Boggild v. Kenner Products,
776 F.2d 1315, 228 U.S.P.Q. (BNA) 130 (6th Cir. 1985),
a Division of CPG Products Corp
cert. denied 477 U.S. 908 (1986)
Keith, J.: [*1316]
The issue in this case is whether the terms of a licensing agreement, which
the parties entered into prior to application for or issuance of anticipated
but subsequently issued patents, can be enforced beyond the expiration dates
of the patents. We hold that under the rule of per se invalidity
established by Brulotte v. Thys Co., 379 U.S. 29, 85 S.Ct. 176, 13
L.Ed.2d 99 (1964), the terms of a licensing agreement calling for royalty
payments beyond the life of the patent are unenforceable where the parties
enter the agreement with clear expectations that a valid patent will issue.
We therefore reverse the order of the district court granting partial
summary judgment for the plaintiffs and remand for proceedings consistent
with this opinion.
Over twenty years ago, the plaintiffs-appellees, Robert Boggild and William
Dale, invented a toy extruder to be used with the modeling substance called
Play-Doh. In January 1963, the plaintiffs granted Kutol products,
Inc. an exclusive license to make, use and sell the extruder in conjunction
with its line of Play-Doh products. Kutol subsequently assigned its
rights and obligations under the 1963 license agreement to the defendant-appellant,
Kenner Products. At the time the plaintiffs executed the agreement,
no patents on the extruder had been issued or applied for. However,
under Article II of the agreement, upon execution of the license the plaintiffs
were required to promptly apply for mechanical and design patents on the
extruder. The [*1317] plaintiffs' patent applications were
subsequently issued with expiration dates of March 2, 1979 for the design
patent and August 9, 1983 for the mechanical patent.
Under the agreement, Kenner, the licensee, was required to pay royalty payments
for a minimum of twenty-five years from the date of the license, or January
18, 1988, regardless of whether the anticipated patents issued or not. Thus,
the agreement required the royalty payments to continue four and a half
years beyond the latest patent expiration date.
In March 1983, the plaintiffs filed in state court a breach of contract
action challenging the method used by Kenner to calculate royalties due
on the selling price of the extruder devices. Kenner petitioned for
removal to the federal district court and filed an answer to the plaintiffs'
complaint. In its answer, Kenner generally denied that it improperly
calculated royalties and asserted two counterclaims. The first counterclaim
alleged that the plaintiffs owed Kenner an amount of royalty overpayments.
The second counterclaim alleged that, due to the expiration of the
patents, Kenner was no longer obligated to pay royalties, and, despite the
terms of the agreement, was entitled to make, use and sell the toy extruders
without further payments.
Upon consideration of the plaintiffs' motion for partial summary judgment
on Kenner's second counterclaim, the district court determined that since
the patents had issued after the parties entered into the licensing agreement,
the agreement did not run afoul of the holding in Brulotte v. Thys Co.,
prohibiting a patent licensor from using the leverage of its patent to extend
royalty payments beyond the patent's seventeen year term. Kenner appeals
the district court's grant of partial summary judgment for the plaintiffs
on Kenner's second counterclaim.
The underlying policy of patent law grants a seventeen year monopoly to
an inventor in exchange for release of the invention to the public upon
expiration of the patent. Thus, for a limited time, the inventor exclusively
reaps any material rewards from the invention on condition that she disclose
it to the public upon expiration of the patent. The extensive social
and economic consequences of the patent "give the public a paramount interest
in seeing that patent monopolies are kept within their legitimate [*1318]
scope." Precision Instrument Mfg. Co. v. Automotive Maintenance
Machinery Co., 324 U.S. 806, 816, 65 S.Ct. 993, 89 L. Ed. 1381 (1945).
Hence, efforts to extend or reserve the patent monopoly beyond the
seventeen years contravene the policy and purpose of the patent laws.
Accordingly, in Brulotte v. Thys Co., the Supreme court found that
an owner of patent on hop-picking techniques who executed licensing agreements
requiring royalty payments beyond the life of the patent had improperly
used the leverage of his patents to extend the monopoly. * * *
All of the patents incorporated into the machines expired before
the licenses. Nonetheless, the royalties and restrictions required
under the licenses remained in identical effect both before and after the
last patent expired.
The hop farmers eventually refused to pay royalties accruing both before
and after the expiration of the patents. The patent owner sued to
enforce the licenses under state contract law, and the farmers defended
with misuse of the patents through projection of royalties beyond the expiration
date of the patents. The trial court enforced the licenses, however
[, and] the Supreme Court of Washington affirmed.
