Week 11 - Defenses to Patent Infringement (II)

Brulotte v. Thys Co. 379 U.S. 29 (1964) Background

Brulotte Facts — Royalties on Hop-Picking Machines Thys sold hop-picking machines and charged yearly royalties under licenses that ran past the date the patents expired. When the farmers stopped paying, Thys sued, and the farmers argued that charging royalties after expiration was patent misuse.

Procedural Posture

Brulotte Holding and the Limited Patent Term The Supreme Court reversed and held that royalties for use after the last patent expired could not be collected. The Court explained that the Constitution and the patent statute give patent rights only "for limited times," and the invention belongs to the public once the term ends.

Court Reasoning

Payments Were Not Spread-Out Purchase Price The Court rejected the state court's view that the later payments were just a reasonable way to spread out payment. The machines were sold for a flat price, so the yearly payments were royalties for using the machines during each year, not delayed payments for the patent years.

Restrictions Revealed Patent Leverage The license limits on assigning or moving the machines continued even after the patents expired. The Court said this showed Thys was using the license to stretch its patent monopoly past the patent term.

Per Se Rule Against Post-Expiration Royalties Because the license treated the time before and after expiration the same way, the Court held that charging royalties beyond the patent term is unlawful in every case. The Court distinguished the earlier Hazeltine case and compared post-expiration royalties to illegally tying patented goods to unpatented ones.

The Patent Grant Is "Spent" The Court agreed with another appeals court that once the last patent expires, the patent right is used up. Any attempt to continue the license and keep collecting royalties after that point cannot be enforced.

Dissent

Harlan's Dissent — Separating the Machine From the Idea Justice Harlan argued that patent law limits restrictions on the patented idea, not on a physical machine someone has bought. He pointed out that Thys clearly could have sold the machine on long-term credit that ran past the patent term.

Harlan's Examples Harlan said that unpatented items can lawfully be sold at a price based on how much they are used, but royalties on the idea itself must end when the patent ends. After expiration, anyone could build similar machines and farmers could use other machines, so in his view the public's use of the idea was not restricted.

Use-Based Payments Do Not Show Misuse Harlan offered an example in which a deal based only on use, extending past the patent term, would involve no misuse of patent leverage. He argued that the up-front and minimum payments actually encouraged more use of the machine, which undercuts the majority's concern about restricting use.

No Real Difference From Installment Sales Harlan said use-based payments are economically similar to installment payments, which the majority appeared to allow. He added that most of the amounts at issue were fixed minimums owed whether or not the machine was used, so they were identical to flat installments.

Farmers Can Judge Their Own Needs Harlan reasoned that a farmer usually knows best how much he will use the machine and does not need the Court's protection. A farmer may have good business reasons to tie payments to use, so treating such deals as automatic misuse seemed wrong to him.

The Rule Is Easy to Draft Around Harlan noted that this was a patent case, not an antitrust case, and nothing in the record showed an antitrust violation. He warned that if Thys could reach the same result simply by redrafting its contracts, the decision would be both wrong and ineffective.

Scheiber v. Dolby Laboratories, Inc. 293 F.3d 1014 (7th Cir. 2002) Background

Scheiber v. Dolby Facts Scheiber licensed his surround-sound patents to Dolby to settle a lawsuit, and royalties on all the patents were to continue until his last Canadian patent expired. Dolby itself proposed that arrangement in exchange for a lower royalty rate, but it later refused to pay royalties on patents that had already expired.

Legal Arguments

Dolby's Contract Argument Rejected Dolby argued that the agreement itself ended royalties when each patent expired. The court rejected this argument because it would make meaningless the very clause Dolby had proposed.

Brulotte Controls Dolby's main argument was that Brulotte bars royalties after expiration, and the court found the two cases indistinguishable. Judge Posner noted that Brulotte has been heavily and, in his view, fairly criticized.

Court Reasoning

Why Post-Expiration Royalties Don't Extend the Patent Posner explained that once a patent expires, anyone can make the invention, so the patent's exclusive right really does end. Spreading royalties over a longer period simply means a lower rate, so only the timing of payment changes.

Brulotte Rests on Misplaced Fear of Monopoly Scholars have described post-expiration royalties as a credit arrangement that shifts risk, not an extension of the monopoly. Posner said Brulotte was not based on the Constitution or any statute but on patent misuse doctrine and a misplaced fear of monopoly.

