Will the Supreme Court Remove <i>Brulotte</i>'s Shadow Over Patent Licensing?

In Brulotte, the Court reasoned that obtaining royalties for the use of patents post-expiration would expand the scope of the patentee's rights:

A patent empowers the owner to exact royalties as high as he can negotiate with the leverage of that monopoly. But to use that leverage to project those royalty payments beyond the life of the patent is analogous to an effort to enlarge the monopoly of the patent by tieing the sale or use of the patented article to the purchase or use of unpatented ones. The exaction of royalties for use of a machine after the patent has expired is an assertion of monopoly power in the post-expiration period when, as we have seen, the patent has entered the public domain. 379 U.S. at 33 (citations omitted)

The Court therefore held that “a patentee's use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se.” Id. at 32.

This reasoning has been the subject of significant criticism. Commentators have pointed out that “post-expiration royalties merely amortize the price of using patented technology” and “thus do not represent an extension in time of the patent monopoly.” See, Phillip E. Areeda, Einer Elhauge & Herbert Hovenkamp, “Antitrust Law: An Application of Antitrust Principles and Their Application '1782c,” at 492 (2004); Michael Koenig, “Patent Royalties Extending Beyond Expiration: An Illogical Ban from Brulotte to Scheiber,” 2003 Duke L. & Tech. Rev. 5 (2003); Harold See & Frank M. Caprio, “The Trouble with Brulotte: The Patent Royalty Term and Patent Monopoly Extension,” 1990 Utah L. Rev. 813, 814, 851 (1990). Economists have called Brulotte's rule “flawed” and shown that “allocative efficiency considerations should permit a licensor and licensee to agree to longer royalty terms.” See, Richard Gilbert & Carl Shapiro, “Antitrust Issues in the Licensing of Intellectual Property: The Nine No-No's Meet the Nineties,” 1997 Brookings Papers on Econ. Activity, Microeconomics 283, 322 (1997). Contrary to the premises of Brulotte, the U.S. antitrust enforcement agencies have noted that it is “possible that collecting royalties over a longer period of time than the patent grant will reduce the deadweight loss associated with a patent monopoly and allow the patent holder to recover the full value of the patent, thereby preserving innovation incentives.” U.S. Dep't of Justice & Federal Trade Comm'n, “Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition,” 122 (2007).

The courts too have criticized Brulotte. Dissenting from the opinion itself, Justice Harlan believed that the majority had failed to understand the “substantive economic effect” of the provisions. See, 379 U.S. at 37. The Seventh Circuit has questioned whether obtaining post-expiration royalties “really 'extends' the patent,” and noted that Brulotte has been “severely, and as it seems to us, with all due respect, justly, criticized.” USM Corp. v. SPS Techs., Inc., 694 F.2d 505, 510-11 (7th Cir. 1982); Scheiber v. Dolby Labs., Inc., 293 F.3d 1014, 1017 (7th Cir. 2002). The circuit court reasoned that “paying royalties after the patent expires does not extend the duration of the patent either technically or practically, because ' if the licensee agrees to continue paying royalties after the patent expires the royalty rate will be lower.” Id. Such licenses are therefore nothing more than “a risk-shifting credit arrangement between patentee and licensee.” Id. The Ninth Circuit similarly noted that “many courts and commentators have found” the reasoning of Brulotte “economically unconvincing,” but nevertheless conceded that “[n]o matter how unconvincing Brulotte 's foundation may be, ' we are bound to apply its holding if it applies to the case before us.” Zila, Inc. v. Tinnell, 502 F.3d 1014, 1020 (9th Cir. 2007).

Brulotte 's Broad Impact

Brulotte's effect would be limited if the holding were applied only to cases in which all of the licensed patents have expired. But Brulotte has been applied in other licensing contexts, which has lead to a differing, fact-dependent rules that complicate negotiations and create traps for the unwary.

