Aronson v. Quick Point Pencil Company

• Decision Date: 28 February 1979
• Docket Number: No. 77-1413,77-1413
• Parties: Jane ARONSON, Petitioner, v. QUICK POINT PENCIL COMPANY
• Court: U.S. Supreme Court

440 U.S. 257

99 S.Ct. 1096

59 L.Ed.2d 296

Jane ARONSON, Petitioner,

v QUICK POINT PENCIL COMPANY.

No. 77-1413.

Argued Dec. 6, 1978.

Decided Feb. 28, 1979.

Syllabus

Petitioner entered into a contract with respondent whereby, in return for the exclusive right to make and sell a keyholder designed by petitioner for which a patent application was pending, respondent agreed to pay petitioner a royalty of 5% of the selling price. If the patent was not allowed within five years, the royalty was to be reduced to 21/2% of sales. The patent was not allowed within five years, whereupon respondent accordingly reduced the royalty to 21/2%. Subsequently the patent application was rejected. After respondent had paid petitioner royalties for a number of years following rejection of the patent application, it brought an action in District Court seeking a declaratory judgment that the royalty agreement was unenforceable on the ground that state law which otherwise made the contract enforceable was pre-empted by federal patent law. The District Court upheld the contract, but the Court of Appeals reversed, holding that the contract became unenforceable once petitioner failed to obtain a patent within the stipulated 5-year period and that a continuing obligation to pay royalties would be contrary to "the strong federal policy in favor of the full and free use of ideas in the public domain," Lear, Inc. v. Adkins, 395 U.S. 653, 674, 89 S.Ct. 1902, 1913, 23 L.Ed.2d 610. Held : Federal patent law does not pre-empt state contract law so as to preclude enforcement of the contract. Cf. Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 94 S.Ct. 1879, 40 L.Ed.2d 315. Pp. 261-266.

(a) Enforcement of the contract is not inconsistent with the purposes of the federal patent system (1) to foster and reward invention; (2) to promote disclosure of inventions, stimulate further innovation, and permit the public to practice the invention once the patent expires; and (3) to assure that ideas in the public domain remain there for the free use of the public. Pp. 262-264.

(b) Enforcement of the contract does not prevent anyone from copying the keyholder but merely requires respondent to pay the consideration it promised in return for the use of a novel device which enabled it to pre-empt the market. P. 264.

(c) When, as here, no patent has issued, and no ideas have been withdrawn from public use, the case is not controlled by the holding of Lear, supra, that a patent licensee who establishes the invalidity of a patent need not pay royalties accrued after the issuance of the patent nor by the rationale of that case that it is desirable to encourage licensees to challenge the validity of patents in order to further the strong federal policy that only inventions meeting the rigorous requirements of patentability shall be withdrawn from the public domain. P. 264.

(d) Enforcement of the contract comports with the principle that the monopoly granted under a patent cannot lawfully be used "to negotiate with the leverage of that monopoly." Brulotte v. Thys Co., 379 U.S. 29, 33, 85 S.Ct. 176, 179, 13 L.Ed.2d 99, since the challenged reduced royalty, rather than being so negotiated, rested on the contingency that no patent would issue within five years. Pp. 264-265.

8 Cir., 567 F.2d 757, reversed.

C. Lee Cook, Jr., Chicago, Ill., for petitioner.

B. Barry Grossman, Washington, D. C., for the United States, as amicus curiae, by special leave of Court.

Erwin N. Griswold, Washington, D. C., for respondent.

Mr. Chief Justice BURGER delivered the opinion of the Court.

We granted certiorari, 436 U.S. 943, 98 S.Ct. 2843, 56 L.Ed.2d 784, to consider whether federal patent law pre-empts state contract law so as to pre clude enforcement of a contract to pay royalties to a patent applicant, on sales of articles embodying the putative invention, for so long as the contracting party sells them, if a patent is not granted.

(1)

In October 1955 the petitioner, Mrs. Jane Aronson, filed an application, Serial No. 542677, for a patent on a new form of keyholder. Although ingenious, the design was so simple that it readily could be copied unless it was protected by patent. In June 1956, while the patent application was pending, Mrs. Aronson negotiated a contract with the respondent, Quick Point Pencil Co., for the manufacture and sale of the keyholder.

The contract was embodied in two documents. In the first, a letter from Quick Point to Mrs. Aronson, Quick Point agreed to pay Mrs. Aronson a royalty of 5% of the selling price in return for "the exclusive right to make and sell keyholders of the type shown in your application, Serial No. 542677." The letter further provided that the parties would consult one another concerning the steps to be taken "[i]n the event of any infringement."

