Court Opinion

ID: 2995696
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:21:48.304785+00
Date Added: 2024-06-11T15:02:32.792824
License: Public Domain

In the
 United States Court of Appeals
                  For the Seventh Circuit
                           ____________

No. 01-2466
PETER SCHEIBER,
                                                  Plaintiff-Appellant,
                                  v.

DOLBY LABORATORIES, INC., and DOLBY LABORATORIES
 LICENSING CORP.,
                                   Defendants-Appellees.
                    ____________
             Appeal from the United States District Court
      for the Southern District of Indiana, Indianapolis Division.
           No. 95 C 1531—John P. Godich, Magistrate Judge.
                           ____________
      ARGUED DECEMBER 3, 2001—DECIDED JUNE 17, 2002
                           ____________

  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
2                                                  No. 01-2466

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 agree-
ment 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 roy-
alties 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 pat-
No. 01-2466                                                   3

ent 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 infringe-
ment. 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
4                                                 No. 01-2466

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, li-
censees know this when they enter into a licensing agree-
ment. 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 rep-
resent 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 dif-
ferent. 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 mere-
ly amortize the price of using patented technology.” 10 Phil-
lip E. Areeda et al., Antitrust Law §§ 1782c2-c3, pp. 505-11
(1996); cf. Jahn v. 1-800-FLOWERS.com, 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 stat-
ute; but it seems rather to have been a free-floating prod-
uct 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-expira-
No. 01-2466                                                   5

tion 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 Constitu-
tion, see U.S. Const. art. I, § 8, cl. 8; Bonito Boats, Inc. v.
Thunder Craft Boats, Inc., 489 U.S. 141, 146 (1989), and nec-
essary 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 royal-
ties 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 rejected in some other
line of decisions, the Court of Appeals should follow the
case which directly controls, leaving to this Court the pre-
rogative of overruling its own decisions,’ ” quoting Rodri-
guez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477,
6                                                   No. 01-2466

484 (1989); see also State Oil Co. v. Khan, 522 U.S. 3, 20 (1997);
Sasnett v. Litscher, 197 F.3d 290, 292 (7th Cir. 1999); National
Foreign Trade Council v. Natsios, 181 F.3d 38, 58 (1st Cir.
1999), aff’d under the name Crosby v. National Foreign Trade
Council, 530 U.S. 363 (2000) (“scholarly debate about the
continuing viability of a Supreme Court opinion does not,
of course, excuse the lower federal courts from applying
that opinion”). In Khan, the lower court (namely us),
pointing out that the Supreme Court decision that we
refused to declare defunct was clearly out of touch with the
Court’s current antitrust thinking, invited the Court to
reverse, see Khan v. State Oil Co., 93 F.3d 1358, 1363 (7th Cir.
1996), vacated and remanded 522 U.S. 3 (1997), and it did,
but pointedly noted that we had been right to leave the
execution and interment of the Court’s discredited prece-
dent to the Court. Id. at 20.
  In Aronson v. Quick Point Pencil Co., 440 U.S. 257 (1979), a
case decided some years after Brulotte, the Supreme Court
upheld a superficially similar arrangement: a patent appli-
cant granted a license for the invention it hoped to patent to
a firm that agreed, if a patent were not granted, to pay the
inventor-applicant royalties for as long as the firm sold
products embodying the invention. The Court was careful
to distinguish Brulotte, and not a single Justice suggested
that any cloud had been cast over the earlier decision. Since
no patent was granted, the doctrine of patent misuse could
not be brought into play, and there was no other federal
ground for invalidating the license. The Court emphasized
that Brulotte had been based on the “leverage” that the
patent had granted the patentee to extract royalties beyond
the date of expiration, 440 U.S. at 265, and that leverage was
of course missing in Aronson.
  If Aronson and Brulotte were inconsistent with each other
and the Court had not reaffirmed Brulotte in Aronson, then
we would have to follow Aronson, the later opinion, since to
No. 01-2466                                                  7

