Tag Archives: IP Economics

Supreme Court Upholds Brulotte Rule Preventing Post-Expiration Patent Royalties

by: Robert Wagner, intellectual property attorney at the Pittsburgh law firm of Picadio Sneath Miller & Norton, P.C. ()

In a 6-3 decision authored by Justice Kagan, the United States Supreme Court in Kimble v. Marvel Entertainment, LLC (No. 13-720) upheld the long-standing rule previously announced in Brulotte v. Thys Co., 379 U. S. 29 (1964), that patentees cannot charge royalties for the use of an invention after the patent covering the invention has expired. Justice Alito, joined by Chief Justice Roberts and Justice Thomas, dissented and would have abolished the rule announced in Brulotte.

We previously discussed the Ninth Circuit’s decision in this case here.

Background

Web BlasterIn 1990, Kimble developed a web-shooting toy that allowed children to shoot foam strings from their hands like Spider-Man. He obtained a patent (U.S. Pat. No. 5,072,856) on his invention and offered it to Marvel Entertainment. Marvel declined, but soon afterwards came out with a similar toy. Kimble sued Marvel for patent infringement, and the parties ultimately settled the case. As part of the settlement, the parties entered into a license agreement that provided an up-front lump sum payment to Kimble along with a perpetual 3% royalty.

Some time later, Marvel discovered the Brulotte decision, which neither side was aware of during the settlement discussions, and moved for a declaration that its obligation to pay royalties expired when the patent expired. The district court, citing Brulotte, sided with Marvel, as did the Ninth Circuit. The Ninth Circuit, however, criticized the rationale of Brulotte, and the Supreme Court took up the case.

Analysis

The patent statute provides that patent owners have exclusive rights to the use and sale of their inventions for a limited period of time. Once that time expires, the invention falls into the public domain and can be used freely by anyone in this country.

The rule in Brulotte was announced as a way of preventing patent owners from extending their exclusive rights beyond the lifetime of the patent. The concern was that patent owners could use license agreements to force others to pay royalties long after the patent expired, which would artificially extent the lifetime of the patent.

Recently, economists have challenged the anti-competitive basis for the Brulotte ruling and noted that in some instances, allowing post-expiration royalties allows the user to obtain lower royalty rates (albeit spread out of a longer time), which can be pro-competitive behavior.

Justice Kagan, writing for the majority, ultimately decided that the principle of stare decisis controlled the outcome of the case. Brulotte was decided back in 1964 and represented the Court’s interpretation of the patent statute. In the case of statutory construction issues, the Court is disinclined to reverse itself without a significant reason for doing so. She noted that in the more than 50 years since the decision, Congress has not chosen to use its legislative powers to overrule this decision. She also noted that the economic concerns were far from conclusive.

The majority also noted that there were several ways that parties can construct license agreements that meet the limitations of Brulotte. For instance, parties can agree to spread out payments after the expiration of the patent, as long as the use/sale giving rise to the royalty occurred before the patent expired. Parties can also create hybrid agreements that include royalties for other intellectual property (such as trade secrets) if the royalty amount decreases after expiration of the patent.

In the end, the majority felt that there was not a sufficient reason to overrule Brulotte. Therefore, it affirmed the lower court’s rulings that the post-expiration royalties were barred.

The Dissent

The dissent took a different view. They felt that the economic rationale behind Brulotte was flawed and did not deserve deference. They also questioned the notion that Brulotte was decided by construing the patent statute. Instead, they felt that the decision was improper policymaking that should be overruled.

With respect to the particulars of the this case, they were concerned that the parties negotiated a resolution being unaware of the Brulotte rule, only to have Marvel come in afterwards and upset the prior agreed arrangement once it learned of Brulotte. Had the parties been aware of Brulotte during negotiations, they might have reached a different arrangement.

Conclusion

The Kimble decision does not change the state of the law. In a rather unusual move for the Supreme Court in the patent arena, they have maintained the bright-line rule that patent royalties based on actions that occur after a patent expires are not enforceable. Practitioners should be aware of this rule when crafting royalty agreements to structure them in a way to avoid this issue.