The Lower Court Must Still Follow It Posner illustrated the point with a license signed a month before expiration, which would carry only a tiny royalty even if payments lasted 100 years. Even so, a lower court cannot overrule a Supreme Court decision, however doubtful its reasoning.

Aronson Did Not Undermine Brulotte In Aronson, the Supreme Court upheld long-running royalties where no patent was ever granted, and it carefully distinguished Brulotte. Because the Court reaffirmed Brulotte there, the lower court had no basis to treat it as overruled.

The 1988 Statute Does Not Apply Scheiber argued that a 1988 amendment to the patent statute replaced Brulotte, but the court said that law only limits defenses in infringement suits. Scheiber was suing to enforce a contract, not for infringement, and his patents had already expired.

The Statute Covers Tying, Not Royalty Duration The 1988 amendment is limited to tying and requires real market power before tying counts as misuse. Even if it covers bundling of patents, Dolby's objection was about how long royalties lasted, which the statute does not address.

Lear, Inc. v. Adkins 395 U.S. 653 (1969) Background

Lear Facts — The Gyroscope Inventor Lear hired inventor John Adkins, who developed a cheaper and more accurate way to build gyroscopes, and Lear quickly began using it. The dispute was whether Adkins should be paid for Lear's use of the improvements, which Lear claimed were not new enough to deserve a patent.

Licensee Estoppel Below Lear also alleged that Adkins obtained the patent by fraud, while Adkins argued Lear had to pay royalties regardless of validity. The California Supreme Court agreed with Adkins, applying the old rule that a licensee cannot deny the patent's validity, and the Supreme Court took the case to reconsider that rule.

The Parties' Agreements The parties first signed a simple agreement promising a license on mutually satisfactory royalty terms, and later a detailed 17-page license in 1955. That license let Lear terminate if no patent issued or if the patent was later held invalid.

The Patent Application Process The Patent Office often rejects early claims and requires the inventor to narrow them, and Adkins' application followed that typical pattern. After several rejections, Adkins' much narrower claim was granted in 1960, but by 1957 Lear had decided no patent would issue and found prior art it believed anticipated his idea.

Lear Stops Paying Lear stopped paying royalties on its Michigan gyroscopes and later on its California gyroscopes as well. The California Supreme Court applied estoppel and reinstated an $888,000 jury verdict for Adkins on the Michigan gyroscopes.

Legal Standard

History of Licensee Estoppel The Court found that licensee estoppel had little solid support in its earlier cases and had been steadily cut back over time. In Pope v. Gormully, the Court had refused to enforce a promise never to challenge a patent, stressing the public interest in eliminating worthless patents.

Contract Law Versus Patent Policy The confusion in the cases came from a conflict between contract law, which holds people to their promises, and federal patent policy, which leaves unpatentable ideas free for everyone. Courts' attempts to find a middle ground produced a chaos of conflicting decisions.

What a Typical Licensee Gets Most licenses are signed after a patent issues, when the invention is already public. The licensee gains only two benefits, avoiding an expensive lawsuit and discouraging competitors, and ordinary contract law would enforce the deal on that basis.

Court Reasoning

Licensor's Equities Are Weak The Court said a patent is only the Patent Office's legal conclusion, often reached without hearing from opponents, so it is fair to make the patentee defend it. Licensees may be the only ones with enough incentive to challenge a bad patent, and the public interest in free competition outweighs the licensor's interests.

Hazeltine Overruled The Court said that if licensees were silenced, the public would keep paying for monopolies that should not exist. It therefore overruled Hazeltine's estoppel holding.

Pre-Patent Access Complicates the Case Lear's case was harder because it got its license and access to Adkins' secret ideas years before the patent issued. Until a patent issues, the application is kept confidential, so a manufacturer must deal directly with the inventor to use the ideas.

Adkins' Broad Claim Rejected The Court refused to let Adkins collect royalties for the entire patent period regardless of validity. Allowing that would let inventors sign all their important licenses while applications were pending and silence those most likely to challenge the patent.

No Duty to Keep Paying During a Challenge The Court also rejected requiring Lear to keep paying until the patent was finally held invalid. That rule would reward the licensor for delaying the case and would discourage licensees from challenging patents.