follow Brulotte in those circumstances would be to over-
rule Aronson. But the reaffirmation of Brulotte in Aronson
tells us that the Court did not deem the cases inconsistent,
and so, whether we agree or not, we have no warrant for
declaring Brulotte overruled.
   Scheiber argues further, however, that Brulotte has been
superseded by a 1988 amendment to the patent statute
which provides, so far as bears on this case, that “no patent
owner otherwise entitled to relief for infringement . . . shall
be . . . deemed guilty of misuse or illegal extension of the
patent right by reason of his having . . . conditioned the
license of any rights to the patent or the sale of the patented
product on the acquisition of a license to rights in another
patent or purchase of a separate product” unless the patent-
ee has market power in the market for the conditioning
product (which is not argued here). 35 U.S.C. § 271(d)(5).
The statute is doubly inapplicable to this case. It merely
limits defenses to infringement suits, and Scheiber isn’t
suing for infringement; he’s suing to enforce a license agree-
ment. He can’t sue for infringement; his patents have
expired. Scheiber argues that since the agreement was in
settlement of his infringement suit, the only effect of
limiting the statute to such suits would be to dissuade
patentees from settling them. Not so. Had Scheiber pressed
his 1983 infringement suit against Dolby to judgment, he
would not have obtained royalties beyond the expiration
date of his patents, because Dolby had not as yet agreed to
pay any royalties; there was no license agreement before the
case was settled. The significance of the statute is that if
some subsequent infringer should point to the license
agreement with Dolby as a misuse of Scheiber’s patent by
reason of the tying together of different patents, Scheiber
could plead the statute as a bar to the infringer’s defense
of patent misuse.
8                                                  No. 01-2466

   In any event the new statutory defense is explicitly limited
to tying, Lasercomb America, Inc. v. Reynolds, 911 F.2d 970, 976
and n. 15 (4th Cir. 1990); In re Recombinant DNA Technology
Patent & Contract Litigation, 850 F. Supp. 769, 775-77 (S.D.
Ind. 1994), normally of a nonpatented product to a patented
product, as in a number of famous patent misuse cases, such
as Henry v. A.B. Dick Co., 224 U.S. 1 (1912), and antitrust
tying cases, such as International Business Machines Corp. v.
United States, 298 U.S. 131 (1936); Morton Salt Co. v. G.S.
Suppiger Co., 314 U.S. 488 (1942), and International Salt Co. v.
United States, 332 U.S. 392 (1947). The 1988 amendment
limited the tying doctrine, in cases in which the tying
product is a patent, to situations in which the patentee
has real market power, not merely the technical monopoly
(right to exclude) that every patent confers. Virginia Panel
Corp. v. MAC Panel Co., supra, 133 F.3d at 869. There are
multiple products here, and they are tied together in the
sense of having been licensed as a package. The more exact
term is bundling, because a single price is charged for the
tied goods, rather than separate prices as in the canonical
tying cases. United States v. Microsoft Corp., 253 F.3d 34, 87,
96 (D.C. Cir. 2001) (en banc) (per curiam); Multistate Legal
Studies, Inc. v. Harcourt Brace Jovanovich Legal & Professional
Publications, Inc., 63 F.3d 1540, 1548 (10th Cir. 1995). We may
assume that the statute encompasses bundling. We can’t
find a case on the point, but certainly the statutory language
encompasses it and the objections to tying and bundling,
such as they are, are the same. (The naive objection is that
they extend monopoly; the sophisticated objection is that
they facilitate price discrimination.) But it is not the bun-
dling of the U.S. and Canadian patents on which Dolby
pitches its refusal to pay royalties; it is the duration of the
royalty obligation. The objection would be the same if there
were a single patent and the agreement required the licensee
to continue paying royalties after the patent expired.
No. 01-2466                                                    9

  Brulotte called extending the royalty obligation beyond the
term of the patent analogous to tying, 379 U.S. at 33, because
the traditional objection to tying as we noted is that by
telling the buyer that he can’t buy the tying product unless
he agrees to buy a separate product from the seller as well,
the seller is trying to “lever” or “extend” his monopoly to
the market for that separate product: only extending it in
product space rather than in time. Yet if the seller tries to
charge a monopoly price for that separate product, the
buyer will not be willing to pay as much for the tying
product as he would if the separate product, which he has
to buy also, were priced at a lower rate. Acquiring monop-
oly power in the tied-product market comes at the expense
of losing it in the tying-product market. Advo, Inc. v. Phil-
adelphia Newspapers, Inc., 51 F.3d 1191, 1202-03 (3d Cir. 1995);
Hirsh v. Martindale-Hubbell, Inc., 674 F.2d 1343, 1349 n. 19
(9th Cir. 1982). Thus, as these cases and a tidal wave of legal
and economic scholarship point out, the idea that you can
use tying to lever your way to a second (or, in the post-
expiration patent royalty setting, a longer and therefore
greater) monopoly is economic nonsense, imputing system-
atic irrationality to businessmen. Congress seems to have
recognized this in the 1988 amendment. But even if the
amendment should therefore be interpreted to reject the
rationale of the tying cases, and even though the rationale of
Brulotte is materially identical to that of the discredited tying
cases—the Court even invoked “leverage” (as it emphasized
later in Aronson), saying that to “use that leverage [the
power conferred by the monopoly] to project those royalty
payments beyond the life of the patent is analogous to an
effort to enlarge the monopoly of the patent,” 379 U.S. at
33—and not a whit stronger (probably even weaker, since
there is only one product), it would not follow that the
statute had changed the rule of that case. Congress isn’t
constrained, as courts like to think they are, to rule logically.
10                                                No. 01-2466

