Boggild v. Kenner Products, Div. of General Mills, C-1-83-638.

• Decision Date: 15 December 1983
• Docket Number: No. C-1-83-638.,C-1-83-638.
• Citation: 576 F. Supp. 533
• Parties: Robert BOGGILD, and William L. Dale, Plaintiffs, v. KENNER PRODUCTS, DIVISION OF GENERAL MILLS FUND GROUP, INC., Defendant.
• Court: U.S. District Court — Southern District of Ohio

576 F. Supp. 533

Robert BOGGILD, and William L. Dale, Plaintiffs, v. KENNER PRODUCTS, DIVISION OF GENERAL MILLS FUND GROUP, INC., Defendant.

No. C-1-83-638.

United States District Court, S.D. Ohio, W.D.

December 15, 1983.

William Singer, Cincinnati, Ohio, for plaintiffs.

Donald McG. Rose, Cincinnati, Ohio, for defendant.

OPINION AND ORDER GRANTING PLAINTIFFS' MOTION FOR PARTIAL JUDGMENT ON THE PLEADINGS AND DENYING DEFENDANT'S MOTION FOR PARTIAL SUMMARY JUDGMENT

SPIEGEL, District Judge:

This matter came on for hearing on the plaintiffs' motion for partial judgment on the pleadings with respect to defendant's eighth affirmative offense and second counterclaim (doc. 8) and defendant's cross-motion for partial summary judgment on its second counterclaim, or in the alternative to suspend both motions so that discovery with respect to these motions can be conducted (doc. 9). Defendant filed a memorandum in opposition to plaintiffs' motion and in support of its own motion (doc. 10) and a reply memorandum (doc. 15). Plaintiffs filed a reply memorandum in support of their motion and opposing defendant's motion (doc. 14).

Defendant's alternative motion to suspend both motions is denied as we find that additional discovery is not necessary to decide the issues presented to us by the cross-motions. We find that there are no genuine issues of material fact with respect to defendant's second counterclaim and eighth affirmative defense and further that plaintiff is entitled to judgment as a matter of law on that counterclaim and defense. Accordingly, defendant's motion is denied. Plaintiffs' motion is granted.

Underlying this action is a toy extruder device invented by plaintiffs. That device is the subject of an agreement and its amendments under which plaintiffs granted exclusive rights to the invention to Kutol Products, Inc. (see complaint, exh. A). Kutol, Kenner's predecessor in interest, subsequently assigned its rights and obligations under the agreement to defendant Kenner.

The parties entered into the licensing agreement January 18, 1963.¹ Plaintiff subsequently applied for mechanical and design patents on their invention as required by Article II of the agreement. Both patents issued. The design patent expired March 2, 1979; the mechanical patent, August 9, 1983.

Plaintiffs brought this action challenging the way in which defendant has calculated royalties and alleging unauthorized use without payment of royalties. They seek an accounting and damages.

Defendant filed an answer in which it asserted two counterclaims, the second of which is the subject of these motions. That counterclaim seeks a declaration that as of August 9, 1983, when the second patent expired, defendant owed no further obligation to pay royalties to plaintiffs under the licensing agreement and may manufacture, use and sell the device disclosed or claimed in the two patents disclosing the extruder device without obligation to plaintiffs. This counterclaim is the obverse of defendant's eighth affirmative defense, which asserts that the expiration of the patents covering the device bars plaintiffs from enforcing the licensing agreement.

Article IV of the agreement gives defendant the exclusive right to manufacture, use and sell the licensed extruder device. Article II requires that plaintiffs file patent applications covering the device. Article IV(g), however, states:

It is agreed by the parties hereto that the royalty payments provided for herein shall be paid by Kutol regardless of whether or not the filing of the patent applications contemplated in Article II hereof results in the issuance of a patent or patents.

Article XIII(d) of the agreement provides:

Unless previously terminated in accordance with the foregoing provisions of this Article XIII, this Agreement and the rights granted hereunder shall run to the full end of the term or terms of any Letters Patent that may issue on or as a result of the application or applications referred to Article II hereof or for a period of 25 years, whichever is longer, and shall thereupon terminate.

