Today, the Supreme Court declined to overrule its prior decision in Brulotte v. Thys Co., 379 U.S. 29 (1964), and maintained its ruling that a patent holder cannot charge royalties for the use of his invention where the use occurs after the patent term has expired.  The Supreme Court held that stare decisis ruled the day, and it would be up to Congress to change the Brulotte rule if a change is to be made.  The Court also gave advice on how to structure an agreement to avoid the Brulotte rule.

Further, in explaining the strength that stare decisis plays in patent cases, the Court gave insight into distinctions between competition issues under the Sherman Act–where courts are more expected to overrule prior decisions based on newer economic theories–and patent (as property law) and contract law where parties rely on settled decisions and Congress is the more appropriate body to overrule prior case rulings.

Justice Kagan authored the opinion; Justices Alito authored a dissent joined by Chief Justice Roberts and Justice Thomas.

Background

The patent at issue (U.S. Patent No. 5,072,856) allows “children (and young-at-heart adults)” to role play as “a spider person” by shooting “webs” (i.e., pressurized string) from the palm of their hand.  The patent owner, Kimble, sought to sell or license his patent to Marvel Entertainment for their Spider-Man character.  Marvel did not buy or license the patent.  But Marvel later sold its own “Web Blaster” toy that used a canister of foam to shoot a web.  The patent owner sued Marvel in 1997 and they reached a settlement agreement in which Marvel bought the patent for a lump sum (about $500,000) and a 3% royalty royalty on Marvel’s future sales of the Web Blaster and similar products. The agreement provided no end to such running royalty payments.

When entering the agreement, neither party had considered the Supreme Court’s Brulotte decision that prevents a patentee from receiving royalties for sales made after the patent expires.  But Marvel did later, and brought a declaratory judgment action seeking a ruling that it need not pay royalties after the patent expired in 2010.  The Brulotte case involved a patent owner who maintained ownership while licensing the patent at a running royalty; in this case, however, the running royalty was part of the sale of the patent to the party making the royalty payments.  The Supreme Court noted that “no one here disputes that Brulotte covers a transaction structured in that alternative way.”

The district court agreed with Marvel and applied Brulotte to preclude royalty payments after the patent expired.  The Ninth Circuit reluctantly affirmed, stating that the Brulotte rule “is counterintuitive and its rationale is arguably unconvincing.”

Decision

Following the theme presented, the Supreme Court initially noted that “Patents endow their holders with certain superpowers, but only for a limited time.” (emphasis added)  The Court has “carefully guarded that cut-off date.”

The Court noted that the Brulotte rule may “prevent[] some parties from entering into deals they desire.”  But the Court also noted that “parties can often find ways around Brulotte, enabling them to achieve those same ends.”  For example, parties can (1) amortize payments after the patent expires for products sold during the royalty period, (2) require payment until the last of several licensed patents expire, (3) tie royalties to non-patent rights or (4) make “business arrangements other than royalties–all kinds of joint ventures”:

Yet parties can often find ways around Brulotte, enabling them to achieve those same ends.  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. A licensee could agree, for example, to pay the licensor a sum equal to 10% of sales during the 20-year patent 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 time frame.  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.  Too, post-expiration royalties are allowable so long as tied to a non-patent right–even when close related to a patent.  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 the risks and rewards of commercializing an invention.

The Court stated that the Brulotte rule “is simplicity itself to apply”:

A court need only ask whether a licensing agreement provides royalties for post-expiration use of a patent.  If not, no problem; if so, no dice.

The Court stressed the importance of stare decisis — “the idea that today’s Court should stand by yesterday’s decisions” — particularly in the areas of “property (patents) and contracts (licensing agreements)” where “parties are especially likely to rely on such precedents when ordering their affairs.”  Keeping with the theme, the Supreme Court called this context a “superpowered form of stare decisis” requiring “a superspecial justification to warrant reversing Brulotte.” (emphasis added)

The Court discussed at length the patent owner’s competition law arguments, but found them ill-suited in the patent context.  Basically, competition law under the Sherman Act may be based on economic theory that may change over time and, hence, may require courts to be more inclined to overrule prior decisions where “to overturn [a prior] decision in light of sounder economic reasoning was to take them ‘on [their] own terms.'”.  But patent law interprets statutes where stare decisis is more important and “Congress is the right entity to fix” problematic court rulings, the Court stating:

Although some of [Brulotte’s] language invoked economic concepts, 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.

Last Thursday, December 5, the House of Representatives passed H.R. 3309 (“the Innovation Act”), a patent reform bill generally directed to perceived patent litigation abuse by certain patent assertion entities (what some call “patent trolls”).  Prior draft versions of the House bill had gone through several revisions in the past few months (see our September 24 and October 23 posts), and the bill as passed by the House contains a number of provisions that will directly affect future litigation involving Standard Essential Patents (SEPs). These provisions are discussed in more detail below.