Package Licenses

Package licenses are a prime example. Patents with varying expiration dates are commonly licensed in packages. The courts are split on whether a package license royalty that remains uniform throughout the term of the last issued patent runs afoul of Brulotte by effectively extending the monopoly of the patents that expire during the term. Some courts require a step-down in the license fee when patents in the package expire. Others require a step-down only if the uniform royalty rate was “coerced.”

Relying on Brulotte , the Sixth Circuit has held that a package license that “contains no diminution of license fee at the expiration of the most important patent and contains no termination clause at the will of the licensee” is unenforceable. See, Rocform Corp. v. Acitelli-Standard Concrete Wall, 367 F.2d 678, 681 (6th Cir. 1966). In other words, the court held that a package license that does not contain a step-down provision is per se misuse.

Other courts, however, have concluded that a step-down in royalties is required only if the package license is coerced. The Tenth Circuit, for instance, respectfully disagreed with the Sixth Circuit's conclusion, reasoning that “[f]reedom of choice is the controlling question.” Well Surveys, Inc. v. Perfo-Log, Inc., 396 F.2d 15, 18 (10th Cir. 1968). The court held that there is no misuse so long as a “licensee is given the choice to take a patent alone or in combination on reasonable terms”; thus, the “question is whether the licensee was forced to enter into a package agreement.” Id. (citing Hazeltine Research, Inc. v. Zenith Radio Corp., 388 F.2d 25 (7th Cir. 1967));'Id. at 17; see also,Sunrise Med. HHG, Inc. v. AirSep Corp., 95 F. Supp. 2d 348, 458 (W.D. Pa. 2000) ('the royalty rate need not diminish as patents included in a package license expire, as long as the licensee is not coerced'); A.C. Aukerman Co. v. R.L. Chaides Const. Co., 29 U.S.P.Q.2d (BNA) 1054, 1058 (N.D. Cal. 1993) ('Brulotte has been held inapplicable to package licensing agreements containing expired patents if the licensee was not coerced to enter the arrangement. Whether the agreement was the product of unfair patent leverage exerted by the patentee rather than mutual convenience of the parties is a question of fact.') (internal citations omitted); Cardinal of Adrian, Inc., v. Keystone Consol. Indus., Inc., 195 U.S.P.Q. (BNA) 26, 29 (E.D. Mich. 1977) ('in order to constitute a misuse, there must be an element of coercion, such as where there has been a request by a prospective licensee for a license under less than all of the patents and a refusal by the licensor to grant such a license').'

The Seventh Circuit has similarly held that “a package license agreement, voluntarily entered into, which requires the payment of royalties beyond the expiration of some, but not all, of the licensed patents is valid.” Beckman Instruments, Inc. v. Technical Dev. Corp., 433 F.2d 55, 61 (7th Cir. 1970).

