J. Competition L. & Econ. (Forthcoming)
20 Pages Posted: 5 Jul 2015 Last revised: 15 Oct 2015
Date Written: August 7, 2015
Kimble v. Marvel Entertainment held that stare decisis required the Supreme Court to adhere to the half century old, much criticized rule in Brulotte v. Thys. Justice Douglas' Brulotte opinion concluded that license agreements requiring royalties measured by use of a patent after its expiration are unenforceable per se. The court need not inquire into market power nor anticompetitive effects, effects on innovation, and it may not accept any defense. Congress can change the rule if it wants to, but has resisted many invitations to do so.
Under Brulotte a hybrid license on patents and trade secrets requires a royalty reduction when the last patent expires. But there is little reason for thinking that a process is worth more to a licensee when it is covered by both a patent and a trade secret than when it is covered by only a single right. What the licensee wants is access to a technology that reduces its costs or improves the quality of its output. Those numbers are determined by market value and product competition, and are not obviously affected by the number and kind of IP rights that they embody. For example, the price I am willing to pay for a patented weed killer for my back yard is not higher because I know that production of the weed killer is protected by a trade secret as well as a patent.
One area where Brulotte/Kimble threatens efficient risk sharing is reach through royalties. Researchers in some areas often require costly patented research tools, or inputs, that may produce considerable value once a successful product has been developed. The research might succeed in producing a valuable drug but there is also a high chance that it will fail. A rational way to price out such an asset is conditionally, perhaps with little or no royalty during the research period, but a substantial royalty down the road if the project succeeds. Depending on the age of the patent and the timeline for the project, this can contemplate royalties on the pharmaceutical drug long after the patent on the research tool expires.
A lively debate has emerged about the economics of reach through royalties, with some believing that they contribute to a patent "thicket" that is difficult for researchers to negotiate, and others arguing that they constitute a reasonable form of risk sharing. That issue is a serious one and should never be addressed by any rule as ham handed as the Brulotte per se rule against post-expiration royalties.
One problematic effect of Kimble is that antitrust tying law is undergoing a process of revision that is coming close to removing per se illegality. That has largely happened for just the reasons that the Court suggested: the underlying economic theory has changed, de-emphasizing harmful leverage and emphasizing efficiencies. By contrast, the patent law of tying arrangements -- heavily borrowed from antitrust -- remains stuck in a time warp until Congress gets around to changing it.
In defending its rule of stare decisis, the Kimble Court also observed that the challenged practice involved two areas of law, property and contract, where stare decisis has traditionally been regarded as strong because of reliance interests. A legal regime that previously permitted unlimited licensing but then adopted the Brulotte rule could certainly upset many reliance interests. When the legal change is in the other direction, however the weight of reliance interests is less clear. The real impact of overruling would be on those people, who like the parties in Kimble, wrote their agreements in ignorance of Brulotte. In such cases the effect of overruling would be that these parties would get precisely what they bargained for.
The Kimble Court rejected Kimble's proposed alternative -- namely, that post-expiration royalty extensions be addressed under a rule of reason. The Court found this unacceptable, substituting a bright line (although ill conceived) rule for something as complex and indeterminate as antitrust's rule of treason. But nearly every commercial transaction in the country is subject to antitrust evaluation under Section 1 of the Sherman Act. Agreements requiring post-expiration payments would join the general run of agreements that are nearly always legal.
Keywords: patents, brulotte, licensing, antitrust, misuse
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