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Pittsburgh Business Success Story: “Branding Brand. Com” for Mobile Commerce

Branding Brand LogoBy: Henry Sneath, Chair of the Intellectual Property practice at Picadio Sneath Miller & Norton, P.C.  hsneath@psmn.com or 412-288-4013

I attended the Pittsburgh Technology Council’s breakfast briefing this morning and heard a great presentation by Jeffrey Hennion, President of Pittsburgh based Branding Brand: http://www.brandingbrand.com/ Founded by 3 CMU students, the company is now an industry leader in Mobile Commerce website and application development. They serve some of the largest retailers and businesses who are now true believers in the power of mobile commerce and mobile wallet apps – shopping from a phone. Costco (See Image below), Dicks Sporting Goods, Sephora, Ralph Lauren and countless more retailers have large percentages of sales now flowing through Branding Brand platforms. Starbucks is currently the leader in mobile commerce sales with its QR code based “mobile wallet”, which allows purchases from a scan of your phone screen.  A next big market for these products is the travel industry. As you ride from the airport to the hotel, you use your phone to check into the hotel, you skip the registration desk, open your room with your phone which has been activated with a mobile key. As Jeff described it – these developments are fascinating, but sometimes a little creepy. The percentage of phone driven ordering, and mobile wallet purchased sales is zooming upward and some companies could face loss of significant market share if they don’t keep up.

Costco_1_large

PATENT TROLLS: $29 Billion Cost!

by: Henry M. Sneath, a shareholder at Picadio Sneath Miller & Norton, P.C.

Our friends at Thompson and Knight have provided the latest on the cost to businesses and society of Patent Troll litigation. The costs remain staggering.  We share their article with you and commend you to its reading. Thanks to author R. David Donoghue. See link below: http://www.retailpatentlitigation.com/2012/08/07/trolls-cost-society-29-billion-with-a-b-in-2011/#page=1

The Cost of IP Justice – Can Small Businesses Afford it?

Posted By: Henry M. Sneath, principal shareholder and IP Group Chair at Pittsburgh Litigation and Patent Prosecution boutique Picadio, Sneath Miller & Norton, P.C. (hsneath@psmn.com or 412-288-4013)

The Patent Reform Act of 2011 portends yet another problem for small business folks trying to develop technology, and more importantly trying to enforce it. We have written about the pending legislation in prior posts. If it passes the US Congress, and if the “first to file” patent rule is therefore adopted by the USPTO as the law, patents will go to those with superior resources, in-house legal departments and the wherewithal to file patents on a moment’s notice. Gone will be the rule that “invention” is the starting point. It will be the result of a race to the PTO.

This is only part of the current IP problem for small businesses however, and the bigger problem is litigation cost. Small businesses simply cannot afford to bring or defend intellectual property lawsuits. If they are the plaintiff, it is likely that they have been given advice by counsel on the anticipated expense of patent or trademark enforcement litigation. Legal fee costs, expert witness costs, deposition costs, demonstrative evidence for trial costs and lost opportunity time for employees can add up quickly and it is important for the client and counsel to set a budget and to discuss each phase of the litigation with a projection of costs. Sadly this cost discussion is often ignored and we have received calls from potential clients who have exhausted their litigation budgets and who are nowhere near a settlement or trial. Frustrated they seek new counsel, but often new counsel is hampered by the inability to properly fund the ongoing litigation.

More difficult perhaps is the plight of the small business (or individual) defendant in an IP suit. These litigants are often ill-prepared for the costs and rigor of defending litigation in Federal Court. Having never been sued before, but having read about the high cost of lawsuits, they frequently seek legal counsel with the plea: “Can we end this quickly as I can’t afford to be in a lawsuit?” When Plaintiff is seeking to shut down production and sale of the new defendant’s chief product line, the answer to this question may not be easy. I tell them sure – we can end it early – all you need to do is stop making  the product that is your main source of revenue, agree never to make it again, pay the plaintiff money for their alleged damages and pay all of their legal fees. These legal fees are generally not insignificant and may have been generated by one or more large law firms at enormous billing rates.