Exactly what constitutes “coercion” sufficient to invoke Brulotte is a fact-intensive inquiry that has eluded any bright line rule. Courts have looked at a number of factors, such as “whether the provision was bargained for or imposed or whether the licensee made 'protestations' which were overridden.” Glen Mfg. Inc. v. Perfect Fit Indus., Inc., 420 F. 2d 319, 321 (2d Cir. 1970). As a general matter, where the licensor and the prospective licensee engage in extensive negotiations, where both sides ask for and receive modifications to the original proposal, courts have not found coercion.'See, e.g., Ohio-Sealy Mattress Mfg. Co. v. Sealy, Inc., 585 F.2d 821, 939 (7th Cir. 1978) (finding that Ohio-Sealy's claim of conditioning failed because extensive negotiations were had over agreement provisions and Ohio-Sealy was able to obtain revisions in the proposed trademark license agreement); Leesona Corp. v. Varta Batteries, Inc., 522 F. Supp. 1304, 1342 n.17 (S.D.N.Y. 1981) (no coercion found where the licensee admitted at deposition that there was no 'protracted negotiations' on the subject of the fixed royalty rate on a package of patents, and where the licensor never rejected a proposal by the licensee to assign fixed royalty rates to each of the patents in the package); Mobil Oil Corp. v. W.R. Grace & Co., 367 F. Supp. 207, 245-48, 257 (D. Conn. 1973) (finding no conditioning where both sides negotiated package license agreement terms for three years and where the licensee admitted that the licensor never refused to discuss granting a license to the particular patents the licensee needed to accomplish its business needs).'To show conditioning, a licensee must show that the licensor did not give it a choice to take a license to the desired patents alone or in combination with other patents on reasonable terms.'See, e.g., Cordance Corp. v. Amazon.com, Inc., 727 F. Supp. 2d 310, 336 (D. Del. 2010) (finding no evidence of leverage); Western Elec. Co. v. Stewart-Warner Corp., 631 F.2d 333, 339-39 (4th Cir. 1980) (citing Well Surveys, and finding no coercion where 'viable economic alternatives' were made available to the licensee by the licensor); Studiengesellschaft Kohle mbH v. Northern Petrochemical Co., 225 U.S.P.Q. (BNA) 194 (N.D. Ill. 1984) (finding no misuse where licensor offered to license the desired patent separately, instead of as part of a package, on the same terms as had been granted to a prior licensee), rev'd on other grounds, 784 F.2d 351 (Fed. Cir. 1986).'Courts are reluctant to find coercion even in situations where the patent holder is firm but proposes an alternative arrangement within the scope of its patent rights.'See, e.g., Engel Indus., Inc. v. Lockformer Co., 96 F.3d 1398, 1408 (Fed. Cir. 1996) (voluntariness of the licensee's agreement to the royalty provision is a key consideration in determining coercion, and finding no coercion where the licensor was doing nothing more than what the patent grant gave it the statutory right to do and the licensee voluntarily agreed to the royalties provision, at least initially); Applera Corp. v. MJ Research Inc., 349 F. Supp. 2d 321, 334 (D. Conn. 2004) ('the relevant question is not whether [the licensee] found [the licensor's] alternative royalty proposal suitable and accepted it, but whether [the licensee] was offered a genuine alternative within the scope of [the licensor's] patent rights').'Although unclear, a finding of coercion, and thus misuse, may also require a showing that the patent holder has market power in the market for the technology covered by its patent.'See,U.S. Philips Corp. v. ITC, 424 F.3d 1179, 1186 (Fed. Cir. 2005) ('[t]o establish the defense of patent misuse, the accused infringer must show that the patentee has power in the market for the tying product'); Semiconductor Energy Lab. Co. v. Chi Mei Optoelectronics Corp., 531 F. Supp. 2d 1084, 1100-01 (N.D. Cal. 2007) (citing U.S. Philips and quoting 35 U.S.C. ' 271(d): 'No patent owner ' shall ' deemed guilty of misuse ' by reason of his having ' conditioned the license of any rights to the patent ' on the acquisition of a license to rights in another patent ', unless, in view of the circumstances, the patent owner has market power in the relevant market for the patent or patented product on which the license or sale is conditioned').'The question of whether a license is coerced thus creates uncertainty regarding the application of Brulotte.

Moreover, when a licensor packages both U.S. and foreign patents in a license, the impact of Brulotte may be different. The Ninth Circuit, for instance, has held that Brulotte does not “extend its royalty-cancelling powers to contracts for foreign patents.” Zila, at 1023. In a case involving a package of expired U.S. patents and an unexpired foreign patent, the Ninth Circuit reasoned that ” Brulotte has no self-executing international effect,” and “[e]ven if the principle announced in Brulotte were to obviate [the licensee's] obligation to pay royalties on the [U.S.] patent once it expired ' it neither renders the entire [license agreement] unenforceable nor displaces [the] obligation to pay royalties on that valid [foreign] patent.” Id. at 1024; see also, Alvarado Orthopedic Research, L.P. v. Linvatec Corp., No. 11-CV-246-IEG RBB (S.D. Cal. May 24, 2013). Thus, package licenses need not have a step-down provision if the last expiring issued patent is foreign. It is not clear, however, whether a step-down provision is required if the last expiring issued patent is domestic. But see, MedImmune, LLC v. PDL BioPharma, Inc., No. C 08-5590 JF HRL, 2011 WL 61191, at 24 (N.D. Cal. Jan. 7, 2011) (reading the reasoning of Zila to apply to question of whether state law was preempted regardless of whether last expiring patent is foreign or domestic).

