Wednesday, April 27, 2022

Brulotte is Not the Law in Canada

Ghali v Jordahl USA Inc 2022 ABQB 248 Labrenz J

In Brulotte v Thys Co 379 US 29 (1964) the US Supreme Court held that an agreement to pay postexpiration patent royalties is per se unenforceable. The Court then reaffirmed in Kimble v Marvel Entm't LLC 135 S Ct 2401 (2015). Ghali v Jordahl illustrates that this rule, thankfully, is not part of Canadian law.

The invention at issue related generally to a mechanically anchored reinforcement system for concrete slabs. One clause of the agreement defined the “Invention” to include “all mechanically anchored reinforcements for concrete structures, protected or not protected by patents,” [46] (my emphasis). Another clause expressly provided that royalties would be paid after the expiry of the last patent: “Following the expiry date of the last Patent, DECON agrees to pay a royalty of three percent (3%) of Sales Price receipts. . . for as long the as [sic] product is made. . .” Thus the agreement was express that the payment obligation survived the expiry of the patents.

The wrinkle, as a matter of contract law, was that the termination clause provided that the agreement was to be in effect “for the lifetime of the Patents issued based on Invention,” and also provided for termination on one year’s notice [51]. Applying standard principles of contractual interpretation, Labrenz J held that the only way to give effect to all the terms of the agreement was to interpret the payment obligations as not being captured by the termination clause [46], [58].

This would be an unremarkable matter of contractual interpretation, but for the US rule in Brulotte, which held that royalty provisions of a patent licensing agreement which provides for royalties for the use of machines incorporating certain patents are not enforceable for the period beyond the expiration of the last patent incorporated in the machine. This rule was widely criticized by commentators: see Herbert Hovenkamp Brulotte's Web (2015) 11 J of Comp Law & Econ 527. It was nonetheless reaffirmed by the Court in Kimble, largely on the basis that it was settled law. As Professor Cotter points out, even the majority in Kimble seemed to acknowledge that the rationale for the rule is unconvincing; and he notes that Landes & Posner referred to it as “one of the all-time economically dumb Supreme Court decisions.”

The main prior Canadian case on point is Culzean Inventions v Midwestern Broom Co (1984) 82 CPR(2d) 175 (SKQB), which also held that parties are able to contract for the payment of royalties beyond the term of the patent. The analysis in Culzean focused on competition law, in particular the argument that at common law monopolies were void as being against the public interest and contrary to public policy. The argument in Ghali v Jordahl focused on the contract law issue of whether such an agreement would be commercially unreasonable. These arguments were rejected in both cases, in favour of the basic policy in favour of enforcing the express terms of a contract between sophisticated parties. (For authority Culzean relied on cases such as Trubenizing Process [1943] SCR 422, which make the distinct but related point that payment obligations can survive the invalidity of the patent; Ghali relied on standard contract law doctrine and cases.)

While Culzean and Ghali are not high authority, but they are consistent in the result and in the reasoning. In light of this, and given the criticism that Brulotte and Kimble have received, it seems safe to say that the Brulotte doctrine is not, and will not become, part of the Canadian law.

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