The United States Supreme court reversed. The Court determined that
the license provisions described above were intrinsically designed to protect
the privileges of the patent monopoly and that their identical application
to the post-expiration period constituted a "bald attempt to exact the same
terms and conditions for the period after the patents have expired as they
do for the monopoly period." Brulotte v. Thys Co., 379 U.S.
at 32. The Court found that, by their terms, the royalties were for
use during the post-expiration period and did not constitute deferred payment
for the use during the pre-expiration period or a sale of unpatented machines
through long term payments based on a deferred purchase price. Id.
at 31-32. Since the license provisions failed to distinguish between
the pre-expiration and post-expiration periods, the Court was unable to
determine whether the post-expiration royalties were subject to the leverage
of the patent. The Supreme court concluded that under these circumstances
the patent owner had abused the leverage of the monopoly to project royalties
into the post-expiration period; the agreement, therefore, was unlawful
In the case at bar, the district court reasoned that the Brulotte
rule of per se invalidity was inapplicable because, unlike the hop-picking
patents in Brulotte, the toy extruder patents had not been issued
at the time the parties entered into the licensing agreement. Thus,
the district court distinguished the present case as one involving patents
which issued after the agreement and which conferred "hybrid rights entailing
trade secrets" as well as "potential patent rights in part." The district
court then rejected the Eleventh Circuit's holding in Pitney Bowes, Inc.
v. Mestre, 701 F.2d 1365 (11th Cir.), cert. denied 464 U.S. 893
(1983), which concluded that the Brulotte rule of per se invalidity
could be applied to hybrid agreements executed while applications for
patents were pending. * * * [*1319] * * * We
reverse this judgment and hold that the Brulotte rule of per se
invalidity precludes enforcement of license provision which were developed
in anticipation of patent protection and which require royalty payments
for use, sale or manufacture of a patented item beyond the life of the patent.
The Eleventh Circuit's decision in Pitney Bowes, Inc. v. Mestre,
is significant for several reasons. In Mestre, a prospective
patent owner executed four licenses for the sole and exclusive rights to
make and sell four different paper handling machines. Three of the
agreements licensed both patent rights and trade secrets, one licensed only
trade secrets,(1) but all four agreements entitled
Mestre to collect royalties on each machine. As in the case at bar,
patents for the machines issued after execution of the agreements. However,
unlike plaintiffs Boggild and Dale, Mestre had filed patent applications
before the agreements were struck. Also, as in Brulotte and
the case at bar, the royalty and use provision did not distinguish between
rates of payment for the pre-expiration and post-expiration periods or between
royalties attributable to the patent rights and those for any other rights.
Finally, like Brulotte and this case, the termination provisions
in the Mestre agreements extended "hybrid" royalty payments beyond
the life of the patent.
The United States District Court for the Southern District of Florida rejected
Mestre's contention that the post-expiration royalties were attributable
to the license for trade secrets and found that the hybrid agreement and
Mestre's right to collect royalties thereunder ended upon expiration of
the patent. Pitney Bowes, Inc. v. Mestre, 517 F. Supp. 52,
63 (S.D. Florida 1981). The Eleventh Circuit affirmed, ruling moreover
that Brulotte was applicable to hybrid agreements and that issuance
of the pending patent precluded enforcement of conflicting trade secret
provision. The circuit court found that under Brulotte, the
agreement was invalid per se because the agreement's terms for royalty
payments and exclusive use applied equally before and after expiration
of the patent. 701 F.2d at 1373. Thus, the Eleventh Circuit
found improper leveraging of the patent monopoly by applying Brulotte's
rationale of per se invalidity to an agreement where the patents
had not issued at the time of licensing but were pending and where trade
secret rights were expressly included with patent rights.
We agree with the Eleventh Circuit that once the pending patent issues,
enforcement of royalty provision for the other rights which conflict with
and are indistinguishable from royalties for patent rights, is precluded.
As noted in Mestre, the Supreme court has upheld enforcement
of potentially conflicting state trade secret provisions in hybrid agreements
only where no patents ever issued. See Aronson v. Quick Point Pencil
Co., 440 U.S. 257, 99 S.Ct. 1096, 59 L.Ed.2d 296 (1979);(2)
[*1320] Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 94
S.Ct. 1879, 40 L.Ed.2d 315 (1974). Upon issuance of the patent, however,
federal supremacy required directly conflicting provisions to be resolved
under federal patent law.
We also agree with the Eleventh Circuit that misuse of the leverage afforded
by a pending patent is subject to the Brulotte rule of per se
invalidity. In Aronson v. Quick Point Pencil Co., the Supreme
court acknowledged the leverage afforded to a patent owner by a pending
patent application. Although the Court refrained from defining what
constitutes abuse of such leverage, it described the nature of the leverage
and the inquiry upon examination for abuse:
"No doubt a pending patent application gives the applicant some additional
bargaining power for purposes of negotiating a royalty agreement. The
pending application allows the inventor to hold out the hope of an exclusive
right to exploit the idea, as well as the threat that the other party
will be prevented from using the idea for 17 years. However, the
amount of leverage arising from a patent application depends on how likely
the parties consider it to be that a valid patent will issue."
440 U.S. at 265.
In Mestre, the agreement expressly referred to the pending patent
applications, and several of its provisions would become enforceable only
if the patens issued. On these facts, the Eleventh Circuit concluded
that the parties had anticipated issuance of the patents and that Mestre
had obtained sufficient leverage from the pending patents to warrant application
of the analysis in Brulotte.
In our view, the same violations of patent law arising from abuse of the
leverage attached to a pending or issued patent can arise from abuse of
the leverage afforded by an expressly anticipated application for a patent.
