more difficult "to shift the risk of commercialization failure and innovation failure from the licensee to the licensor" (p.5)).  Justice Scalia asked what the benefits of the rule are, and Mr. Stewart responded that the licensee could decide how to exploit the invention without "any disincentive created by the obligation to pay royalties" (p.43).  Mr. Stewart also came back to Lear v. Adkins, the case in which the Court abandoned the principle of licensee estoppel (though in my view, that case is different in that the third-party effect of precluding the licensee from challenging patent validity is arguably much greater).  And he argued that post-expiration third parties may be faced with barriers to entry if they tried to exploit the now-expired patent, such that only the contractually bound licensees will remain in the market. 

In rebuttal, Mr. Melnik stated that, as an alternative to abandoning Brulotte in favor of the rule of reason, the Court could craft a test that focused on whether the licensee was coerced into entering into the postexpiration royalty agreement (p.48; see also p.14).  (Personally, I'm not so sure that a coercion-based test would be the right one; it seems like that could open up a can of worms.  Mr. Saunders' alternative to his preferred position was a rule of presumptive illegality (p.35), which however I also think would be a mistake.)   

It's always difficult to predict these things, but based on the tenor of the oral argument I'd guess that there is a majority to overrule Brulotte, with Justices Kagan and Breyer dissenting.  The Chief Justice and Justice Scalia seem to favor overruling, and my reading of their remarks leads me to think that Justices Ginsburg, Sotomayor, and Kennedy will side with the Chief and Justice Scalia (though of course I could be wrong).  Justice Thomas, as is usual, didn't ask any questions, and neither did Justice Alito; I don't see any indication on the docket sheet provided by the Scotus Blog that either of them recused themselves. 

And by the way:  Here's the transcript of oral argument in the other patent case argued today, Commil USA, LLC v. Cisco Systems, Inc., on the question of "Whether the Federal Circuit erred in holding that a defendant's belief that a patent is invalid is a defense to induced infringement under 35 U.S.C. § 271(b)."  I'm inclined to expect a reversal here as well, but we'll see.


  1. Interesting takes. I didn't get a clear "reversal" out of Commil on reading the transcript, and news reports I've seen (which are admittedly anti-patent biased) seemed to think that Brulotte would be affirmed. I like your predictions better. :)

    Side note: Was there no way Kimble wins without the patent royalty? Why couldn't this be a settlement or a trade secret royalty similar to Warner-Lambert?

    1. I don't remember the specific facts well enough to answer your question. There certainly are some ways to try to draft around Brulotte, though. My personal view is that it's silly to require compliance with that sort of formalism, though.