FALL 2010

Trade Secrets


Course No. 9200-704 (& 804)-801

ID No. 85737 & 85736

Time:  W 6:30 - 9:30 p.m.
Room:  W-215
Professor Jay Dratler, Jr.
Room Across from 231D (IP Alcove)
Home: 330-835-4537
Copyright © 2000, 2002, 2003, 2006, 2008, 2010   Jay Dratler, Jr.   For permission, see CMI.

Questions and Notes on Pitney Bowes and Boggild

1.  Both Both Pitney Bowes and Boggild are progeny of Aronson.  They are also progeny of Brulotte v. Thys Co.—a case that long predated Aronson.  The opinions in all three cases—Aronson, Pitney Bowes and Boggild—discuss Brulotte.  Based upon their discussions, can you state the facts, result and holding of Brulotte precisely?  Did Brulotte completely foreclose a patent licensor's receipt of money after the patent expires, or did it leave some room for post-expiration payment?

2.  On the way to rejecting pre-emption of trade secret law, the Kewanee Court examined the policies underlying patent protection, and the Aronson Court summarized these policies succinctly.  What three policies did these two courts enunciate?  Which policy best explains the result in Brulotte?  Is the result in Brulotte necessary to advance that policy, or is it merely desirable?

3.  The courts in all three of our licensing cases—Aronson, Pitney Bowes and Boggild—speak of the "leverage" of the patent monopoly.  Precisely what does that term mean?  How does it relate to the result in Brulotte and the underlying policy?  Was there "leverage" in Aronson?  If so, to what obligations of the licensee (Quick Point) did it relate?  Did "leverage" affect the 2-1/2% royalty that Quick Point was eventually required to pay forever?

4.  What was the subject matter of the Vertical Collator Agreement in Pitney Bowes?  That is, what intellectual property rights were licensed under that agreement?  How did those rights compare with the rights licensed under the agreements in Aronson?

The Pitney Bowes court finds "leverage" in the vertical collator agreement and therefore refuses to enforce the royalty obligation as written.  What policies explain that result?  Would a contrary result contravene good patent policy?  Would it be inconsistent with Brulotte?  If so, how?

What specific differences between the transactions in Aronson and in Pitney Bowes account for the difference in result?  Do all the relevant differences relate to the terms of the agreements, or do some also relate to the stage of patent prosecution?  For each difference that you note, be prepared to explain how it affects patent "leverage" and patent policy.

If you had been able to advise Mestre before he signed the Vertical Collator Agreement, could you have suggested changes that, if adopted, would have made the royalty obligation enforceable throughout the agreed-upon term?  If so, what changes would you suggest?  Could you guarantee Mestre that those change, if made, would preserve the royalty obligation?

5.  According to the Pitney Bowes court, the agreed-upon royalty obligation was unenforceable after the last patent expired.  Does that mean that Pitney Bowes could use Mestre's trade secrets thereafter for free?  Did Mestre's (or his lawyer's!) mistake in drafting the agreement, in effect, make a gift of his trade secrets to Pitney Bowes after the patents expired?  Is there any way that Mestre's widow could recover for Pitney Bowes' use of his trade secrets after the last patent expired?  If so, how?

6.  Boggild is another case in which a royalty obligation bit the dust under the per se rule of Brulotte. What differences between the transaction in Aronson and the transaction in Boggild explain the difference this result?  what policy or policies?

What type(s) of intellectual property did the agreement in Boggild cover?  Armed with the answer to this question, and with knowledge that the royalty obligation extended beyond the term of the patent, could you have predicted that it would not be enforceable for the agreed-upon term?  Or would you have to know more about the terms of the agreement?

7.  The Boggild court, like the Pitney Bowes court, finds patent "leverage" at work.  What are its reasons?  What specific features of the agreement and the transaction suggested patent "leverage" at work?  Did any specific features suggest the contrary?  If so, what are they?

How would you, as Mestre's counsel, have changed the terms of the agreement to make the royalty agreement enforceable throughout the entire agreed-upon term?  Could you have guaranteed Mestre that your precautions would work?  If they didn't work, could you give him any assurance that Kenner Products nevertheless would have to pay for the use of his intellectual property after the patent expired?  If so, how would that payment be determined, and how would the amount differ from the agreed-upon royalty?

8.  Both Pitney Bowes and Boggild addressed the enforceability of so-called "hybrid" license agreements.  In this context the term "hybrid" usually means covering both patent rights and trade secrets.  It also has a broader meaning: covering both patent rights and other, nonpatent intellectual property. See Jay Dratler, Jr., Intellectual Property Law: Commercial, Creative, and Industrial Property, § 4.06[2] (Law Journal Press 1991).

Except for semiconductor chip protection, which has a term of ten years, see 17 U.S.C. § 904(b), patents have the shortest term of any form of IP.  Therefore, whenever you draft or review a license agreement involving patents and other forms of intellectual property, you must consider how the per se rule of Brulotte might affect the royalty obligations after the patents expire.

What precautions would/should you take in that regard?  How should you draft the royalty obligation?  Do the same considerations apply if no patent has yet been been applied for, and an application for patent might be rejected?  What if the patent is litigated, for example, in an action for infringement, and the court holds it invalid?  See, e.g., Span-Deck, Inc. v. Fab-Con, Inc., 677 F.2d. 1237, 1247, 1249 (8th Cir.), cert. denied 459 U.S. 891 (1982); St. Regis Paper Co. v. Royal Industries, Inc., 552 F.2d 309, 315 (9th Cir.), cert. denied 434 U.S. 996 (1977).

9.  The Supreme Court's decision in Brulotte has been criticized for rigid formalism.  See 1 Jay Dratler, Jr., Licensing of Intrellecual Property § 4.04[5][d] (Law Journal Press 1994 & Supps.).  Indeed, Justice Harlan penned a strong dissent in the case itself, arguing that merely charging royalties after expiration of a patent does not project the patent's power beyone the patent's term but merely gives the licensee the business option of stretching out payments for use during that term.  See Brulotte v. Thys Co., 379 U.S. 29, 34-38, 85 S.Ct. 176, 13 L.Ed.2d 99 (1964) (dissenting opinion of Justice Harlan).

Was Justice Harlan right?  When a licensee agrees to pay royalties after a patent's expiration, is the patent's power necessasrily projected into the post-expiration period?  Can't the licensee, if it wishes, use the teaching of the patent without restriction then?  Can't he make the patented machine or product without restriction or pay someone else to do so?  Shouldn't a licensee have the right to extend payment for use of the patent during its term beyond the patent's expiration in a sort of "installment plan"?

10.  But if Brulotte stands on shaky ground, does that necessarily mean that cases like Pitney Bowes and Boggild do so also?  If there is no change in a license's royalty rate after expiration of a licensed patent, might that suggest that the royalties were for something other than the patent license?

If some other intellectual property might serve as a basis for post-expiration royalties, shouldn't there be some explicit basis for allocating payment?  Isn't that just good contract drafting?  Without an allocation, how would anyone interpreting the license know whether the post-expiration royalties were extended payments for use of the patent during its term or current payments for post-expiration use of some other intellectual property?  Won't proper allocation have a number of legal implications, not only if one or another item of intellectual property is declared invalid, but also for tax purposes?

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