Heightened Pleading Standards.  The Innovation Act requires specific details regarding a complainant’s patent infringement allegations.  Similar to existing Patent Local Rules adopted by district courts in E.D. Tex. and N.D. Cal., the Innovation Act requires a patentee to identify the patents, the patent claims specifically asserted, the instrumentalities accused of infringement, and an element-by-element description of how each accused instrumentality practices the asserted patent claims.  Such provisions will undoubtedly provide proponents of early stage Twombly/Iqbal motions with ample grounds to seek dismissal of bare-bones counts for patent infringement.

The Act also requires a patent plaintiff to disclose some basic patent ownership information to the court, other parties, and the U.S. Patent and Trademark Office (PTO), including the patent assignee, the assignee’s parent entity, any entity with a right to sublicense or enforce the patent, and any entity with a financial interest in the patent.

Although it does not appear that a patent-plaintiff must identify existing licensees, it must identify any SSOs to which the patent has been declared essential.  The Act specifically provides a claim for patent infringement must set forth:

[W]hether a standard-setting body has specifically declared such patent to be essential, potentially essential, or having potential to become essential to that standard-setting body, and whether the United States Government or a foreign government has imposed specific licensing requirements with respect to such patent.

The original drafts of this language created problems in requiring a plaintiff to plead “whether such patent is subject to any licensing term or pricing commitments through an agency or standard-setting body” and addressed that by focusing on more knowable facts of whether a patent was “declared” essential or potentially essential (see our September 24 post).  The provision as passed kept the more fact-specific pleading of whether a patent has been declared essential, but misses the mark by requiring disclosure of “whether a standard setting body has specifically declared such patent to be essential …”.  SSOs generally do not declare patents essential, potentially essential or the like; rather, such declarations typically are made by the patent owners themselves in letters of assurances or similar disclosures that often don’t state definitively whether the patent does cover the standard, but that it might cover the standard and what the patent owner would do if the patent actually is essential to the standard.  One wonders whether this issue will be cleaned-up when the Senate considers it.

The provision about pleading whether the U.S. or other government body has imposed licensing obligations probably is in response to some limited actions by competition agencies that require certain procedures to be followed before a patent owner may seek injunctive relief (like the U.S. FTC’s consent order with Google or what Samsung has proposed to the European Commission) or court orders that have sought to put similar limits on injunctive relief.

The revised language goes hand-in-hand with another section of the Act directed to proposed Judicial Conference rules and procedures governing discovery burdens and costs, the Act proposes that the Judicial Conference consider “documents relating to any licensing term or pricing commitment to which the patent or patents may be subject through any agency or standard-setting body” to be included among the categories of “core documentary evidence” that must be produced by a patent-plaintiff to defendants in every litigation.  Such rules would provide defendants with documentary evidence directly related to establishing RAND obligations at an early stage in litigation.

Licensing Obligations Continue Through Bankruptcy.  The Innovation Act ensures that IP licenses are not eliminated in bankruptcy, resolving an apparent discrepancy between U.S. and foreign law in favor of the American rule.  As we discussed in a post earlier this month, the Fourth Circuit recently affirmed a district court decision that licensees could rely on Section 365(n) of the U.S. bankruptcy code to preserve the existing licenses to U.S. patents.  The present legislation codifies this principle, barring a bankruptcy trustee from terminating certain licenses to patents and other intellectual property of the debtor, adding trademarks to definition of “intellectual property” in title 11 proceedings, and requiring a bankruptcy trustee to meet any existing contractual obligation to monitor and control the quality of a licensed product or service covered by a licensed trademark.

The Customer-Suit Exception.  The Innovation Act allows a manufacturer to intervene in a patent suit brought against its customer.  These provisions allow a patent suit to be stayed as to the customer while the manufacturer and patent plaintiff litigate the merits of the infringement action, so long as (1) the manufacturer and the customer consent, (2) the stay is sought within 120 days after the first complaint for infringement, and (3) the customer agrees to be bound by the court’s ruling on any issues in common between the customer and manufacturer.

Other Key Provisions.  Although we haven’t discussed them here, the Innovation Act contains a number of other key provisions, including:

  • Cost Shifting, awarding costs and attorneys fees to a prevailing party unless the position and conduct of the nonprevailing party was reasonably justified in law and fact;
  • Post Grant and Inter Partes Review, allowing a PGR petitioner to later assert invalidity defenses in a civil action that could have been, but were not raised during PGR and requiring the PTO to use district court claim constructions in PGR and IPR proceedings;
  • Expanding the scope of prior art used in transitional program for business method patents covering financial products;
  • Core Discovery and Discover Fee Shifting, limiting the types of discovery prior to claim construction and requiring Judicial Conference to develop rules and proposals limiting discovery in patent cases and to study the efficacy of the rules enacted;
  • Codifying Doctrine of Double Patenting for first-inventor-to-file patents; and
  • Demand Letters, requiring a claimant seeking to establish willful infringement may not rely on evidence of pre-suit notification that fails to set forth claimant’s infringement allegations with particularity.

