A Not-So-Tangled Web: U.S. Supreme Court Upholds 'Brulotte' Rule, Patent Holders Cannot Charge Post-Expiration Patent Royalties

June 22, 2015

The U.S. Supreme Court, earlier today, declined to overrule its long-standing holding from Brulotte v. Thys Co., 379 U.S. 29 (1964) “that a patent holder cannot charge royalties for the use of his invention after its patent term has expired.” Kimble v. Marvel Entertainment, LLC, Case No. 13-720, slip op. (S. Ct. June 22, 2015). As the majority opinion in this 6-3 decision notes, today’s holding: is founded on the principles of stare decisis; may prohibit some preferred transactional structures, but enables other alternative business arrangements; and permits Congress, not the courts, to correct any perceived shortcomings in the bright-line Brulotte rule.

The initial dispute, in Brulotte, arose based on licenses of patented hop-picking machines to farmers. Under those licenses, farmers were required, inter alia, to make future payments equal to the greater of $500 or $3.33 1/3 per 200 lbs. of dried hops harvested. By the license terms those future payments purported to continue beyond each patent’s expiration. When licensees refused to pay royalties accruing both before and after the patents’ expiration, they were denied relief by both the trial court and the Supreme Court of Washington. See Brulotte v. Thys Co., 379 U.S. 29, 29-30 (1964).

The Supreme Court, considering at least the limited term of exclusivity granted to patent owners under 35 U.S.C. §154, concluded “that a patentee’s use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se.” Brulotte, 379 U.S. at 32. The licensees, therefore, owed no royalties for using the hop-picking machines after the underlying patents had expired.

Certain economists and scholars have, in the over 50 years since Brulotte, criticized its holding as arguably inconsistent with economic theory. See, e.g., Scheiber v. Dolby Labs. Inc., 293 F.3d 1014, 1018 (7th Cir. 2002) (“[W]e have no authority to overrule a Supreme Court decision no matter how dubious its reasoning strikes us, or even how out of touch with the Supreme Court’s current thinking the decision seems.”). The Supreme Court considered those criticisms, through the lens of stare decisis, in Kimble.

The dispute in Kimble concerned royalty payments from Marvel to Mr. Kimble in connection with its purchase of his patented web shooting glove invention. See U.S. Pat. No. 5,072,856. The parties’ agreement called for, inter alia, ongoing payments to Mr. Kimble equal to a 3% royalty on Marvel’s sales of Spider-Man products embodying the patented invention – with no end date or patent term reference. Upon discovering Brulotte, Marvel sought a declaratory judgment that no royalties could accrue after the patent expired in 2010. Mr. Kimble countered by demanding that Brulotte be overruled in favor of a “case-by-case analysis” of post-expiration royalties “under the rule of reason.” The District Court granted relief to Marvel and the U.S. Court of Appeals for the Ninth Circuit affirmed.

The Supreme Court granted certiorari on a single issue, whether it should overrule Brulotte, and answered with a firm “no.”

While the Supreme Court acknowledged that “[t]he Brulotte rule … prevents some parties from entering into deals they desire,” it also noted several ways that contracting parties may work around the rule such as, for example, “defer[ring] payments for pre-expiration use of a patent into the post-expiration period,” tying post-expiration royalties to a “non-patent right” (such as a trade secret), or engaging in a different type of transaction (such as a joint venture).

The Supreme Court then addressed the Brulotte rule within the context of stare decisis and noted several reasons for upholding the well-established rule. Among them are that the holding interprets a statute, that Congress can correct any “error” (if and as needed), and that Congress has engaged in “continual reworking of the patent laws – but never of the Brulotte rule….” And, further, the Supreme Court cited to “a reasonable possibility that parties have structured their business transactions in light of Brulotte … [as another] reason to let it stand.” In the end, Mr. Kimble presented no “superspecial justification to warrant reversing Brulotte.”

Mr. Kimble’s additional policy-based criticisms – namely that the Brulotte rule “rests on a mistaken view of the competitive effects of post-expiration royalties” and “suppresses technological innovation” – were likewise eschewed by the Supreme Court. Such concerns “may give Congress cause to upset Brulotte, but does not warrant this Court’s doing so.”

The Supreme Court relied on stare decisis in declining to overrule Brulotte and reaffirming the rule “that a patent holder cannot charge royalties for the use of his invention after its patent term has expired.” Justice Alito, joined by Chief Justice Roberts and Justice Thomas, offered a dissenting opinion.

If you would like to discuss how this may affect your business, please click on the Related Team Members link above to contact a member of Bryan Cave’s Intellectual Property Client Service Group.