June 23, 2015

Supreme Court Cites Spiderman In Ruling Against Post-Expiration Patent Royalties

By Robert S. Schwartz

Spiderman swung through the halls of the U.S. Supreme Court yesterday as Justice Elena Kagan liberally relied on the comic book superhero in the Court’s decision in Kimble v. Marvel Enterprises, Inc., reaffirming the Court’s 51-year-old rule precluding patent owners from collecting patent royalties on expired patents.

In 1964 the U.S. Supreme Court ruled in Brulotte v. Thys Co. that the statutory limit on patent terms precludes patent licensors from enforcing any contract to receive royalties for exploitation of the patent after its term had expired.  The Court accepted the Kimble case explicitly to consider whether, in light of subsequent antitrust law and economics scholarship, this precedent should be overruled.  On Monday, the Court, adhering to principles of stare decisis, declined to do so in a six to three opinion by Justice Kagan.  The majority held that, assuming that the antitrust economics criticisms of Brulotte are correct, it would be up to Congress to revise the law in order to change this long-standing interpretation of the Patent Act.

Kimble, which patented a toy that shot “webbing” like Spiderman, successfully sued Marvel for infringement in 1997.  The parties, both ignorant of Brulotte, settled the case by agreeing Marvel would purchase Kimble’s patent for a lump sum payment and a running three percent royalty on all future sales.  More than a decade later, Marvel, as Justice Kagan put it, “stumbled across Brulotte,” and filed for a declaratory judgment to release its royalty obligation.  After the district court granted the relief, the U.S. Court of Appeals for the Ninth Circuit affirmed, but, per Justice Kagan, was “none too happy about doing so.”  The Supreme Court accepted the case “to decide whether, as some courts and commentators have suggested, we should overrule Brulotte.”

As this blog reported at the time of the oral argument, economists and not-for-profit patent owners (such as universities and research hospitals) argued that post-expiration royalty agreements could have pro-competitive justifications such that they would not per se violate the Sherman Act.  Indeed, the 2007 joint report of the Antitrust Division of the U.S. Department of Justice and Federal Trade Commission explains that those agencies would apply a rule of reason antitrust analysis to such an agreement.  See Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition 122 (Apr. 2007).  However, in Kimble, the United States, through the Solicitor General, sided with Marvel, citing principles of stare decisis and patent law policy.

Petitioner Kimble asked the Court to replace the Brulotte doctrine with a “flexible, case-by-case analysis” of post expiration royalty agreements – just as former antitrust per se rules had been overturned in favor of the “rule of reason.”  The majority rejected this analogy on three bases:  (1) antitrust per se rules are not as grounded in direct statutory interpretation, (2) departing from precedent on this basis alone would give short shrift to patent policy, and (3) such litigation is expensive and thus may chill deal-making as much as would the purported inability to conserve up-front investment through post-expiration licensing.

The majority questioned the entire premise of the appeal – that antitrust economics were the only policy considerations here:

“But Brulotte is a patent rather than an antitrust case. … [T]he patent laws do not turn over exceptional law-shaping authority to the courts. … Congress will correct whatever mistakes we commit. *** And in any event, Brulotte did not hinge on the mistake Kimble identifies.  Although some of its language invoked economic concepts … the [Brulotte] Court did not rely on the notion that post-patent royalties harm competition. … Instead, it applied a categorical principle that all patents, and all benefits from them, must end when their terms expire.”

Moreover, Justice Kagan observed, in the real world licensor and licensee have court-approved alternatives, such as post-expiration installment payments for commerce occurring prior to expiration.  And, as to antitrust economics arguments that post-expiration royalties actually harm innovation:  “Maybe.  Or, then again, maybe not. … [W]e just cannot say whether barring them imposes any meaningful drag on innovation.”

In an opinion judiciously peppered with light punning references to the context of the case, Justice Kagan could not resist ending with a more profound quotation from an, ahem, comic book:

What we can decide, we can undecide. But stare decisis teaches that we should exercise that authority sparingly. Cf. S. Lee and S. Ditko, Amazing Fantasy No. 15: “Spider-Man,” p. 13 (1962) (“[I]n this world, with great power there must also come—great responsibility”). Finding many reasons for staying the stare decisis course and no “special justification” for departing from it, we decline Kimble’s invitation to overrule Brulotte.

Edited by Gary J. Malone

Categories: Antitrust and Intellectual Property Law, Antitrust Litigation

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