In Part Two, next month, the authors examine how Brulotte impacts hybrid licenses and patent applications, and the arguments made to the U.S. Supreme Court for and against overruling the case.

Sean Gates is a Partner in the Los Angeles office of Morrison & Foerster LLP focusing on antitrust, unfair competition, patent and trade secret matters. He can be reached at [email protected]. Jeny Maieris a senior associate in Morrison & Foerster's Antitrust Practice Group in Washington, DC. She can be reached at'[email protected].

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Fifty years ago, in Brulotte v. Thys Co., 379 U.S. 29 (1964), the U.S. Supreme Court held that the collection of royalties after a patent's expiration constitutes per se patent misuse. Although criticized by scholars, antitrust agencies and the lower courts, Brulotte has not only endured, it has impacted licensing practices in a number of contexts. See, Sean Gates & Jeny Maier, “Brulotte 's Continuing Shadow Over Patent Licensing'” 4 J. Intell. Prop. L. & Prac. 181 (2009). Brulottelooms large over the licensing of a single patent, packages of patents, patents combined with trade secrets, and patent applications.'See, e.g., Outman v. Western Contracting Corp., 204 U.S.P.Q. (BNA) 289 (N.D. Iowa 1979); Phillips Screw Co. v. Amtel, Inc. , 465 F. Supp. 3, 5, 7 (D. Mass. 1978); Veltman v. Nortel Simon, Inc. , 425 F. Supp. 774, 775 (S.D.N.Y. 1977); Beckman Instruments, Inc. v. Technical Dev. Corp. , 433 F.2d 55, 61 (7th Cir. 1970); Well Surveys, Inc. v. Perfo-Log, Inc. , 396 F.2d 15 (10th Cir. 1968); Rocform Corp. v. Acitelli-Standard Concrete Wall , 367 F.2d 678 (6th Cir. 1966); Pitney Bowes, Inc. v. Mestre , 701 F.2d 1365 (11th Cir. 1983); Baladevon, Inc. v. Abbott Labs., Inc. , 871 F. Supp. 89 (D. Mass. 1994); Sanford Redmond, Inc. v. Mid-America Dairymen, Inc., 29 U.S.P.Q.2d (BNA) 1222 (S.D.N.Y. 1992); Veltman , 425 F. Supp. 774; Meehan v. PPG Indus., Inc ., 802 F.2d 881 (7th Cir. 1986).' It has bedeviled licensing negotiations, voided freely negotiated contracts, and been used to reopen what were considered long-settled agreements. All that may change, however, because the Court ' contrary to the suggestion of the Solicitor General ' granted certiorari in Kimble v. Marvel Enterprises, Inc., No. 13-720 (cert. granted Dec. 12, 2014), to decide whether to overrule Brulotte.

Unless the Court leaves Brulotte undisturbed, the decision will certainly affect the licensing practices not only for agreements involving a single patent, but also for agreements involving patent applications, packages of patents, and packages of patents and other intellectual property rights. The outcome could allow for more flexible licensing structures, potentially ushering in an era of innovative licensing. Such a change may, however, come with more uncertainty about what practices constitute misuse. Kimble may therefore be a harbinger of significant change in the world of patent licensing.

The Long Line of Brulotte 's Critics

In Brulotte, the Court reasoned that obtaining royalties for the use of patents post-expiration would expand the scope of the patentee's rights:

A patent empowers the owner to exact royalties as high as he can negotiate with the leverage of that monopoly. But to use that leverage to project those royalty payments beyond the life of the patent is analogous to an effort to enlarge the monopoly of the patent by tieing the sale or use of the patented article to the purchase or use of unpatented ones. The exaction of royalties for use of a machine after the patent has expired is an assertion of monopoly power in the post-expiration period when, as we have seen, the patent has entered the public domain. 379 U.S. at 33 (citations omitted)

The Court therefore held that “a patentee's use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se.” Id. at 32.

