Antitrust Law Daily Wrap Up, ANTITRUST NEWS: High Court oral arguments discuss anticompetitive nature of licensing beyond patent term, (Mar 31, 2015)

By Cheryl Beise, J.D.

The U.S. Supreme Court today heard oral arguments in a patent licensing case that has garnered much attention. In Kimble v. Marvel Enterprises, Inc., Docket No. 13-720, the Court has been asked to overrule its decision in Brulotte v. Thys Co., 379 U.S. 29 (1964), holding that “a patentee's use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se.” The purpose of the Brulotte rule was to ensure no patent owner extended its monopoly against the licensee. However, economist have criticized the decision as anti-competitive by unduly restrict contracting practices.

The petitioner, inventor Stephen Kimble, asked the court to reverse a decision of the U.S. Court of Appeals in San Francisco, holding that Marvel Enterprises, Inc. was not required to pay royalties to Kimble for use of his patent in a Spider-Man role-playing toy after the patent expired. Marvel apparently was unaware of the Brulotte when it entered into the license agreement with Kimble.

The Court heard oral arguments for one hour. Roman Melnik, of Goldberg Lowenstein & Weatherwax LLP, appeared on behalf of petitioner Stephen Kimble. Thomas G. Saunders, of Wilmer Cutler Pickering Hale and Dorr, LLP, argued for respondent Marvel Enterprises, Inc. Deputy Solicitor General Malcolm L. Stewart, presented arguments on behalf of the United States as amicus curiae, in support of Marvel.

Petitioner’s argument. Roman Melnik began by stating that “Brulotte's per se ban on patent royalties on post-expiration use should be discarded because it is a rule without a reason. Brulotte is widely recognized as an outdated and misguided decision that prohibits royalty arrangements that are frequently socially beneficial.”

The justices lost no time in challenging Melnik’s premise. Justice Ginsburg suggested that the obvious solution to the problem is to “make it clear that, although the payments continue after expiration, they are for the pre-expiration period.” A contract can clarify that the payments “represent an amortization of the predicted value of the pre-expiration authorization,” she said.

Melnik explained that the problem with Brulotte is that it currently does not permit deferred accrual into the post-expiration period. Deferred accrual allows parties to shift the risk of commercialization failure and innovation failure from the licensee to the licensor. He suggested that this was advantageous in the case of new technology.

Justice Kagan proposed that the solution would be to enter into a joint venture instead of a licensing arrangement. Melnik responded that such arrangements did not always work well for universities and research hospitals. In fact, many of the amici in this case were research institutions.

Justice Kennedy observed that Congress is well-aware of the Brulotte rule in reference to drug and pharmaceutical industry issues, and has chosen to leave it alone. “And you're asking us now to add on to the remedies Congress has already given.”

Melnik next summarized competition reasons for reversing Brulotte: (1) the fall of the presumption that patent equals market power; (2) a shift in competition law away from per se rules and toward contextualized rules, such as the rule of reason; and (3) a more nuanced understanding post-expiration royalties among economists and licensing experts.

Justice Breyer asked how deferred payment can be reconciled with the constitutional and statutory mandates that establish the expiration of a patent monopoly. After being questioned a third time by Justice Breyer, Melnik said that the right to exclude, which is what a patent term is about, needs to be de-coupled from royalty arrangements.

“Why are we importing antitrust principles, which already have their own set of problems?” Justice Sotomayor asked. Why import the much-complained of rule of reason principle into the economic principles of patent law? “Antitrust law could take care of this by itself. We don't have to import this into patent law at all,” she said.

Justice Breyer agreed that there was no reason to replace a simple rule that has operated for 50 years with a rule of reason in a complicated area.

Chief Justice Roberts remarked that he could not imagine what type of case would fail the rule of reason, given the logic for overturning Brulotte in the first place. The Chief Justice asked for an example.

Menlnik cited a patent license example set forth by Professor Hovenkamp in his IP and Antitrust treatise, at the end of Section 3.3c. Justice Sotomayor asked whether the antitrust laws would address that problem. Melnik admitted that they would.

Justice Kagan did not see the special justification for overturning precedent. This was not a situation where Brulotte had made things unworkable or had become completely anomalous. Justice Kagan also suggested a congressional solution was more suited to handling any real world marketplace issues. She did not see “naïve economics” as a reason to depart from stare decisis.

Respondent’s argument. Thomas Saunders began his argument by suggesting that the “case should begin and end with stare decisis.” He said that Brulotte served an important public interest in patent law and that if any change were needed, Congress was the appropriate institution. In fact, Congress specifically considered and rejected proposals to modify Brulotte when making other changes to patent misuse in 1988. Sunders added that, unlike in the antitrust area, Congress frequently takes action to amend the patent law, and that overruling Brulotte would upset that balance.

Justice Scalia observed that the overruling Brulotte would not have such dire consequences. In this case, Marvel had entered into the licensing agreement without knowing about Brulotte, so it could not claim that relying on Brulotte caused it harm.

This issue has been taken “off the table for 5 decades,” Saunders said. “No one's reading cases about the horrors of perpetual royalties.”

“The economists are,” the Chief Justice interjected. The economists are almost unanimous that Brulotte is a very bad rule, Chief Justice Roberts said.

Saunders did not dispute that there could be nuanced economic arguments when looking though the antitrust prism, perhaps regarding market entry barriers. “And if you move solely to a rule of reason analysis, all you’re offering is a remedy that’s already available,” he said.

Justice Sotomayor asked Saunders what he would use instead of a rule of reason, assuming that the Court chooses to overrule Brulotte. Saunders did not really answer the question.

Government’s argument. Deputy Solicitor General Malcom Stewart began by stating that Brulotte was not an outlier, but a rule that fit with a strong patent policy and prior decisions of the Court favoring unrestricted public access to previously patented inventions. Stewart did not agree that the Brulotte rule causes more economic harm than benefit.

Justice Scalia asked what the economic benefits were. Stewart responded that the licensee, after the patent expires, can make decisions about whether to exploit the invention, such as devising follow-on products without any disincentive created by the obligation to pay royalties. To the extent that license agreements were being impaired, that issue was better handled by Congress, Stewart said.

Petitioner’s rebuttal. In his brief rebuttal remarks, Melnik emphasized that the petitioner was simply asking that the Court remove a barrier to licensing arrangements. Melnick added that the petitioners would be content with an alternative that focuses on coercion as an alternative to a rule of reason analysis.

The case is Docket No. 13-720.

Attorneys: Roman Melnik (Goldberg Lowenstein & Weatherwax LLP) for Stephen Kimble. Seth P. Waxman (Wilmer Cutler Pickering Hale and Dorr LLP) for Marvel Enterprises, Inc. Malcolm L. Stewart , Deputy Solicitor General, Department of Justice, for the United States.

Companies: Marvel Enterprises, Inc.

News: Antitrust