Next Steps.  Now that the bill has passed the House, the Senate is expected to move quickly. Last Thursday, Senate Judiciary Committee Chairman Patrick Leahy (D-Vt.) confirmed a legislative hearing will be held on December 17 to consider the upper house’s patent reform bill (S. 1702).  The House and Senate measures will have to be merged before the Act is presented for President Obama’s signature, but it is expected the proposed legislation will be signed into law early next year.  Because the bill’s litigation provisions apply to patent cases filed after the date of enactment, and not pending cases, we may see an uptick in the filing of patent cases prior to the anticipated date of enactment (as we saw with enactment of the America Invents Act).

Last month, we briefly discussed an article that proposed that “baseball-style” arbitration be used to resolve FRAND licensing disputes.  The following guest post about this article was authored by David Balto, a former Policy Director of the Bureau of Competition for the Federal Trade Commission who currently has his own public interest antitrust practice here in Washington, DC.  David’s views expressed below are his own, and do not necessarily reflect the views of the authors of The Essential Patent Blog, Dow Lohnes PLLC, or Dow Lohnes’s clients.

Baseball has the Best Rules:  Using Arbitration to Solve FRAND Disputes

How to calculate Fair, Reasonable and Nondiscriminatory (FRAND) royalties seems like one of the most intractable problems firms, standard setting organizations and the courts are grappling with.   No wonder, there is sparse authority and relatively few litigated cases.

Two of the most thoughtful scholars on antitrust intellectual property issues — Professors Mark Lemley and Carl Shapiro — have weighed in and issued a paper outlining an interesting solution to the FRAND licensing problem and it provides a clarion call for how to grapple with the problem.

Continue Reading Baseball has the Best Rules: Using Arbitration to Solve FRAND Disputes

This afternoon, the House Judiciary Committee’s Subcommittee on Courts, Intellectual Property and the Internet held a hearing titled “Abusive Patent Litigation: The Issues Impacting American Competitiveness and Job Creation at the International Trade Commission and Beyond.”  This hearing comes on the heels of a broader hearing on abusive patent litigation held by the same committee two months ago, as well as a different hearing in July 2012 that generally addressed the ITC’s role in deciding patent disputes.  Several witnesses representing a variety of diverse backgrounds and interests testified today before the subcommittee, including:

  • Kevin Rhodes, VP and Chief IP Counsel for 3M Innovative Properties Co.
  • Jon Dudas, Former Director of the USPTO (and a member of the board of non-practicing entity MOSAID Technologies)
  • Prof. Colleen Chien of Santa Clara University
  • Russell Binns, Associate General Counsel for IP Law & Litigation at Avaya
  • Deanna Tanner Okun, Former Chairwoman of the ITC (and a partner at Adduci Mastriani & Schaumberg)
  • David Foster, Chairman of the Legislative Committee for the ITC Trial Lawyers Association (and a partner at Foster, Murphy, Altman & Nickel)

A link to the video webcast of the full hearing is available at the House Judiciary Committee’s website, along with PDFs of each witness’s prepared testimony.  Our friends at Patent Progress also live-tweeted the event — take a look at their Twitter feed @PatentProgress for their blow-by-blow account.

As we anticipated, while standard-essential patents were not the focus of this particular hearing, the issue of SEPs was indeed given some attention.  In his opening remarks, Congressman Melvin Watt noted concerns some have expressed about the potential for improper usage of standard-essential patents in seeking injunctive relief, and Congressman Ted Poe briefly quizzed Prof. Chien about the propriety of asserting standard-essential patents in the ITC. 

Continue Reading House Judiciary Subcommittee hearing on abusive patent litigation and the ITC focuses on non-practicing entities, litigation costs, and remedies

[UPDATE]  Since this post was originally published on January 22, the deadline passed for the parties to submit extrinsic evidence and additional arguments supporting their respective interpretations of the Google-MPEG LA AVC/H.264 license agreement.  Microsoft submitted both a brief and a supporting Declaration of Lawrence A. Horn, who is the President and CEO of MPEG LA, LLC.  Mr. Horn’s declaration supports Microsoft’s argument (as detailed in our original post below) that the scope of the grant-back under the MPEG LA license agreement extends to all Affiliates of Google, not just to those specifically identified.  For its part, Motorola argues that the “scope” language of the MPEG LA agreement remains ambiguous, and that Mr. Horn’s declaration represents inadmissible hearsay because Motorola was unable to cross-examine him.

The parties’s respective briefs and Mr. Horn’s declaration may be accessed from the links below:

[/UPDATE]

Judge Robart’s forthcoming opinion in the Microsoft v. Motorola RAND breach of contract case in the Western District of Washington is highly anticipated by those who pay attention to standard-essential patent disputes, as it will likely provide a judicially-sanctioned roadmap for how to determine RAND terms and conditions in a given licensing situation.  But before he issues a written decision, a hearing is scheduled for January 28, during which Judge Robart will hear oral argument from Microsoft and Motorola regarding the implications that Google’s AVC/H.264 patent pool license agreement with MPEG-LA may have on the appropriate RAND terms for Motorola Mobility’s H.264-essential patent portfolio. (Google, of course, being the parent company of Motorola Mobility since it acquired Motorola in May 2012).

Continue Reading Preview: Motorola, Microsoft set to debate relevance of Google’s MPEG LA license agreement to RAND terms next week