This reasoning has been the subject of significant criticism. Commentators have pointed out that “post-expiration royalties merely amortize the price of using patented technology” and “thus do not represent an extension in time of the patent monopoly.” See, Phillip E. Areeda, Einer Elhauge & Herbert Hovenkamp, “Antitrust Law: An Application of Antitrust Principles and Their Application '1782c,” at 492 (2004); Michael Koenig, “Patent Royalties Extending Beyond Expiration: An Illogical Ban from Brulotte to Scheiber,” 2003 Duke L. & Tech. Rev. 5 (2003); Harold See & Frank M. Caprio, “The Trouble with Brulotte: The Patent Royalty Term and Patent Monopoly Extension,” 1990 Utah L. Rev. 813, 814, 851 (1990). Economists have called Brulotte's rule “flawed” and shown that “allocative efficiency considerations should permit a licensor and licensee to agree to longer royalty terms.” See, Richard Gilbert & Carl Shapiro, “Antitrust Issues in the Licensing of Intellectual Property: The Nine No-No's Meet the Nineties,” 1997 Brookings Papers on Econ. Activity, Microeconomics 283, 322 (1997). Contrary to the premises of Brulotte, the U.S. antitrust enforcement agencies have noted that it is “possible that collecting royalties over a longer period of time than the patent grant will reduce the deadweight loss associated with a patent monopoly and allow the patent holder to recover the full value of the patent, thereby preserving innovation incentives.” U.S. Dep't of Justice & Federal Trade Comm'n, “Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition,” 122 (2007).

The courts too have criticized Brulotte. Dissenting from the opinion itself, Justice Harlan believed that the majority had failed to understand the “substantive economic effect” of the provisions. See, 379 U.S. at 37. The Seventh Circuit has questioned whether obtaining post-expiration royalties “really 'extends' the patent,” and noted that Brulotte has been “severely, and as it seems to us, with all due respect, justly, criticized.” USM Corp. v. SPS Techs., Inc., 694 F.2d 505, 510-11 (7th Cir. 1982); Scheiber v. Dolby Labs., Inc., 293 F.3d 1014, 1017 (7th Cir. 2002). The circuit court reasoned that “paying royalties after the patent expires does not extend the duration of the patent either technically or practically, because ' if the licensee agrees to continue paying royalties after the patent expires the royalty rate will be lower.” Id. Such licenses are therefore nothing more than “a risk-shifting credit arrangement between patentee and licensee.” Id. The Ninth Circuit similarly noted that “many courts and commentators have found” the reasoning of Brulotte “economically unconvincing,” but nevertheless conceded that “[n]o matter how unconvincing Brulotte 's foundation may be, ' we are bound to apply its holding if it applies to the case before us.” Zila, Inc. v. Tinnell, 502 F.3d 1014, 1020 (9th Cir. 2007).

Brulotte 's Broad Impact

Brulotte's effect would be limited if the holding were applied only to cases in which all of the licensed patents have expired. But Brulotte has been applied in other licensing contexts, which has lead to a differing, fact-dependent rules that complicate negotiations and create traps for the unwary.

Package Licenses

Package licenses are a prime example. Patents with varying expiration dates are commonly licensed in packages. The courts are split on whether a package license royalty that remains uniform throughout the term of the last issued patent runs afoul of Brulotte by effectively extending the monopoly of the patents that expire during the term. Some courts require a step-down in the license fee when patents in the package expire. Others require a step-down only if the uniform royalty rate was “coerced.”

Relying on Brulotte , the Sixth Circuit has held that a package license that “contains no diminution of license fee at the expiration of the most important patent and contains no termination clause at the will of the licensee” is unenforceable. See, Rocform Corp. v. Acitelli-Standard Concrete Wall, 367 F.2d 678, 681 (6th Cir. 1966). In other words, the court held that a package license that does not contain a step-down provision is per se misuse.

