Scheiber v. Dolby Laboratoris, 061702 FED7, 01-2466

Docket Nº:01-2466
Party Name:Scheiber v. Dolby Laboratoris
Case Date:December 03, 2001
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit




No. 01-2466

In the United States Court of Appeals For the Seventh Circuit


June 17, 2002

Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division. No. 95 C 1531--John P. Godich, Magistrate Judge.

Before Posner, Evans, and Williams, Circuit Judges.

Posner, Circuit Judge

The plaintiff in a suit to enforce a patent licensing agreement appeals to us from the grant of summary judgment to the defendants, Dolby for short. Scheiber, the plaintiff, a musician turned inventor who held U.S. and Canadian patents on the audio system known as "surround sound," sued Dolby in 1983 for infringement of his patents. The parties settled the suit by agreeing that Scheiber would license his patents to Dolby in exchange for royalties. The last U.S. patent covered by the agreement was scheduled to expire in May 1993, while the last Canadian patent was not scheduled to expire until September 1995.

During the settlement negotiations Dolby suggested to Scheiber that in exchange for a lower royalty rate the license agreement provide that royalties on all the patents would continue until the Canadian patent expired, including, therefore, patents that had already expired. That way Dolby could, it hoped, pass on the entire royalty expense to its sublicensees without their balking at the rate. Scheiber acceded to the suggestion and the agreement was drafted accordingly, but Dolby later refused to pay royalties on any patent after it expired, precipitating this suit. Federal jurisdiction over the suit is based on diversity of citizenship, because a suit to enforce a patent licensing agreement does not arise under federal patent law. E.g., Jim Arnold Corp. v. Hydrotech Systems, Inc., 109 F.3d 1567, 1575 (Fed. Cir. 1997). The presence of a federal defense (here, patent misuse) is irrelevant to jurisdiction. Christianson v. Colt Industries Operating Corp., 486 U.S. 800 (1988).

Dolby argues that the duty to pay royalties on any patent covered by the agreement expired by the terms of the agreement itself as soon as the patent expired, because the royalties were to be based on Dolby's sales of equipment within the scope of the patents and once a patent expires, Dolby argues, there is no equipment within its scope. The argument would make meaningless the provision that Dolby itself proposed for continuing the payment of royalties until the last patent expired. Anyway the reference to equipment within the scope of the patent was clearly meant to identify the equipment on which royalties would be based (Dolby makes equipment that does not utilize Scheiber's patents as well as equipment that does) rather than to limit the duration of the obligation to pay royalties.

Dolby's principal argument is that the Supreme Court held in a decision that has never been overruled that a patent owner may not enforce a contract for the payment of patent royalties beyond the expiration date of the patent. The decision was Brulotte v. Thys Co., 379 U.S. 29 (1964), dutifully followed by lower courts, including our own, in such cases as Meehan v. PPG Industries, Inc., 802 F.2d 881, 883 (7th Cir. 1986); Virginia Panel Corp. v. MAC Panel Co., 133 F.3d 860, 869 (Fed. Cir. 1997), and Boggild v. Kenner Products, 776 F.2d 1315, 1318-19 (6th Cir. 1985). Brulotte involved an agreement licensing patents that expired at different dates, just like this case; the two cases are indistinguishable. The decision has, it is true, been severely, and as it seems to us, with all due respect, justly, criticized, beginning with Justice Harlan's dissent, 379 U.S. at 34, and continuing with our opinion in USM Corp. v. SPS Technologies, Inc., 694 F.2d 505, 510-11 (7th Cir. 1982). The Supreme Court's majority opinion reasoned that by extracting a promise to continue paying royalties after expiration of the patent, the patentee extends the patent beyond the term fixed in the patent statute and therefore in violation of the law. That is not true. After the patent expires, anyone can make the patented process or product without being guilty of patent infringement. The patent can no longer be used to exclude anybody from such production. Expiration thus accomplishes what it is supposed to accomplish. For a licensee in accordance with a provision in the license agreement to go on paying royalties after the patent expires does not extend the duration of the patent either technically or practically, because, as this case demonstrates, if the licensee agrees to continue paying royalties after the patent expires the royalty rate will be lower. The duration of the patent fixes the limit of the patentee's power to extract royalties; it is a detail whether he extracts them at a higher rate over a shorter period of time or a lower rate over a longer period of time.

This insight is not original with us. "The Brulotte rule incorrectly assumes that a patent license has significance after the patent terminates. When the patent term ends, the exclusive right to make, use or sell the licensed invention also ends. Because the invention is available to the world, the license in fact ceases to have value. Presumably, licensees know this when they enter into a licensing agreement. If the licensing agreement calls for royalty payments beyond the patent term, the parties base those payments on the licensees' assessment of the value of the license during the patent period. These payments, therefore, do not represent an extension in time of the patent monopoly . . . . Courts do not remove the obligation of the consignee to pay because payment after receipt is an extension of market power--it is simply a division of the payment-for-delivery transaction. Royalties beyond the patent term are no different. If royalties are calculated on post-patent term sales, the calculation is simply a risk-shifting credit arrangement between patentee and licensee. The arrangement can be no more than that, because the patentee at that time has nothing else to sell." Harold See & Frank M. Caprio, "The Trouble with Brulotte: the Patent Royalty Term and Patent Monopoly Extension," 1990 Utah L. Rev. 813, 814, 851; to similar effect see Rochelle Cooper Dreyfuss, "Dethroning Lear: Licensee Estoppel and the Incentive to Innovate," 72 Va. L. Rev. 677, 709-12 (1986). "[T]he Supreme Court refused to see that typically such post-expiration royalties merely amortize the price of using patented technology." 10 Phillip E. Areeda et al., Antitrust Law §§ 1782c2-c3, pp. 505-11 (1996); cf. Jahn v., Inc., 284 F.3d 807, 811-12 (7th Cir. 2002).

These criticisms might be wide of the mark if Brulotte had been based on the interpretation of the patent clause of the Constitution, or of the patent statute or any other statute; but it seems rather to have been a free-floating product of a misplaced fear of monopoly ("a patentee's use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se. If that device were available to patentees, the free market visualized for the post-expiration period would be subject to monopoly influences that have no proper place there," 379 U.S. at 32-33) that was not even tied to one of the antitrust statutes. 10 Areeda et al., supra, at §§ 1782c2, 1782c3, pp. 505, 511. The doctrinal basis of the decision was the doctrine of patent misuse, of which more later.

A patent confers a monopoly, and the longer the term of the patent the greater the monopoly. The limitation of the term of a patent, besides being commanded by the Constitution, see U.S. Const. art. I, § 8, cl. 8; Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 146 (1989), and necessary to avoid impossible tracing problems (imagine if some caveman had gotten a perpetual patent on the wheel), serves to limit the monopoly power conferred on the patentee. But as we have pointed out, charging royalties beyond the term of the patent does not lengthen the patentee's monopoly; it merely alters the timing of royalty payments. This would be obvious if the license agreement between Scheiber and Dolby had become effective a month before the last patent expired. The parties could have agreed that Dolby would pay royalties for the next 100 years, but obviously the royalty rate would be minuscule because of the imminence of the patent's expiration.

However, we have no authority to overrule a Supreme Court decision no matter how dubious its reasoning strikes us, or even how out of touch with the Supreme Court's current thinking the decision seems. In Agostini v. Felton, 521 U.S. 203, 237 (1997), the Supreme Court "reaffirm[ed] that '[i]f a precedent of this Court has direct application in a case, yet appears to rest on reasons...

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