Most statutes are the product of compromise, and compro-
mises need not cut at the logical joints of a controversy.
There just is no evidence that Congress in the 1988 amend-
ment wanted to go or did go beyond tying. Had it wanted
to, it would have chosen different words. We are not
literalists, but there must be some semantic handle on which
to hang a proposed statutory interpretation, and there is
none here, though we have found a district court case that
did hold that the 1988 amendment had overruled Brulotte:
Sunrise Medical HHG, Inc. v. AirSep Corp., 95 F. Supp. 2d 348,
457-59 (W.D. Pa. 2000).
  Scheiber has another ground for disregarding Brulotte that
deserves consideration (again a ground supported by a lone
district court decision, A.C. Aukerman Co. v. R.L. Chaides
Construction Co., No. CIV. 88-20704 SW, 1993 WL 379548, at
*6 (N.D. Cal. Sept. 13, 1993), but one that misreads Brulotte
as having been held in Well Surveys, Inc. v. Perfo-Log, Inc.,
396 F.2d 15, 17 (10th Cir. 1968), to be inapplicable to pack-
age-licensing agreements that contain expired patents unless
the licensees were coerced into making the agreements). The
ground is that Dolby comes into court with “unclean hands”
that should not be allowed to touch and stain the Supreme
Court’s decision. Scheiber points out that it was Dolby that
asked him to stretch out the royalties until the last patent
expired and that now seeks to get out of the obligation it not
only accepted but volunteered to shoulder.
  The doctrine of “unclean hands”—colorfully named, equi-
table in origin, and reflecting, in its name at least,
the moralistic background of equity in the decrees of the
clerics who filled the office of lord chancellor of England
during the middle ages, Shondel v. McDermott, 775 F.2d
859, 867 (7th Cir. 1985); 1 Dan B. Dobbs, Law of Remedies
§ 2.4(2), pp. 92-93 (2d ed. 1993)—nowadays just means that
equitable relief will be refused if it would give the plaintiff
No. 01-2466                                                  11

a wrongful gain. See, e.g., Packers Trading Co. v. CFTC, 972
F.2d 144, 148-49 (7th Cir. 1992); United States v. Bob Stofer
Oldsmobile-Cadillac, Inc., 853 F.2d 1392, 1398-99 (7th Cir.
1988); Adler v. Federal Republic of Nigeria, 219 F.3d 869, 871,
876-77 (9th Cir. 2000). “Today, ‘unclean hands’ really just
means that in equity as in law the plaintiff’s fault, like the
defendant’s, is relevant to the question of what if any rem-
edy the plaintiff is entitled to. An obviously sensible ap-
plication of this principle is to withhold an equitable rem-
edy that would encourage or reward (and thereby encour-
age) illegal activity . . . . In what may have been the earliest
application of the principle of unclean hands, a highway-
man was refused an accounting against his partner in crime
(and later hanged, to boot, along with the partner).” Shondel
v. McDermott, supra, 775 F.2d at 868 (citations omitted). That
is an apt description of the relief (in effect a partial rescis-
sion of the license agreement, and so equitable in character)
sought by Dolby. But unfortunately for Scheiber it is an
apt description of almost any case in which a party to a
contract seeks relief on the basis that the contract is illegal.
Dolby is in effect a private attorney general, charged by
Brulotte with preventing Scheiber from seeking to “extend”
his patent and being rewarded for this service to the law by
getting out of a freely negotiated royalty obligation.
   The obvious problem is that Dolby is not seeking equita-
ble relief; it just doesn’t want to pay what it owes Scheiber
under their licensing agreement on the ground that the
agreement, or at least so much of it as creates the duty to
pay that Dolby is flouting, is unlawful and therefore
unenforceable. That is how the Court put it in Brulotte v.
Thys Co., supra, 379 U.S. at 33-34. The effect is the same as
rescission but that is true in any case where the payee in a
contract is allowed to refuse payment because the contract
is unenforceable. Scheiber is the plaintiff, seeking damages,
and Dolby is pleading the defense of illegality to contract
12                                                  No. 01-2466