Other courts, however, have concluded that a step-down in royalties is required only if the package license is coerced. The Tenth Circuit, for instance, respectfully disagreed with the Sixth Circuit's conclusion, reasoning that “[f]reedom of choice is the controlling question.” Well Surveys, Inc. v. Perfo-Log, Inc. , 396 F.2d 15, 18 (10th Cir. 1968). The court held that there is no misuse so long as a “licensee is given the choice to take a patent alone or in combination on reasonable terms”; thus, the “question is whether the licensee was forced to enter into a package agreement.” Id. (citing Hazeltine Research, Inc. v. Zenith Radio Corp., 388 F.2d 25 (7th Cir. 1967));' Id. at 17; see also, Sunrise Med. HHG, Inc. v. AirSep Corp. , 95 F. Supp. 2d 348, 458 (W.D. Pa. 2000) ('the royalty rate need not diminish as patents included in a package license expire, as long as the licensee is not coerced'); A.C. Aukerman Co. v. R.L. Chaides Const. Co., 29 U.S.P.Q.2d (BNA) 1054, 1058 (N.D. Cal. 1993) ('Brulotte has been held inapplicable to package licensing agreements containing expired patents if the licensee was not coerced to enter the arrangement. Whether the agreement was the product of unfair patent leverage exerted by the patentee rather than mutual convenience of the parties is a question of fact.') (internal citations omitted); Cardinal of Adrian, Inc., v. Keystone Consol. Indus., Inc., 195 U.S.P.Q. (BNA) 26, 29 (E.D. Mich. 1977) ('in order to constitute a misuse, there must be an element of coercion, such as where there has been a request by a prospective licensee for a license under less than all of the patents and a refusal by the licensor to grant such a license').'

The Seventh Circuit has similarly held that “a package license agreement, voluntarily entered into, which requires the payment of royalties beyond the expiration of some, but not all, of the licensed patents is valid.” Beckman Instruments, Inc. v. Technical Dev. Corp., 433 F.2d 55, 61 (7th Cir. 1970).