Holding on Post-Patent Royalties Lear could avoid all royalties accruing after the 1960 patent issued if it proved the patent invalid. Whether Adkins could recover royalties for the period before the patent issued was sent back to the state courts to decide.

MedImmune, Inc. v. Genentech, Inc. 549 U.S. 118 (2007) Background

MedImmune — The Question Presented The issue in MedImmune was whether a licensee must stop paying or breach its license before suing for a ruling that the patent is invalid or not infringed. MedImmune held a license from Genentech that covered an existing patent and a pending application.

MedImmune Pays Under Protest When the pending application became the Cabilly II patent, Genentech demanded royalties on MedImmune's drug Synagis. MedImmune believed the patent was invalid, but it paid under protest because losing an infringement suit could mean triple damages and losing a product that produced more than 80% of its revenue.

Procedural Posture

Lower Courts Dismiss The lower courts dismissed MedImmune's case, relying on Gen-Probe, which held that a paying licensee has no real fear of being sued. The Supreme Court then took the case.

Declaratory Judgment Standards A declaratory judgment case must involve a real, concrete dispute between parties with opposing interests, not a hypothetical question. Everyone agreed this test would be met if MedImmune had stopped paying royalties.

Legal Standard

Coerced Compliance Still Counts In cases against the government, a person does not have to break the law before challenging it in court. Terrace and Steffel show that a plaintiff need not "bet the farm" first.

Applying This to Private Parties Avoiding harm under pressure does not defeat jurisdiction, and the Declaratory Judgment Act was designed to solve exactly that dilemma. In Altvater, the Court allowed licensees who were paying royalties under protest to challenge a patent.

Altvater Not Limited to Injunctions The Federal Circuit had tried to limit Altvater to cases involving an injunction, but the Supreme Court disagreed. The coercion that mattered in Altvater was the risk of treble damages from the patentee, a private party, not a government penalty.

Willing Distinguished Willing found no case because the parties had only a casual, friendly disagreement, and the case was decided before any declaratory judgment law existed. Article III does not require a plaintiff to risk treble damages and most of its business before asking a court to decide its rights.

Court Reasoning

The "Insurance Policy" Argument Genentech argued that a license works like insurance that the licensee gives up if it sues. The Court said a promise to pay royalties on patents not yet held invalid is not a promise never to challenge them.

Contract Defenses Go to the Merits MedImmune was not rejecting the contract but arguing that the contract, properly read, allowed its challenge. Even if the contract barred the suit, that would mean Genentech wins on the merits, not that the court lacks jurisdiction.

MedImmune Holding A licensee does not have to break or terminate its license before suing to have the patent declared invalid, unenforceable, or not infringed. The Federal Circuit was wrong to dismiss the case.

Declaratory Judgment Jurisdiction Generally

MedImmune appeared to overrule the Federal Circuit's "reasonable apprehension" test and made it easier for accused infringers to sue first. A declaratory judgment lets an accused infringer take the initiative and choose the forum, but it must show an actual controversy.

SanDisk Corp. v. ST Microelectronics, Inc. 80 F.3d 1372 (Fed. Cir. 2007) Background

SanDisk Background ST sent SanDisk letters listing patents that "may be of interest" and asked to discuss a cross-license. SanDisk responded slowly and preferred to keep discussions "friendly".

Separating Business From Patent Talks ST insisted on keeping patent licensing talks separate from business meetings, while SanDisk wanted to avoid "the rattling of sabers". ST asked SanDisk to come prepared to discuss infringement analyses and fair cross-license terms.

The Licensing Meeting At the August 2004 meeting, ST's experts spent hours mapping specific patent claims onto SanDisk's products. ST also labeled SanDisk's various "unlicensed activities".

"No Plan to Sue" ST gave SanDisk detailed infringement materials and admitted they could support a declaratory judgment suit. Even so, ST said it had "absolutely no plan whatsoever to sue SanDisk".

Negotiations Break Down The two sides exchanged confidential offers and disagreed over how to handle them. SanDisk then sued, seeking a declaration that ST's 14 patents were invalid and not infringed.

Procedural Posture

District Court Dismissal The district court found no controversy because ST never threatened suit and said it would not sue. It concluded SanDisk had no objectively reasonable fear of being sued.

Parties' Arguments SanDisk argued that ST's infringement presentation amounted to an accusation and that negotiations had ended. ST countered that merely mentioning infringement during license talks is not enough.

