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Supreme Court Seeks To Untangle Patent And Antitrust Principles Caught In Spider-Man’s Web

Posted  March 31, 2015

By Seth D. Greenstein

The Supreme Court heard oral argument today on whether litigation over a toy based on Spider-Man’s web should be used to vanquish a 50-year-old precedent precluding patent owners from collecting patent royalties on expired patents under a per se rule, and to replace it, in effect, with an antitrust Rule of Reason analysis.

In Kimble v. Marvel Enterprises, Inc., an individual inventor patented a toy glove that shoots foam string, similar to Spider-Man’s web.  After Stephen Kimble, the patent owner, showed his invention to the president of Marvel, Marvel began selling an allegedly infringing “Web Blaster” toy.  The patent owner and Marvel settled their patent and breach of contract litigation with an agreement assigning the patent to Marvel, and requiring Marvel to pay specified royalties on sales, with no reduction in the royalty amount or termination date after the patent expired.

When the patent owner filed suit over a dispute under the settlement agreement, Marvel responded with a declaratory judgment claim that, under Brulotte v. Thys Co., 379 U.S. 29 (1964), it had no obligation to pay any royalties after the patent expired.  In Brulotte, the Court prohibited the licensor of a hop-picking invention from collecting royalties after the patent term, as “an assertion of monopoly power” analogous to tying sales of patented items to unpatented items, since an invention disclosed in an expired patent enters the public domain.  Kimble and Marvel testified, however, that neither was aware of Brulotte when settling the prior case.  Both the district court and the Ninth Circuit found for Marvel, holding that Brulotte prohibits collection of patent royalties on sales after the expiration of a patent.

At the Supreme Court, economists and not-for-profit patent owners (such as universities and research hospitals) are supporting Kimble’s call for reversal of Brulotte’s per se rule.  Under antitrust law, they observe, such agreements could have pro-competitive justifications such that they would not per se violate the Sherman Act.  In fact, 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).  As a matter of economics, many patents cover “early stage” technologies (particularly in the medical and pharmaceutical fields) that may not reach commercial success until after years of research and marketing, which suggests that patent owners may not reap full value for their inventions before patent expiration.  Absent market power, coercion, or misuse, they contend, patent law should not preclude a licensor and licensee from striking whatever license deal makes economic sense to those parties.

Marvel and the United States, as amicus curiae, cite principles of stare decisis and patent law policy.  Brulotte in their view is not an “outlier” case, but one among a series of decisions affirmatively protecting the public’s free right to use inventions following the limited patent term (now 20 years).  Antitrust principles such as the existence of market power, or antitrust analysis as might be applied by the Antitrust Division or the FTC, are ill-suited to resolving such patent law policies; and not all acts prohibited by patent law (such as patent misuse) violate antitrust laws.  Brulotte does not preempt the action of antitrust laws, such as for license agreements that unlawfully expand the scope of the patent grant or tie a license to the purchase of unpatented products.  If a rule of reason must be applied to post-expiration royalty payments, as Kimble suggests, then complex and uncertain antitrust analysis effectively supplants bright-line patent policies and favors profit maximization over the public interest and constitutional limits on the patent term.  Moreover, Brulotte expressly contemplates the ability to structure patent license payments into the post-expiration term for the rights acquired and/or exercised during the patent term—a point later echoed by Justices Ginsburg and Kagan.

Responding to the stare decisis argument, Kimble noted that in other cases the Court has reversed decades-long precedent based on developments in economic analysis; for example, by overruling the presumption that patents bestow market power in Illinois Tool Works.  Chief Justice Roberts cited cases from the 1960s that the Supreme Court has since overruled (specifically naming U.S. v. Arnold Schwinn,  U.S. v. Loew’s, and Albrecht v. Herald Co.), based largely on changes to economic conditions and market theories.  Marvel observed that is to be expected.  Unlike the Patent Act, which Congress has revisited some 33 times since the last major revision in 1952, antitrust law is largely created by courts upon common law underpinnings and a barebones statutory framework.  Several justices suggested that if Kimble and his amici believe that Brulotte was based on “naïve economics,” that complaint should be taken to Congress and not the Court.

Justice Sotomayor questioned why the Court should import antitrust and economics principles into patent law in the first place, particularly where antitrust law has its own role to play.  Justice Breyer posed a hypothetical, in which a license granted to virtually all industry players charges next to nothing during the patent term, but a high rate for the 10 years after expiration.  If the patent term has any meaning, following expiration anyone can use the invention without a license and for free.  But if, instead, the patent owner ties up the industry with an expensive post-expiration royalty, the public pays more rather than less for the invention, and increased prices restrict output.

Chief Justice Roberts asked Kimble what license, if any, would fail a proposed patent rule of reason if the Court overrules Brulotte.  The patent owner cited as an example four conditions from the treatise on IP and Antitrust by Professors Hovenkamp, Janis and Lemley:  (1) that the licensor has market power; (2) the license requires royalty payments on products that do not practice the patent; (3) the market is characterized by high barriers to new entrants; and, (4) licensees comprise the majority of the market.

That answer took Justice Sotomayor back to her earlier question:  Wouldn’t any license that failed such a rule also violate the antitrust laws?  And, if so, what role is left for patent law?  That question forms the heart of the issue the Court will need to decide in this case:  whether post-expiration license royalty obligations are caught in the web of patent policies or antitrust analysis.

A decision is expected by late June.

Edited by Gary J. Malone

Tagged in: Antitrust Litigation,