Seventh Circuit Reluctantly Holds that Patent License Agreements Cannot Be Enforced After Expiration of the Patent
 
September 24, 2002
 
Jennifer A. Short- Northern Virginia

Citing its inability to overrule Supreme Court precedent, “no matter how dubious its reasoning strikes us, or even how out of touch with the Supreme Court’s current thinking the decision seems,” the Seventh Circuit held in Scheiber v. Dolby Laboratories, Inc., 293 F.3d 1014 (7th Cir. 2002), that a licensing agreement cannot be enforced after the patent that is the subject of the agreement has expired. 

The dispute in Scheiber centered upon a licensing agreement between the plaintiff patent owner, the inventor of “surround sound” technology, and his licensee, Dolby.  The licensing agreement was executed in 1983 to settle a patent infringement dispute between Scheiber and Dolby.  During negotiations, the parties explicitly recognized that the last U.S. patent in the agreement would expire in 1993, while a Canadian patent included in the agreement was not scheduled to expire until 1995.  Dolby suggested that, in exchange for a lower royalty rate, it would continue paying royalties until the last Canadian patent expired, even after the expiration of the U.S. patents.  Schieber accepted this suggestion and the licensing agreement was drafted accordingly.  After the last U.S. patent expired, however, Dolby refused to pay royalties. 

Schieber filed a lawsuit to enforce the original agreement.  Dolby argued that the licensing agreement was unenforceable as a matter of law according to Supreme Court’s ruling in Brulotte v. Thys Co., 379 U.S. 29 (1964).  In Brulotte, the Supreme Court held that a patent owner may not enforce a contract for the payment of patent royalties beyond the expiration date of the patent.  Based on this principle, Dolby moved for, and was granted, summary judgment by the trial court. 

On appeal, the Seventh Circuit panel indicated its strong preference for upholding the parties’ negotiated agreement, but could not distinguish the circumstances presented in Scheiber from the facts of Brulotte.  Judge Posner, writing for the court, criticized Brulotte’s reasoning that “by extracting a promise to continue paying royalties after the expiration of the patent, the patentee extends the patent beyond the term fixed in the patent statute and therefore in violation of the law.”  Instead, Posner explained, the royalties that a patent holder can extract are fixed by the statutory duration of the patent.  The patent holder can either charge those royalties “at a higher rate over a shorter period of time or a lower rate over a longer period of time.”  Parties who choose to negotiate a lower royalty rate over a longer period of time are not increasing the value of the patent, nor extending the validity of the patent – they are merely negotiating the economic details of their royalty payments.  In sum, “charging royalties beyond the term of the patent does not lengthen the patentee’s monopoly; it merely alters the timing of royalty payments.”

In Judge Posner’s opinion, the Brulotte holding that a royalty agreement that projects beyond the patent’s expiration date is unlawful per se was based upon “a misplaced fear of monopoly,” and is contrary to economic reality.  Nonetheless, the appellate court noted that it could not overrule or contradict the Supreme Court’s controlling authority in Brulotte.  Moreover, the court determined that Scheiber’s attempts to distinguish his case from Brulotte were unavailing.   The panel rejected Scheiber’s contention that a 1988 amendment to the patent statute superceded the holding in Brulotte, because the amendment, which limits the defense of patent misuse in certain cases, clearly applied only to infringement disputes, not to actions to enforce a licensing agreement.  The Court likewise was unpersuaded by Scheiber’s argument that Dolby’s “unclean hands” should prevent it from escaping its contractual obligations.  The Court pointed out that, where the contract sought to be enforced is illegal as a matter of law, the equitable doctrine of unclean hands could not be used to remedy the fatal flaw.  Although clearly dissatisfied with the result, the Seventh Circuit affirmed judgment in Dolby’s favor.

For more information, contact Jennifer Short, toll free at 888-688-8500, or via e-mail at jshort@hklaw.com.