As noted, the last of the applicable patents expired August 9, 1983. The twenty-five year period from the date of the license agreement will not expire until January 18, 1988.

The unambiguous language of the agreement makes it clear that the parties intended that royalty payments would continue whether or not the patents issued. Further, the payments would continue for a minimum of twenty-five years.

It is also undisputed that the inventors had not yet applied for patents covering the extruder device at the time the agreement was entered into. The agreement thus involved the disclosure and licensing by Boggild and Dale to Kutol of certain confidential information in the form of finished drawings of the design and a working model of the extrusion device.

Defendant's eighth affirmative defense and second counterclaim are grounded upon the proposition that the licensing agreement loses its validity and enforceability upon the expiration of the patents covering the licensed device. In effect, defendant argues that once the patents issued, plaintiffs lost the protection of state trade secret and/or contract law in exchange for the patent protection conferred by federal law. Defendant frames the issue raised by the cross-motions thusly:

Whether a license agreement that expressly provides for the payment of royalties on the sales of defined subject matter for a term extending beyond the life of a patent which was contemplated by the contract to cover the defined subject matter and which in fact does cover it is enforceable for the full term expressed by the agreement regardless of the expiration date of the patent, or whether the agreement becomes unenforceable as a matter of law upon the expiration of the patents.

(doc. 10 at 1-2). Defendant relies on Brulotte v. Thys Co., 379 U.S. 29, 32, 85 S.Ct. 176, 179, 13 L.Ed.2d 99 (1964) in which the United States Supreme Court held that regardless of state contract law, a licensing agreement that extends a patent's monopoly beyond the life of the patent involved is a per se violation of federal patent law. Defendant concludes that the licensing agreement became violative of federal law and thus unenforceable as of August 9, 1983 when the latter patent expired.

It is fundamental that any attempt to continue "the patent monopoly, after the patent expires, whatever the legal device employed, runs counter to the policy and purpose of the patent laws." Scott Paper Co. v. Marcalus Co., 326 U.S. 249, 256, 66 S.Ct. 101, 104, 90 L.Ed. 47 (1945) quoted in Brulotte, 379 U.S. at 31, 85 S.Ct. at 178. In Brulotte the Supreme Court held that royalty provisions of a licensing agreement covering the use of machines incorporating certain patents are not enforceable beyond the expiration of the last patent incorporated in the machine. The Court observed that a patentee may use his patent to exact the highest royalties possible, using his monopoly as leverage. 379 U.S. at 33, 85 S.Ct. at 179. However, it held unlawful per se a patentee's use of a royalty agreement extending beyond the date of the patent. 379 U.S. at 32, 85 S.Ct. at 179.

As plaintiffs point out, the facts of Brulotte are distinguishable. The royalty agreements in Brulotte issued in connection with the sale of machines incorporating seven patents, all of which had issued prior to the execution of the agreements, and licensed the use of the patent ideas. Thus the rights licensed were exclusively patent rights. In the present case, however, the agreement preceded the patents and thus the rights licensed are more properly characterized as trade secret rights— at least in part — and potential patent rights in part.

Defendant's response is that Brulotte's per se rule extends to agreements where a patent is applied for and issues after the agreement is negotiated. Defendant refers to Pitney Bowes, Inc. v. Mestre, 701 F.2d 1365 (11th Cir.1983), cert. denied, ___ U.S. ___, 104 S.Ct. 239, 78 L.Ed.2d 230 (1983).

At issue in Mestre was a hybrid agreement licensing both patent rights and trade secret rights and providing for royalties in exchange for the sale and exclusive right to manufacture and sell a machine described in then pending patent applications. The agreement expired on the latest of three dates — the patentee's death, after seventeen years, or when the last patent on the machine expired. The last patent expired approximately eighteen months prior to the patentee's death. The Eleventh Circuit held that the agreement was unenforceable under Brulotte on the grounds that two provisions suggested that the patentee used the leverage of his patent to extend the monopoly beyond the seventeen year patent period. First, the exclusive rights licensed under the agreement applied equally before and after expiration of the patent and second, the agreement required the licensee to pay royalties at the same rate and on the same basis both before and after expiration of the patent. 701 F.2d at 1373.

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 contemplated.

That, however, is not the end of our inquiry, for in this case patents...