The contract did not require Quick Point to manufacture the keyholder. Mrs. Aronson received a $750 advance on royalties and was entitled to rescind the exclusive license if Quick Point did not sell a million keyholders by the end of 1957. Quick Point retained the right to cancel the agreement whenever "the volume of sales does not meet our expectations." The duration of the agreement was not otherwise prescribed.

A contemporaneous document provided that if Mrs. Aronson's patent application was "not allowed within five (5) years, Quick Point Pencil Co. [would] pay . . . two and one half percent (21/2%) of sales . . . so long as you [Quick Point] continue to sell same." ^**

^** In April 1961, while Mrs. Aronson's patent application was pending, her husband sought a patent on a different keyholder and made plans to license another company to manufacture it. Quick Point's attorney wrote to the couple that the proposed new license would violate the 1956 agreement. He observed that

"your license agreement is in respect of the disclosure of said Jane [Aronson's] application (not merely in respect of its claims) and that even if no patent is ever granted on the Jane [Aronson] application, Quick Point Pencil Company is obligated to pay royalties in respect of any keyholder manufactured by it in accordance with any disclosure of said application." (Emphasis added.)

In June 1961, when Mrs. Aronson had failed to obtain a patent on the keyholder within the five years specified in the agreement, Quick Point asserted its contractual right to reduce royalty payments to 21/2% of sales. In September of that year the Board of Patent Appeals issued a final rejection of the application on the ground that the keyholder was not patentable, and Mrs. Aronson did not appeal. Quick Point continued to pay reduced royalties to her for 14 years thereafter.

The market was more receptive to the keyholder's novelty and utility than the Patent Office. By September 1975 Quick Point had made sales in excess of $7 million and paid Mrs. Aronson royalties totaling $203,963.84; sales were continuing to rise. However, while Quick Point was able to pre-empt the market in the earlier years and was long the only manufacturer of the Aronson keyholder, copies began to appear in the late 1960's. Quick Point's competitors, of course, were not required to pay royalties for their use of the design. Quick Point's share of the Aronson keyholder market has declined during the past decade.

(2)

In November 1975 Quick Point commenced an action in the United States District Court for a declaratory judgment, pursuant to 28 U.S.C. § 2201, that the royalty agreement was unenforceable. Quick Point asserted that state law which might otherwise make the contract enforceable was preempted by federal patent law. This is the only issue presented to us for decision.

Both parties moved for summary judgment on affidavits, exhibits, and stipulations of fact. The District Court concluded that the "language of the agreement is plain, clear and unequivocal and has no relation as to whether or not a patent is ever granted." Accordingly, it held that the agreement was valid, and that Quick Point was obliged to pay the agreed royalties pursuant to the contract for so long as it manufactured the keyholder.

The Court of Appeals reversed, one judge dissenting. 567 F.2d 757. It held that since the parties contracted with reference to a pending patent application, Mrs. Aronson was estopped from denying that patent law principles governed her contract with Quick Point. Although acknowledging that this Court had never decided the precise issue, the Court of Appeals held that our prior decisions regarding patent licenses compelled the conclusion that Quick Point's contract with Mrs. Aronson became unenforceable once she failed to obtain a patent. The court held that a continuing obligation to pay royalties would be contrary to "the strong federal policy favoring the full and free use of ideas in the public domain," Lear, Inc. v. Adkins, 395 U.S. 653, 674, 89 S.Ct. 1902, 1913, 23 L.Ed.2d 610 (1969). The court also observed that if Mrs. Aronson actually had obtained a patent, Quick Point would have escaped its royalty obligations either if the patent were held to be invalid, see ibid., or upon its expiration after 17 years, see Brulotte v. Thys Co., 379 U.S. 29, 85 S.Ct. 176, 13 L.Ed.2d 99 (1964). Accordingly, it concluded that a licensee should be relieved of royalty obligations when the licensor's efforts to obtain a contemplated patent prove unsuccessful.

(3)

On this record it is clear that the parties contracted with full awareness of both the pendency of a patent application and the possibility that a patent might not issue. The clause de-escalating the royalty by half in the event no patent issued within five years makes that crystal clear. Quick Point apparently placed a significant value on exploiting the basic novelty of the device, even if no patent issued; its success demonstrates that this judgment was well founded. Assuming, arguendo, that the initial letter and the commitment to pay a 5% royalty was subject to federal patent law, the provision...