enforcement. See, e.g., Kaiser Steel Corp. v. Mullins, 455
U.S. 72, 77-83 (1982); Northern Indiana Public Service Co. v.
Carbon County Coal Co., 799 F.2d 265, 272 (7th Cir. 1986).
In contrast, the remedy sought in the highwayman’s case, an
accounting, is an equitable remedy. But as if this weren’t
complicated enough, patent misuse—the doctrine applied
in Brulotte and invoked here by Dolby—is an equitable
defense, and unclean hands can be asserted in opposition to
an equitable defense as well as being assertible as a defense
to a claim for equitable relief. Alcatel USA, Inc. v. DGI
Technologies, Inc., 166 F.3d 772, 794 and n. 92 (5th Cir. 1999);
Conan Properties, Inc. v. Conans Pizza, Inc., 752 F.2d 145,
150 (5th Cir. 1985). The “theory” that makes this possible is
that before the joinder of law and equity, an equitable de-
fense to a legal claim had to be asserted in a separate pro-
ceeding in equity, in which the plaintiff in the law case
would be the defendant and so could plead the defense of
unclean hands against the law defendant-equity plaintiff.
United Cities Gas Co. v. Brock Exploration Co., 995 F. Supp.
1284, 1296 n. 11 (D. Kan. 1998).
  We needn’t get deeper into this thicket of archaic distinc-
tions, since it is apparent that to apply the doctrine of un-
clean hands in a case such as the present one would fatally
undermine the policy of refusing enforcement to contracts
for the payment of patent royalties after expiration of
the patent. It would be (given the antimonopoly basis of
Brulotte) inconsistent with the Supreme Court’s rejection of
the defense of in pari delicto (“equally at fault”) in antitrust
cases, Perma Life Mufflers, Inc. v. International Parts Corp., 392
U.S. 134, 137-39 (1968), since the effect of that rejection
is to give a party to a contract that violates the antitrust
laws a defense to a suit to enforce the contract even if he
entered into the contract with full knowledge. We even said
in General Leaseways, Inc. v. National Truck Leasing Ass’n, 744
F.2d 588, 597 (7th Cir. 1984), in words that might have been
No. 01-2466                                                   13

uttered with the present case in mind, that “ever since the
Supreme Court, in Perma Life, rejected the defense of in pari
delicto in antitrust cases, it has been clear that whenever
some maxim of equity (such as that to get equitable relief
you must have ‘clean hands’) collides with the objectives of
the antitrust laws, the equity maxim must give way.” Later
the Supreme Court equated “unclean hands” to in pari
delicto. McKennon v. Nashville Banner Publishing Co., 513 U.S.
352, 360 (1995); see also Hartman Bros. Heating & Air Condi-
tioning, Inc. v. NLRB, 280 F.3d 1110, 1116 (7th Cir. 2002).
  What is true is that a contract that is voided on grounds
of illegality—Dolby’s defense to Scheiber’s suit for the
agreed-upon royalties—is ordinarily treated as rescinded,
meaning that the parties are to be put back, so far as pos-
sible, in the positions they would have occupied had the
contract never been made in the first place. Cox v. Zale
Delaware, Inc., 239 F.3d 910, 914 (7th Cir. 2001); United States
v. Amdahl Corp., 786 F.2d 387, 392-93 (Fed. Cir. 1986). For
example, even if a contract is unenforceable because it
violates the statute of frauds, the performing party can still
claim the value of his performance, net of any payment
received before the contract was rescinded, on a theory of
quantum meruit, a type of restitution. See, e.g., Clark v. United
States, 95 U.S. 539, 541-42 (1877); Beanstalk Group, Inc. v. AM
General Corp., 283 F.3d 856, 863-64 (7th Cir. 2002). Cox and
Amdahl involved contracts that were illegal, and not just
unenforceable (there is nothing remotely “wrongful” about
failing to memorialize in writing a contract that is enforce-
able only if so memorialized), yet quantum meruit would still
have been available had the voiding party been unduly
enriched by being able to walk away from the contract. But
Scheiber is not arguing that if indeed the contract is unen-
forceable, as we believe it is, he is entitled to some form
of restitution of the benefits received by Dolby under it as a
result of Dolby’s being allowed to use Scheiber’s patents
14                                              No. 01-2466

without paying the full price that they had agreed upon.
Scheiber would be entitled to such relief only if the amount
of royalties that Dolby did pay was less than the fair market
value of Dolby’s use of the patents, which of course it may
not have been. In any event he makes no claim of quantum
meruit.
  Dolby was indeed entitled to summary judgment.
                                                 AFFIRMED.

A true Copy:
       Teste:

                          _____________________________
                          Clerk of the United States Court of
                            Appeals for the Seventh Circuit

                    USCA-97-C-006—6-17-02