The Supreme Court’s 1964 decision in Brulotte v. Thys Co. has been among the Court’s more heavily criticized patent law decisions. A number of academics and appeals court judges have complained that Brulotte, which establishes a rule governing construction of patent licensing agreements, is based on a misunderstanding of the economic considerations underlying such agreements. Perhaps in response to that criticism, the Court granted certiorari in Kimble v. Marvel Enterprises, Inc. to consider a single question: should it overturn the 50-year-old Brulotte rule? The Court will hear oral arguments in Kimble on March 31.
The correct answer is a resounding “no.” At oral argument, the record will show that parties negotiating patent licensing agreements have relied on Brulotte for half a century when drafting terms governing royalty payments. Overturning Brulotte would be a patent troll’s dream. It could expose licensees to unforeseen royalty demands based on long-forgotten license agreements that they reasonably assumed—in reliance on the Brulotte rule—imposed no additional payment obligations after the expiration of the licensed patent. As with patent trolls, the potential liability in some cases may be so high that in terrorem settlement is the licensee’s only reasonable choice. In other cases, the nuisance value of the claim may be smaller than the cost to litigate. Either way, a shortsighted decision in Kimble could lead to decades of costly and vexatious litigation to no one’s benefit.
When substantial reliance interests are at stake—as they undoubtedly are in Kimble—it is particularly important for the Court to adhere to stare decisis and to leave to Congress the task of deciding whether federal statutes are in need of revision. The possibility that Brulotte may be overturned should be of concern to anyone who values maintaining a settled interpretation of the law on which the business community can rely—and anyone who abhors patent trolls.
Brulotte established a bright-line rule governing patent royalty agreements: patent law bars the enforcement of such agreements to the extent that they “allow[ ] royalties to be collected which accrued after the last of the patents incorporated into the [patented product] has expired.” The Court reasoned, “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 when . . . the patent has entered into the public domain” by virtue of expiration of the patent term prescribed by federal law. The Brulotte rule has stood for more than 50 years. During those years, countless patent royalty agreements have been negotiated with the understanding that their terms were to be construed in light of Brulotte.
Brulotte has its fair share of critics who argue that the decision misconstrued federal patent policy. Judge Richard Posner, for example, contends that Brulotte was based on the erroneous assumption that a patent might have value after its expiration. He argues that a licensing contract providing for post-expiration royalty payments should be fully enforceable because the parties to the contract are basing their agreement to such payments on their understanding of the license’s value during the pre-expiration period—and thus that any such payments cannot be viewed as an effort to extend the life of the patent beyond the term prescribed by Congress.
But calls to overturn Brulotte based on claims that it was wrongly decided put the cart before the horse. As WLF explained in its brief urging that Brulotte be upheld, the inquiry should focus primarily on whether proponents have demonstrated compelling grounds for jettisoning stare decisis, an inquiry in which the “correctness” of the initial statutory interpretation plays at most a minor role. The Petitioners have made no such demonstration. Brulotte creates a bright-line rule governing construction of royalty agreements, and parties can easily fulfill their contracting objectives by negotiating with Brulotte in mind. For example, if they wish to extend the royalty-payment period beyond the date on which the patent is set to expire, they need only specify in their agreement that such payments are deferred payments for pre-expiration use of the patent and not payments for post-expiration use.
A principal effect of Brulotte has been to impose a finite life span on patent license agreements. Even when an agreement did not clearly specify an end date for the obligation to pay patent royalties, licensees could be reasonably confident that they would face few royalty claims once the patent term had expired. A decision to overturn Brulotte would eliminate that peace of mind. In a world where patent trolls are thriving and litigation funding is rampant, “zombie” litigation—in which long-ago licenses are dredged up for new rounds of litigation—is an all-too-likely response to a decision overturning Brulotte.
Those patent holders who believe that current patent law does not provide adequate compensation for their inventions can ask Congress to amend the law going forward. But asking the Court to overturn venerable precedents is particularly unwarranted when, as here, its decision would apply retroactively to existing contracts that were negotiated with the precedent in mind and could thereby usher in a new wave of unanticipated litigation.
Also published by Forbes.com at WLF’s contributor page