Exactly what constitutes “coercion” sufficient to invoke Brulotte is a fact-intensive inquiry that has eluded any bright line rule. Courts have looked at a number of factors, such as “whether the provision was bargained for or imposed or whether the licensee made 'protestations' which were overridden.” Glen Mfg. Inc. v. Perfect Fit Indus., Inc., 420 F. 2d 319, 321 (2d Cir. 1970). As a general matter, where the licensor and the prospective licensee engage in extensive negotiations, where both sides ask for and receive modifications to the original proposal, courts have not found coercion.' See, e.g. , Ohio-Sealy Mattress Mfg. Co. v. Sealy, Inc. , 585 F.2d 821, 939 (7th Cir. 1978) (finding that Ohio-Sealy's claim of conditioning failed because extensive negotiations were had over agreement provisions and Ohio-Sealy was able to obtain revisions in the proposed trademark license agreement); Leesona Corp. v. Varta Batteries, Inc. , 522 F. Supp. 1304, 1342 n.17 (S.D.N.Y. 1981) (no coercion found where the licensee admitted at deposition that there was no 'protracted negotiations' on the subject of the fixed royalty rate on a package of patents, and where the licensor never rejected a proposal by the licensee to assign fixed royalty rates to each of the patents in the package); Mobil Oil Corp. v. W.R. Grace & Co. , 367 F. Supp. 207, 245-48, 257 (D. Conn. 1973) (finding no conditioning where both sides negotiated package license agreement terms for three years and where the licensee admitted that the licensor never refused to discuss granting a license to the particular patents the licensee needed to accomplish its business needs).' To show conditioning, a licensee must show that the licensor did not give it a choice to take a license to the desired patents alone or in combination with other patents on reasonable terms.' See, e.g. , Cordance Corp. v. Amazon.com, Inc. , 727 F. Supp. 2d 310, 336 (D. Del. 2010) (finding no evidence of leverage); Western Elec. Co. v. Stewart-Warner Corp. , 631 F.2d 333, 339-39 (4th Cir. 1980) (citing Well Surveys , and finding no coercion where 'viable economic alternatives' were made available to the licensee by the licensor); Studiengesellschaft Kohle mbH v. Northern Petrochemical Co., 225 U.S.P.Q. (BNA) 194 (N.D. Ill. 1984) (finding no misuse where licensor offered to license the desired patent separately, instead of as part of a package, on the same terms as had been granted to a prior licensee), rev'd on other grounds , 784 F.2d 351 (Fed. Cir. 1986).' Courts are reluctant to find coercion even in situations where the patent holder is firm but proposes an alternative arrangement within the scope of its patent rights.' See, e.g. , Engel Indus., Inc. v. Lockformer Co. , 96 F.3d 1398, 1408 (Fed. Cir. 1996) (voluntariness of the licensee's agreement to the royalty provision is a key consideration in determining coercion, and finding no coercion where the licensor was doing nothing more than what the patent grant gave it the statutory right to do and the licensee voluntarily agreed to the royalties provision, at least initially); Applera Corp. v. MJ Research Inc. , 349 F. Supp. 2d 321, 334 (D. Conn. 2004) ('the relevant question is not whether [the licensee] found [the licensor's] alternative royalty proposal suitable and accepted it, but whether [the licensee] was offered a genuine alternative within the scope of [the licensor's] patent rights').' Although unclear, a finding of coercion, and thus misuse, may also require a showing that the patent holder has market power in the market for the technology covered by its patent.' See, U.S. Philips Corp. v. ITC , 424 F.3d 1179, 1186 (Fed. Cir. 2005) ('[t]o establish the defense of patent misuse, the accused infringer must show that the patentee has power in the market for the tying product'); Semiconductor Energy Lab. Co. v. Chi Mei Optoelectronics Corp. , 531 F. Supp. 2d 1084, 1100-01 (N.D. Cal. 2007) (citing U.S. Philips and quoting 35 U.S.C. ' 271(d): 'No patent owner ' shall ' deemed guilty of misuse ' by reason of his having ' conditioned the license of any rights to the patent ' on the acquisition of a license to rights in another patent ', unless, in view of the circumstances, the patent owner has market power in the relevant market for the patent or patented product on which the license or sale is conditioned').'The question of whether a license is coerced thus creates uncertainty regarding the application of Brulotte.

Moreover, when a licensor packages both U.S. and foreign patents in a license, the impact of Brulotte may be different. The Ninth Circuit, for instance, has held that Brulotte does not “extend its royalty-cancelling powers to contracts for foreign patents.” Zila, at 1023. In a case involving a package of expired U.S. patents and an unexpired foreign patent, the Ninth Circuit reasoned that ” Brulotte has no self-executing international effect,” and “[e]ven if the principle announced in Brulotte were to obviate [the licensee's] obligation to pay royalties on the [U.S.] patent once it expired ' it neither renders the entire [license agreement] unenforceable nor displaces [the] obligation to pay royalties on that valid [foreign] patent.” Id. at 1024; see also, Alvarado Orthopedic Research, L.P. v. Linvatec Corp., No. 11-CV-246-IEG RBB (S.D. Cal. May 24, 2013). Thus, package licenses need not have a step-down provision if the last expiring issued patent is foreign. It is not clear, however, whether a step-down provision is required if the last expiring issued patent is domestic. But see, MedImmune, LLC v. PDL BioPharma, Inc., No. C 08-5590 JF HRL, 2011 WL 61191, at 24 (N.D. Cal. Jan. 7, 2011) (reading the reasoning of Zila to apply to question of whether state law was preempted regardless of whether last expiring patent is foreign or domestic).

In Part Two, next month, the authors examine how Brulotte impacts hybrid licenses and patent applications, and the arguments made to the U.S. Supreme Court for and against overruling the case.

Sean Gates is a Partner in the Los Angeles office of Morrison & Foerster LLP focusing on antitrust, unfair competition, patent and trade secret matters. He can be reached at [email protected]. Jeny Maieris a senior associate in Morrison & Foerster's Antitrust Practice Group in Washington, DC. She can be reached at'[email protected].

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