Legal Standard

Article III and MedImmune Jurisdiction under the Declaratory Judgment Act requires a real Article III case or controversy. The court reviewed MedImmune's point that a plaintiff need not expose itself to liability before suing.

The "Bet the Farm" Principle A dispute must be definite, concrete, and real rather than hypothetical. When a person avoids a threat only because of pressure, the court still has jurisdiction.

The Old Two-Part Test Before MedImmune, the Federal Circuit required a reasonable fear of suit plus actual or planned infringing activity. MedImmune found the "reasonable apprehension" part inconsistent with Supreme Court precedent.

Aetna, Maryland Casualty, Cardinal In Aetna and Maryland Casualty, jurisdiction existed even though the other side had not threatened or could not yet bring suit. Cardinal Chemical held that a ruling of noninfringement does not automatically end a validity counterclaim.

Legal Reasoning

Reasonable Apprehension Test Rejected The court concluded that MedImmune rejected its reasonable-apprehension test. A licensee paying royalties out of fear of ruin has as much of a dispute as one paying under an injunction.

The New Standard Simply knowing that someone else owns a patent is not enough without some affirmative act by the patentee. A case exists when a patentee asserts rights against identified activity and the other side claims the right to continue without a license.

Applying It to SanDisk ST's detailed, claim-by-claim infringement analysis and its demand for royalties created a real controversy. SanDisk did not have to break off talks and risk an infringement suit before asking a court to decide its rights.

Promise Not to Sue Is Not Enough ST's statement that it would not sue did not end the dispute, because its conduct showed it was ready to enforce its patents. The court called this kind of conduct "scare-the-customer-and-run" tactics.

Concurrence - Prior law still valid

Bryson Concurrence — Old Law Supported Dismissal Judge Bryson said the dismissal was correct under prior law because ST had only offered a license. Still, he agreed that MedImmune's footnote requires finding jurisdiction.

Bryson — Almost Any License Offer Qualifies Under the new test, almost any offer of a paid license could support a lawsuit by the party receiving it. Even a promise not to sue would not protect the patentee.

Bryson — The Patentee's Dilemma If the potential licensee asks whether its products are covered, a "no" ends the patentee's licensing efforts and a "yes" invites a lawsuit. The details of ST's presentation therefore do not really matter under the court's test.

Bryson — A Sweeping Change A "put up or shut up" reply would always set up a declaratory judgment suit. Bryson saw no practical stopping point but concurred because footnote 11 compels the result.

Illinois Tool Works, Inc. v. Independent Ink, Inc. 547 U.S. 28 (2006) Background

Illinois Tool Works Facts Trident required equipment makers using its patented printheads and ink containers to buy its unpatented ink. Independent Ink sued, claiming illegal tying and monopolization under the Sherman Act.

Procedural Posture

Lower Court and Certiorari The Federal Circuit followed older Supreme Court cases that presumed a patent gives market power. The Supreme Court took the case to reexamine that presumption.

Legal Standard

Shift Away From Hostility to Tying The Court has grown less hostile to tying and now requires proof of market power. Earlier dicta had treated a patent as conferring market power.

Origins in Patent Misuse Justice O'Connor had observed that the presumption came from patent misuse cases, not antitrust law. Those misuse cases assumed, without examining actual markets, that tying unpatented goods restrained competition.

Migration Into Antitrust International Salt brought the presumption into antitrust law in 1947. Mercoid had earlier expanded patent misuse to cover more types of tying.

Congress Narrows Misuse In the 1952 Patent Act, Congress excluded certain tying arrangements from patent misuse. In 1988, Congress required proof of market power before tying could count as misuse.

Legal Reasoning

Presumption Abandoned It would make no sense to keep the presumption in antitrust after Congress removed its foundation in misuse law. Tying involving patents must now be judged with proof of power in the relevant market.

Rebuttable Presumption Rejected Independent Ink proposed a presumption the patentee could rebut, or one limited to "requirements ties" (ongoing purchases of the tied product). The Court found no support in International Salt for either approach.

Price Discrimination Is Not Proof Price discrimination also occurs in competitive markets, and many ties are consistent with competition. The antitrust agencies' 1995 guidelines likewise do not presume that a patent confers market power.

Holding and Remand In every tying case, the plaintiff must prove the defendant has market power in the tying product. The case was sent back so Independent Ink could present evidence on market power.