Boggild v. Kenner Products, Div. of CPG Products Corp., 84-3467

Citation776 F.2d 1315
Decision Date02 January 1986
Docket NumberNo. 84-3467,84-3467
Parties, 1985-2 Trade Cases 66,852 Robert BOGGILD; William L. Dale, Plaintiffs-Appellees, v. KENNER PRODUCTS, a DIVISION OF CPG PRODUCTS CORP., Defendant-Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals (6th Circuit)

Donald McG. Rose, Frost and Jacobs, Cincinnati, Ohio, Madeline Henricks Devereux (LC) (argued), Edward M. O'Toole, Marshall, O'Toole, Gerstein, Murray and Bicknell, Chicago, Ill., for defendant-appellant.

William Singer (argued), Cincinnati, Ohio, for plaintiffs-appellees.

Before KEITH and MARTIN, Circuit Judges, and DIGGS TAYLOR. *

KEITH, Circuit Judge:

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.

FACTS

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. 1 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. 2 The 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. 3 Thus, the agreement required the royalty payments to continue four and a half years beyond the latest patent expiration date.

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.

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., 379 U.S. 29, 85 S.Ct. 176, 13 L.Ed.2d 99 (1964), prohibiting a patent licensor from using the leverage of its patent to extend royalty payments beyond the patent's seventeen year term. Boggild v. Kenner Products, 576 F.Supp. 533, 536-37 (S.D.Ohio 1983). Kenner appeals the district court's grant of partial summary judgment for the plaintiffs on Kenner's second counterclaim.

DISCUSSION

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. Scott Paper Co. v. Marcalus Manufacturing Co., 326 U.S. 249, 255, 66 S.Ct. 101, 104, 90 L.Ed. 47 (1945); see Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 480-81, 94 S.Ct. 1879, 1885-86, 40 L.Ed.2d 315 (1974); Lear, Inc. v. Adkins, 395 U.S. 653, 673-74, 89 S.Ct. 1902, 1912-13, 23 L.Ed.2d 610 (1969); Brulotte v. Thys Co., 379 U.S. 29, 30-31, 85 S.Ct. 176, 178, 13 L.Ed.2d 99 (1964); Prestole Corp. v. Tinnerman Products, Inc., 271 F.2d 146, 155 (6th Cir.1959), cert. denied, 361 U.S. 964, 80 S.Ct. 593, 4 L.Ed.2d 545 (1960). 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. Scott Paper Co. v. Marcalus Manufacturing Co., 326 U.S. at 255, 66 S.Ct. at 104. 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 scope." Precision Instrument Mfg. Co. v. Automotive Maintenance Machinery Co., 324 U.S. 806, 816, 65 S.Ct. 993, 998, 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. Scott Paper Co., 326 U.S. at 255-56, 66 S.Ct. at 104; Prestole Corp. v. Tinnerman Products, Inc., 271 F.2d at 155.

Accordingly, in Brulotte v. Thys Co., 379 U.S. 29, 85 S.Ct. 176, 13 L.Ed.2d 99 (1964), the Supreme Court found that an owner of patents 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. The patent owner issued a license for the use of each hop-picking machine sold to farmers for a flat sum. Under the license, hop farmers paid the greater of either a minimum royalty of $500 per hop-picking season or $3.33 1/3% per two hundred pounds of hops harvested by the machine. The license also prohibited assignment and removal of the machines from the county where sold. 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 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, 85 S.Ct. at 179. The Court found that, by their terms, the royalties were for use during the post-expiration period and did not constitute deferred payment for 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, 85 S.Ct. at 179-80. 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. Id. 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 per se. Id.

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. Boggild v. Kenner Products, 576 F.Supp. at 536-37. 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." Id. 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, 104 S.Ct. 239, 78 L.Ed.2d 230 (1983), which concluded that the Brulotte rule of per se invalidity could be applied to hybrid agreements executed while applications for patents were pending:

In our view the Eleventh Circuit over extended the Brulotte rule. It is clear from that early case that the Supreme Court found that the agreement, on its face, revealed an improper leveraging of the patent monopoly. In Brulotte, the patents had issued; thus the patentee had something that he could leverage. Here, no application had been made. We recognize that, regardless of whether an application has been made, one might improperly leverage the possibility that a patent might issue if the parties believe there is a substantial likelihood that a patent might issue. Under those circumstances, however, application of a per se rule is inappropriate. We hold, therefore, that the per se rule of Brulotte does not extend to the case where no patent application has been made at the time the agreement is negotiated even if an application is...

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