The client, who may even have solid defenses, is then faced with a difficult choice between: 1) Ignore the defenses and cave in quickly with all of the resultant cost and loss of income; 2) Engage in some litigation to try to establish some leverage for a favorable settlement or 3) Take the chance that expensive litigation will, over time, allow a favorable result and perhaps even an award of attorney’s fees to repay the defendant for the litigation cost. It is option 2 which poses the problem of delicate balancing by lawyer and client. How much litigation and cost is enough to create favorable settlement leverage? The client needs to balance the revenue/profit of the allegedly offending product or mark, against the phased cost of litigation.  We can project that phase one (investigation, pleadings, Federal Rule initial disclosures, status conference before the court etc) might cost “x” dollars. The client can decide whether that cost is appropriate against the revenue stream attributable to the product or mark, and determine when to make the settlement move. There is never, of course, any guarantee that the settlement option will work and therein lies the balancing act problem. The client may get stuck in long litigation and need to simply fight its way out. Good communication between lawyer and client is critical to making these decisions.

Federal Trade Commisssion Issues Report on The Evolving IP Marketplace, Patent Trolls and Competition

Posted by Henry M. Sneath, a principal, shareholder and IP Group Chair at Picadio Sneath Miller & Norton, P.C. in Pittsburgh, Pennsylvania.

The FTC has issued a lengthy, exhaustive, relatively benign (309 pages) report on the state of competition in the IP Marketplace and the role of what they politely call “patent assertion entities” (PAE) – Patent Trolls formerly known politely as “non-practicing entities” (NPE).  Forgetting the changing face of politically correct nomenclature for Trolls, the FTC has examined the role of these entities in the IP Marketplace and it is clear that the FTC is not a big fan of the PAE crowd. They are seen as driving up cost, without any corresponding addition to the community of technological advancement. The FTC March 2011 released report is entitled: “The Evolving IP Marketplace – Aligning Patent Notice and Remedies with Competition.” Bottom line: The FTC urges that Patent drafters utilize clearer language to describe claims; that the PTO utilize “an indefiniteness standard that weeds out claims reasonably susceptible to multiple interpretations;” that courts reign in infringement damages and cap royalty payments and; that courts consider the leverage that injunctions provide to patent holders when they seek to extract a favorable royalty or damage deal. I’d like to say that our government dollars were hard at work here, but who didin’t know all that.

As to the PAE community – The FTC critically writes:

“Some argue that PAEs encourage innovation by compensating inventors, but this argument ignores the fact that invention is only the first step in a long process of innovation. Even if PAEs arguably encourage invention, they can deter innovation by raising costs and risks without making a technological contribution.” See FTC Report at P. 9

Here were some of the problems that the FTC examined in hearings and study. None are particularly novel or inventive:

  • Patent language is inherently imprecise (wow – that’s news);
  •  Some art areas, such as software, lack clear nomenclature and common vocabularies for claiming (didn’t know that);
  • Claiming using functional language, which describes what the invention does rather than what it is, can produce abstract, ambiguous claims (ok – that’s mildly newsy);
  • Some applicants may have incentives to draft ambiguous claims that might be viewed narrowly by the PTO and then construed broadly in litigation (no S—!);
  • PTO examination often focuses on issues of novelty and nonobviousness and may result in deferring clarification of claim boundaries until litigation (OK – decent insight here)   (Disclaimer – Editors comments are in bold and may represent some facetiousness) (See actual FTC Report at page 10)

The report is an attempt to examine the delicate balance between the promotion of,  or the stifling of, competition in the IP marketplace. It throws bones both to the tech transfer community and to true product producers and manufacturers, but remember, it’s a government report.  Here’s an example:

“Courts should not presume irreparable harm based on a finding of infringement or the patentee’s use of the patent. Conversely, courts should recognize that infringement can irreparably harm the ability of patentees that primarily engage in technology transfer through licensing to compete in a technology market.” See FTC report at page 27.

In other words, the FTC was for injunctions, before they were against them. Or – they voted for irreparable harm, before they voted against it.  We will continue to review the lengthy report and provide more analysis in the near future. Read the full FTC report here on our law firm site: http://www.psmn.com/CM/Custom/TOCResourceLibrary.asp