Sir Isaac Newton’s first law of motion holds that a body at rest will start moving only if a big enough outside force acts on it.

Newton’s law governs in the legal realm as well — except we lawyers call it stare decisis.

The doctrine last week doomed an effort to push the Supreme Court to abolish a rule that all the justices conceded their predecessors got wrong half a century ago. And the outcome disrespects royalty — patent royalties.

The error of Brulotte

The decision in Brulotte v. Thys Co., 379 U.S. 29 (1964), has for 51 years barred patent licensors from collecting royalties on uses that occur after the patents expire. The Court concluded, 8-1, that “[t]he 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 . . . the patent has entered the public domain.” Id. at 33. The Court deemed the practice “unlawful per se”. Id. at 32.

In Kimble v. Marvel Entertainment, LLC, No. 13-720 (U.S. June 22, 2015), the Court upheld Brulotte despite “a broad scholarly consensus” that Brulotte mistook the economic effects of post-term royalties. Rather than extending a patent’s lawful monopoly beyond the patent’s term, a license that calls for post-term royalties enhances competition by lowering the royalty rate for the licensee (making it better able to charge lower prices for its products) and by encouraging non-licensees to make competing products available to consumers (also at cheaper prices due to their freedom from royalty obligations). Id., slip op. at 12-13.

As the dissent pointed out:

The economics are simple: Extending a royalty term allows the parties to spread the licensing fees over a longer period of time, which naturally has the effect of reducing the fees during the patent term. See ante, at 5. Restricting royalty payments to the patent term, as Brulotte requires, compresses payment into a shorter period of higher fees. . . .

There are, however, good reasons why parties sometimes prefer post-expiration royalties over upfront fees, and why such arrangements have pro-competitive effects. Patent holders and licensees are often unsure whether a patented idea will yield significant economic value, and it often takes years to monetize an innovation. In those circumstances, deferred royalty agreements are economically efficient. They encourage innovators, like universities, hospitals, and other institutions, to invest in research that might not yield marketable products until decades down the line. See Brief for Memorial Sloan Kettering Cancer Center et al. as Amici Curiae 8–12. And they allow producers to hedge their bets and develop more products by spreading licensing fees over longer periods. See ibid.

Id., slip op. at 3-4 (Alito, J., dissenting).

Brulotte abides

The majority upheld Brulotte anyway. Justice Elena Kagan wrote that “[w]hat we decide, we can undecide” but that Congress’s failure to reject the Brulotte rule as a misreading of the Patent Act gave it the strength of a “superpowered form of stare decisis“. Id. at 10.

The three dissenters saw Brulotte as “a bald act of policymaking” instead of “simply a case of incorrect statutory interpretation.” Id. at 2 (Alito, J., dissenting).

Old licenses and new deals

What does Kimble do for cases involving patent licenses old and new?

It hurts the value of existing licenses to the extent they call for payment of royalties beyond the expiration of the patents they license. You still cannot collect royalties on post-expiration sales.

Kimble also restricts the sorts of licensing arrangements that you can make going forward — in settlement of a patent infringement case, for instance.

Justice Kagan offered four kinds of exceptions (which I set off in the quote below with numbers in bold brackets):

[P]arties can often find ways around Brulotte, enabling them to achieve those same ends. To start, [1] Brulotte allows a licensee to defer payments for pre-expiration use of a patent into the post-expiration period; all the decision bars are royalties for using an invention after it has moved into the public domain. See 379 U. S., at 31; Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U. S. 100, 136 (1969). A licensee could agree, for example, to pay the licensor a sum equal to 10% of sales during the 20-year patent term, but to amortize that amount over 40 years. That arrangement would at least bring down early outlays, even if it would not do everything the parties might want to allocate risk over a long timeframe. And parties have still more options when a licensing agreement covers either multiple patents or additional non-patent rights. Under Brulotte, [2] royalties may run until the latest-running patent covered in the parties’ agreement expires. See 379 U. S., at 30. Too, [3] post-expiration royalties are allowable so long as tied to a non-patent right—even when closely related to a patent. See, e.g., 3 Milgrim on Licensing §18.07, at 18–16 to 18–17. That means, for example, that a license involving both a patent and a trade secret can set a 5% royalty during the patent period (as compensation for the two combined) and a 4% royalty afterward (as payment for the trade secret alone). Finally and most broadly, [4] Brulotte poses no bar to business arrangements other than royalties—all kinds of joint ventures, for example—that enable parties to share the risks and rewards of commercializing an invention.

As the dissent notes, the four “ways around Brulotte” — deferring payments, linking royalties to longer-lasting patents, tying them to use of trade secrets, and entering into joint venture arrangements — “do not provide the same benefits as postexpiration royalty agreements”, which “would allow licensees to spread their costs, while also allowing patent holders to capitalize on slow developing inventions. ” Id. at 4 (Alito, J., dissenting).