The agreement at bar aptly demonstrates this contention. As
noted in the facts section of this opinion, Article II of the licensing
agreement required the plaintiffs "to promptly file and diligently prosecute
mechanical and design patent applications" for the toy extruder. In
fact the parties decreed in Article VI that no royalties would be paid until
the plaintiffs applied for the mechanical patent.
Throughout the licensing agreement, similar provision reiterate the parties'
anticipation and expectation of successful patent applications. Article
IV of the agreement grants the exclusive right to manufacture, use and sell
the licensed extruder. Article X provides that the defendant Kenner
will admit the validity of any "patent under which rights herein are granted."
Article XII gives Kenner the sole right to proceed against infringers
of "any patents granted on the applications or inventions [*1321]
herein licensed." and subparagraph (c) of Article XIII suggests the entire
license was premised upon the issuance of patents: it gives Kenner the right
to terminate the license in the event of unlicensed competition which the
parties "are unable or unwilling to prevent or restrain." Paragraph
XIV, entitled" Patent Infringement Search", required the plaintiffs to commission
a patent infringement search by a reputable patent law firm within thirty
days after execution of the agreement in order to determine the likelihood
of receiving a patent. Moreover, as noted above in footnote 3 of this
opinion, the termination provisions of Article XIII(d) not only contemplate
the anticipated patents but expressly require all terms of the agreement
to run a minimum of twenty-five years, four and a half years beyond the
life of the subsequently issued mechanical patent.
Thus, the tenor of the licensing agreement compels us to find that the possibility
of forthcoming patents on the toy extruder substantially contributed to
the formation of the licensing agreement and that the parties assumed a
high likelihood that valid patents would issue. The terms of the licensing
agreement compel the conclusion that, at the time the parties executed the
license, the plaintiffs exerted considerable leverage from the anticipated
patents. In our view, the absence of a filed patent
application is, under these circumstances irrelevant to the analysis under
Having established the leverage from anticipated patents, our inquiry next
focuses on whether such leverage was misused to project the monopoly beyond
the life of the patent. In Brulotte the Supreme Court found
a per se projection of the monopoly where the provisions protecting
the exclusive rights conferred by the patent applied without change to the
post expiration period and where royalties for use during the patent were
indistinguishable from royalties due after expiration. In the case
at bar, the agreement calls for royalties on the sales of the patented extruder
for a minimum of twenty-five years.(3) As in
Brulotte, the agreement contains neither provisions for reduction
of royalties in the event valid patents never issued nor terms for reduction
of post-expiration royalties. The provisions for use of the extruder
and payment of royalties are applicable to both the pre-expiration and post-expiration
periods. Therefore, under Brulotte, the agreement is unlawful
Accordingly, the district court's grant of partial summary judgment to the
plaintiffs is hereby reversed.
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1. [court's footnote 4] The district
court found that one agreement entitled the "Rotary Collator Agreement"
licensed trade secret rights only. However, the Eleventh Circuit
noted that during oral argument on appeal, Mestre conceded that like the
other three, the Rotary Collator Agreement was a hybrid license for both
patent rights and trade secrets. The Court of Appeals invited the
district court to consider Mestre's concession and to apply Brulotte
to the Rotary Collator Agreement as well. Both the district court
and Court of Appeals equated trade secrets with "know-how."
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2. [court's footnote 5] In our view,
Aronson lends further support to the contention that the Brulotte
rule of per se invalidity is applicable to hybrid agreements in
which royalties for patent rights are indistinguishable from those for
other rights. In Aronson the supreme court reversed an Eighth
Circuit decision applying Brulotte to terms of an agreement which
provided for a 5% royalty for exclusive rights to a keyholder design but
reduced royalty payments if the inventor failed to obtain a patent within
five years after the agreement. The patent applications failed and
the reduced royalties became effective for an indefinite term. The
Eighth circuit concluded that had the pending patent issued, royalty payments
could not have continued beyond the 17 year monopoly period. The
Eighth Circuit reversed the district court judgment enforcing the terms
of the agreement. The Supreme Court reversed and held that absent
issuance of a patent, federal patent law does not preempt state contract
law. The Court concluded the terms of the agreement contravened
no purpose under the federal patent system and that the reduced royalty
was not negotiated with the leverage of a patent. In so holding,
however, the court specifically noted that had the patent issued, enforcement
of the higher 5% royalty rate for exclusive rights beyond the life of
the patent would have been precluded: "Mrs. Aronson attempted to obtain
a patent for over five years. It is quite true that had she succeeded,
she would have received a 5% royalty only on keyholders sold during the
17-year life of the patent." 440 U.S. at 263-64. Thus, the
Court would presumably have applied Brulotte to a "hybrid" agreement
embodying rights conferred under both state law and the federal patent
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3. [court's footnote 6] Although Article
VI of the agreement requires royalty payments whether the patents issued
or not, the only royalties required are those on sales of the patent device.
In light of the parties' clear contemplation of successful patent
applications, the disclaimed relevance of the patent in Article VI must
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